[PHOTO]
Mario J. Gabelli
The
Gabelli
B
A C
Fund
ANNUAL REPORT
DECEMBER 31, 1996
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The Gabelli ABC Fund
One Corporate Center
Rye, New York 10580-1434
Annual Report
December 31, 1996
To Our Shareholders:
In the fourth quarter of 1996, we experienced one of the most breathtaking
rallies in stock market history. Investors saw the Clinton victory, combined
with the Republicans retaining control of Congress, as the best of all possible
worlds and poured money into equities. Blue chip stocks led the post-election
charge, with the Standard & Poor's 500 Index (S&P 500) and the Dow Jones
Industrial Average (DJIA) surging to record levels. This strong fourth quarter
capped a second great year for U.S. equities, concluding one of the best
two-year periods in history.
INVESTMENT RESULTS (a)
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Quarter
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1st 2nd 3rd 4th Year
--- --- --- --- ----
1996: Net Asset Value .. $10.10 $10.16 $ 9.77 $ 9.84 $ 9.84
Total Return ..... 4.1% 0.6% 0.8% 2.2% 7.8%
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1995: Net Asset Value .. $ 9.94 $10.14 $10.41 $ 9.71 $ 9.71
Total Return ..... 3.9% 2.0% 2.7% 2.2% 11.2%
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1994: Net Asset Value .. $10.12 $10.11 $10.42 $ 9.57 $ 9.57
Total Return ..... 0.9% (0.1)% 3.1% 0.6% 4.5%
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1993: Net Asset Value .. __ $10.10 $10.63 $10.03 $10.03
Total Return ..... __ 1.0%(b) 5.2% 2.6% 9.1%(b)
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Average Annual Returns - December 31, 1996 (a)
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1 Year............................. 7.8%
3 Year............................. 7.8%
Life of Fund (b)................... 9.0%
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Dividend History
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Payment (ex) Date Rate Per Share Reinvestment Price
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December 27, 1996 $0.146 $9.83
September 30, 1996 $0.470 $9.77
December 28, 1995 $0.930 $9.71
December 28, 1994 $0.910 $9.52
December 31, 1993 $0.880 $10.03
(a) Total return and average annual return reflect changes in share price and
reinvestment of dividends and are net of expenses. The net asset value of the
Fund is reduced on the ex-dividend (payment) date by the amount of the dividend
paid. Of course, returns represent past performance and do not guarantee future
results. Investment returns and the principal value of an investment will
fluctuate. When shares are redeemed they may be worth more or less than their
original cost.
(b) From commencement of operations on May 14, 1993.
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Investment Performance
For the fourth quarter ended December 31, 1996, The Gabelli ABC Fund's net
asset value increased 2.2% after adjusting for the $0.146 per share distribution
paid on December 27. During the year ended December 31, 1996, the Fund's return
was 7.8%.
The Fund, which seeks to achieve a positive return in various market
environments, had a total return since inception on May 14, 1993 through
December 31, 1996 of 36.7%, which equates to a 9.0% annualized rate of return.
For the three years through December 31, 1996, the Fund has had a total return
of 25.3%, which equates to an average annual return of 7.8%. The Fund has met
its objectives of providing an attractive rate of return without excessive risk
of capital. During 1996, the equities market was very alluring. Our approach
included being selective, without introducing excessive risk.
[The following table was represented as a line graph in the printed material]
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE GABELLI ABC FUND, THE S&P 500 INDEX AND
THE LIPPER U.S. TREASURY MONEY MARKET INDEX
Gabelli S&P 500 Lipper U.S. Treasury
ABC Fund Index Money Market Index
-------- ----- ------------------
5/14/93 $10,000 $10,000 $10,000
12/31/93 $10,910 $10,659 $10,163
12/31/94 $11,401 $10,798 $10,530
12/31/95 $12,278 $14,858 $11,091
12/31/96 $13,667* $18,275 $11,618
* Past performance is not predictive of future performance.
The 5% Performance Guaranty Program
Gabelli Funds, Inc.'s fourth Performance Guaranty Program was completed on
December 31, 1996. This Program was unique in the industry in that it provided
investors the full upside potential of their investment with a guaranteed
minimum return of 5%. The Fund's objective of achieving positive total returns
in various market environments has been achieved. Indeed, the Fund has earned 9%
annualized since inception. What lies ahead?
In 1997, the Fund will continue its objective of seeking to achieve
positive total returns in various market environments. The investment style will
remain the same. Although Gabelli Funds, Inc. is not renewing the Performance
Guaranty in 1997, we have demonstrated that our investment approach can achieve
satisfactory returns particularly in difficult market conditions. Of course,
past performance is not necessarily indicative of future results.
The sales charge has been eliminated and new and existing shareholders may
invest freely. We believe the Fund will be an excellent vehicle for investors
who want to participate in the equities market without excessive risk of capital
loss. Shareholders may acquire additional shares at any time.
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BARRON'S 1997 Roundtable
We thought we would share with you excerpts from BARRON's 1997 Roundtable
interview with our Chief Investment Officer. Discussion of individual companies
is not necessarily reflective of the Fund's entire portfolio.
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--------------------------
BARRON'S
ROUNDTABLE
o
MARIO GABELLI
ARCHIE MACALLASTER
JOHN NEFF
MARC PERKINS
MICHAEL PRICE
JIM ROGERS
OSCAR SCHAFER
CARLENE MURPHY ZIEGLER
FELIX ZULAUF
--------------------------
(the following has been excerpted:)
Playing Themes
Our panelists scour the globe for underappreciated stocks
Barron's 1997 Investment Roundtable features an avalanche of ideas - mega-cap
and micro-, foreign and domestic, straight equity and derivative - about
profitable ways to engage with the markets this year. This second of three
Roundtable installments is a distillation of the mid-section of our marathon
Jan. 6 gabfest. And it's dominated by the four panelists we put on the
stockpicking hot seat during that stretch: Felix Zulauf, Mario Gabelli, Carlene
Ziegler and Mike Price (in the order that we grilled them). But it includes,
too, considerably more than two cents' worth of (frequently contrary) opinions
from the other five stalwarts who graced the table.
The stocks Felix, Mario, Carlene and Mike came prepared to talk about
range from a play on the Polish economy (no kidding) to a little company that's
tearing up the ski slopes; from restructuring stories to consolidation dreams.
Then there's Mario's "Hall of Shame," and even one single solitary short - but
it does encompass an entire market.
So what are they? For all the juicy details, read the Q&A that follows
these brief bios of the knights of the Roundtable who take their stockpicking
turns in this issue.
- Kathryn M. Welling
Mario Gabelli: Iconoclastic, irrepressible, ingenious and indefatigable. The
erstwhile auto analyst from the Bronx is chairman and chief investment officer
of Gamco Inc., the money-management firm otherwise known as Gabelli Asset
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Management. Mario is also chairman of Gabelli Funds Inc., the adviser to the
Gabelli family of mutual funds.
PART 1: Outlook on the Economy and Stock Market
Q: Mario, what kind of economy do you see?
Gabelli: Oh, 1997 should be another good year, with GDP up about 2% to 3%. We
talked a year ago about seeing the early part of a global recovery in '97, but
that seems a little further off now. Still, with the currency changes taking
place, you could see a pretty decent economy in the second half in Germany and
France. Hungary, Poland, the Czech Republic are reasonably strong. Latin
America's reasonably good. Southeast Asia, ex-Japan, and the 3.5 billion new
consumers around the world, have a pretty good appetite for American goods.
Overall, the export side of the house - even with the recent strength of the
dollar vis-a-vis the yen and the mark - should be decent. The outlook for '98 is
not clear. But for '97, I'm in the 2% inflation camp, trickling up to 3% to
311/42% by year-end, and I see long interest rates backed up to a level of
stability around 631/44% to 711/44%.
Q: Everyone always says that.
Gabelli: No. A year ago, long rates were 6.05%, and I argued they would back up
to 611/42% to 631/44% - as they have.
Q: Mario, what's in store for the stock market?
Gabelli: I don't see the market helped by rate changes. Profits, I see up 7%,
more or less. So I don't see any gremlins there, though I watch for them.
Earnings surprises are clearly the wild card for the market. Valuations are not
outrageously high. The flow of funds is incredibly positive. The net inflow into
mutual funds in '96 was about $200 billion, compared with $100 billion net in
'95. Corporate buybacks announced were about $130 billion in '96. Only completed
about $30 billion. But even that is a big number. Corporate dividends were about
$100 billion. There are a couple of other elements. The buying of U.S. stocks by
non-U.S. holders I see accelerating. So I see the money flow into mutual funds
continuing, though it's hard to make the case that it will go up at a higher
incremental rate.
But the big number is not any of those. It is acquisitions. In 1996, we
announced $1 trillion on a global basis, $659 billion in the U.S. So whatever we
see in mutual fund inflows, dividends, buybacks, net foreign investments will be
a paltry number relative to transactions, many of which are for cash.
Q: Isn't that circular? One reason you've had this M&A boom is that the stock
market is so high. If it were to drop off for some reason, mergers would, too.
Gabelli: No. In 1995, there were $200 billion in cash deals, retiring shares and
putting cash in investors' hands. In 1996, I don't have the final number.
Counterbalancing that, last year there was about $48 billion raised in IPOs,
which take cash out of the market and put shares in. And another big chunk of
cash left the U.S. in '95 to go into foreign markets. But that is a loop. In
1997, that flow of funds is still going to be enormously powerful. Deals will be
at an all-time record. Whether, as you saw Gillette do with Duracell, paper will
be swapped for paper, or whether cash is exchanged for paper, it's all recycled.
I would guess the entire world did $1.2 trillion worth of deals in 1996. In
1997, you are going to see more Boeing/ McDonnells. Megadeals like Philip Morris
buying Pepsi-Cola. American Express and someone. GTE buying British Telecom.
Q: In any event, is your point that this is going to keep the stock market going
up?
Gabelli: Let me keep going. I don't think 1997 is going to be a year in which
"three-peats" happen. The Lakers and the Celtics and the Bulls may have been
able to do it. But I don't think the market is going to make it three
championship seasons in a row. So 1997, even with its powerful flow of funds,
will not see another big uplift. However, in light of the powerful flow of funds
and all the deal activity, it's going to be a fertile year to get in front of
themes like the consolidations in certain industries.
Q: Utilities?
Gabelli: They're one example. Banks. Brokers. Money managers. There's an
incredible consolidation
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going on in the money-management business!
Q: Does lightning strike twice?
Gabelli: Hit me!
Q: So it will be a terrible market year except for investors?
Gabelli: I didn't say "terrible." I am not where John is, down 15% to 20%.
Neff: I said zip, though, for the year.
Gabelli: That's where I am, as well, for the whole year. More volatility in the
market. The flow of funds is so powerful that it doesn't allow a material
downdraft from here. At the same time, the places you make money are in
spinoffs, split-ups, corporate transactions. On March 14, 1994, when GE went
after Kemper, I said that signaled a third wave of takeovers. Each year since,
we have seen progressively more, and 1997 is going to be the year of the global
behemoths. Scale economics on a global basis are at work. When you see British
Telecom buying MCI and then you see GTE thinking about buying British Telecom,
it's just phenomenal. The Boeing/ McDonnell Douglas and Gillette/Duracell are
just a taste of what you will see. And when you have a stock that's up 20 points
in a day, you're going to say, "Hey, what else can I buy that's going to be
bought?" You are going to have all the speculative fervor of 1986-87, or
1968-69. Whenever Charlie Bluhdorn was around and Jimmy Ling.
PART 2: Gabelli Talks Stocks
In the `Nineties, one of the themes is consolidation. That is, to buy a
fragmented industry, get the benefit of synergistic dynamics at work. Eliminate
overhead. Use scale economics in the financial and operating areas. We've talked
in years past about consolidations in the banks, the brokers, the broadcasters.
I added to that the defense industry, the Baby Bells and utilities a year ago.
Another area I've been looking at is supermarkets. I want to recommend a
couple today. Just as a backdrop, Royal Ahold bought, from Kohlberg Kravis
Roberts, Stop & Shop. Paid 811/42 times EBITDA [earnings before interest, taxes,
depreciation and amortization]. Vons is merging into Safeway at 10.1 times. Food
Lion just bought Kash `n Karry. A whole bunch of deals. KKR bought 90% of
Bruno's. And so on. The two I am going to recommend today are Giant Food and
Delchamps. Giant Food has 60 million shares. The symbol is GSF.A. on the Amex.
The stock closed around 35. That is a $2 billion market cap. They have 174
supermarkets in the Baltimore-Washington, D.C., area. Revenues of about $4
billion. The balance sheet is over-financed. They have about $250 million cash,
about $170 million total debt, which is primarily capitalized leases. They own
17 of the shopping centers they operate. They have equity interests in four
others. Without factoring in a strike they're involved in, earnings for this
February year will be about $1.80, up from $1.72. Growing at glacial speed.
Q: That implies a pretty decent P/E, if the stock is at 35.
Gabelli: Here is the story: A U.K. company, J. Sainsbury, had 9.8 million
shares. They just bought two million more from Israel Cohen's estate. I can see
earnings accelerating to $1.95-$2.20. The management is marching to a different
drummer. They should use the balance sheet to leverage up, do many of the things
that KKR would do. I don't think they will. Henry Kravis should be sniffing
around at this deal. Sainsbury owns 20%-plus. I think they are going to come in
and take out the balance. The takeout price is somewhere between $42 and $52.
MacAllaster: That's an enormous price.
Gabelli: Only 8.4 times EBITDA. They dominate their market. Their margins are
terrific. Extremely well-run. They have $500 million of excess capital. My own
sense is that the family did a disservice to themselves and shareholders by not
taking the block of stock they sold to Sainsbury and selling it to KKR, to
create an auction. They got lousy investment-banking advice. They should invite
Henry in. He has a new fund, knows this business.
Schafer: What percentage do you own?
Gabelli: There is no vote. The voting stock, all 125,000 shares, is controlled
by four trustees. But
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everybody gets the same price as that stock. We own two million shares out of 60
million. Not a big number.
MacAllaster: There are 60 million shares outstanding?
Gabelli: 59.5 million - for you, 60. The next company I'm recommending is
Delchamps. The stock is 20. The symbol is DLCH. It's in Alabama, approximately
119 locations. The book is around $16 a share. A very good balance sheet. It's
selling at about 4.8 times EBITDA. Takeout value of $35-$45.
MacAllaster: They won't sell out, will they? Haven't they turned down two bids?
Gabelli: You're going back five-seven years. The Delchamps family has migrated
two generations since then.
MacAllaster: Two generations in five years? Talk about fast-forward!
Gabelli: Archie, 46% of the stock is held by - just punch out your 13F.
MacAllaster: They were bid $26 for this company some years ago.
Gabelli: A&P bid in the low 30s. They brought in some investment bankers, said
it was not enough. Or they just didn't want the deal, they were going to do it
themselves. They screwed up, then changed management. I meant, there is a second
generation of management, not of the Delchamps.
MacAllaster: A lot of employees own this stock, too.
Gabelli: Forty-six percent is held by four institutions. If someone comes
knocking at the door this time -
MacAllaster: They'll have a vote.
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GABELLI'S PICKS
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Price
Company Sym. Exch. 1/6/97
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Giant Food GFSA ASE 35 1/8
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Delchamps DLCH NNM 20 1/4
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BHC Comm BHC ASE 102 1/8
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Gray Comm GCS NYSE 19 1/4
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General Host GH NYSE 2 5/8
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Int'l Family Ent FAM NYSE 16 5/8
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Southwest Gas SWX NYSE 19 1/4
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"HALL OF SHAME"
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Santa Anita SAR NYSE 26 7/8
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Kerr Group KGM NYSE 2 1/2
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Media General MEGA ASE 30 1/2
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Q: Do you know which four?
Gabelli: I happen to know which four institutions they are. You're seeing about
a 30% stake at this end of the table. You know, the number of transactions
taking place, the locations they are in, the fact that people like Albertson's
are looking in the area, it makes a lot of sense. Those are my two takeout food
plays for individuals who want to make a return.
MacAllaster: You never did say what this $20 stock earned.
Gabelli: Not enough. They're just going through a restructuring. Earning 68
cents a share from continuing operations.
Neff: Why is this worth so much?
Gabelli: Cash flow.
One last company in this cash camp, which will segue into an area that you
might have an interest in. I'm going to talk about BHC Communications. Stock is
at 100, on the Amex. There are 23.9 million shares outstanding - 24 million for
Archie. That's a $2.4 billion market cap. What you get is a company with $1.3
billion in cash, no debt. A company that owns three television stations, in
L.A., New York and Portland, probably worth another $1.2 billion. Then they own
five million shares of United Television Inc., which sells at 87. So, marked to
market, that's another $500 million. Marked to model.
Q: Marked to what?
Rogers: To valuations he made up in his model.
Gabelli: Marked to my model of the value of the business, based on what would be
paid by a company that wanted to buy the entire enterprise, the company is worth
$130 million more than market.
MacAllaster: Herb Siegel [chairman and CEO] is never going to sell.
Gabelli: My point is, you get their network for free. They own a half-interest -
and Paramount Television Group owns the other in the United Paramount Network,
UPN, which is the fifth network, or fourth or sixth, depending on who's
counting, but most likely the fifth or sixth. That network, if it works, could
have substantial value down the road. So BHC is attractive. That leads me into
the consolidation in the broadcasting industry. Last year, we talked about three
broadcasters. They were taken over. This year, I'll just talk about one in a
little more detail, Gray Communications Systems. Gray operates in what I call
"Bubba country," Lexington and
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Hazard, Ky.; Augusta, Albany and Thomasville, Ga.; Panama City and Tallahassee,
Fla.; and Knoxville, Tenn. There are 8.1 million shares. It's run by two
outstanding value managers. The stock is 17 1/2. Earnings for 1997 should be 55
cents. They go to 90 cents, $1.25, $1.65. By 2000, the company will have only
$140 million of debt. They will have a private-market value marked to model
based on a terminal multiple for both its newspapers and TV stations - of about
$60 a share. I'm buying as much as I can.
Q: What's the cash flow?
Gabelli: Substantial. EBITDA in 1997 is $40 million, by the year 2001 it goes to
$55 million.
Q: Do you have another stock, Mario?
Gabelli: Another $2-$2.50 stock is General Host, which operates Frank's Nursery
& Crafts. Harris Ashton has done a poor job of running the company. They have
170-odd Frank's. The aging population, the right locations, everything is right.
Sears Roebuck should look at this one.
Now, to Alan's favorite subject: cable. I want to talk about 3.5 billion
new eyeballs, i.e., consumers around the world who have an insatiable appetite
for American goods and services.
Perkins: Are they interactive couch potatoes?
Gabelli: As you know that is a trademark of Gabelli & Co. and you should bow
your head when you say it.
Q: Or pay a royalty.
Gabelli: We all know about what happened to cable in 1996: Satellite bloodied
the industry. The concern that telephone was going into cable damaged it. Cable
stocks, on balance, fell 40%. But let's look at the positives. First, satellite
has four million new consumers. Anyone who has a DirecTV views it as an
exceptionally attractive product. I bought it for my house in Moose, Wyo. It
works. It's fabulous. Easy to use.
Gabelli: That four-million-user delivery system is growing probably 25%-50% a
year over the next several years. But DirecTV has to pay for programs. So if
you're an International Family Entertainment with the Family Network, they have
to pay you. And, since they don't have nearly as many subscribers as, say, TCI
[Tele-Communications Inc.], they pay you a higher-than-average rate. So Family
Entertainment is getting 20 cents per set of eyeballs as opposed to 11 cents.
Secondly, it's getting incremental growth in eyeballs at an accelerating rate.
Enlarging its advertising base. So a Family Entertainment has a powerful uplift
to its revenue stream. Family Entertainment, symbol FAM, is run by our dear
friends in Virginia. It closed Friday [Jan. 3] up 131/48, to $17. And 17 times
48 million shares is an $850 million market value. There's about $140 million of
debt. The Family Channel itself had a cash-flow run rate in the fourth quarter
of $100 million. So it's selling at 8.5 times. They also own 72% of FiT TV,
which is 10% owned by Liberty, 10% by Reebok, and is cash-flow negative. They
have a piece of a cable channel in China. They gave up on the Pakistani
telephone venture after they read my comments last year in Barron's. Have a
piece of an equity in Latin America. They got out of their cable channel in the
U.K., but took back a 5% stake in the buyer, Flextech PLC, a U.K. company
controlled by TCI's TCI International unit. Bottom line: This stock, if they had
nothing else, would be worth probably $28-$30 a share. Family Channel's EBITDA
margins are growing substantially. They've started originating better
programming through MTM Entertainment, their Mary Tyler Moore production
company, on Family Channel. That's increasing its penetration. I think the
company will be sold. Pat Robinson has a problem. He doesn't want to give up the
700 Club, which has a time slot in prime time. The buyer has to find a way to
let him not give that up.
Q: What else, dare we ask?
Gabelli: Utilities - I do need to throw in what's going on there - as a
consolidation play. I'll just leave you with one name, because of time:
Southwest Gas. It has 23-24 million shares. Headquartered in Las Vegas. They
have gas distribution companies in Las Vegas, Phoenix. They made a questionable
acquisition, of a pipeline construction company. The book is around $16 and the
takeout value is probably $28-$33. Enormous
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consolidation going on. I'll stop there.
Q: Are you sure?
Rogers: Don't ask! They keep finding more.
Gabelli: Just my 1996 Hall of Shame. These are companies in the areas I follow
that have done their best to try to disengage shareholders from the value of
their enterprises. Either because of their own monetaristic motives, stupidity,
hubris. I have three candidates - I had four or five last year and each did
something. No. 1 is Santa Anita. I have never seen such - what was the word you
used, Jim?
Rogers: Codswallop.
Gabelli: This one was pure horse droppings. Santa Anita tried to sell the
company at $14. We tried to tell them the company is worth $30. Bay Meadows
tried to do the same thing at 18, but backed off and the stock today is 40.
Santa Anita has a wonderful tax vehicle. Santa Anita and Bay Meadows have the
same paired-REIT tax structure. Santa Anita stock today is $26. Management did
everything in their power to convince the world that they had the right deal at
$14. It was an inside deal, stank to the high paddocks. The second one is Kerr
Group, but the management finally got fired, so I have to put them in the Hall
of Shame posthumously. The third one is Media General. This one is pure hubris.
The stock is $30; it's worth $80.
Rogers: You're dreaming.
Gabelli: I know. It's worth $80-$120, actually.
MacAllaster: After a 1-for-3.
Gabelli: No way. They bought Parc Communications and leveraged up the company
without adding to EPS or PMV for five years. Lost all flexibility and they
belong in the Hall of Shame for that. Tomorrow, they will try and explain it to
the world. I doubt they'll do a good job. I think they could lose three
directors out of seven and that may get their attention.
Schafer: Are there still an A and a B stock?
Gabelli: Yes. The family owns 250,000 shares, which control four of the seven
board votes. The A stock, which has 26 million shares outstanding, controls
three. All the directors should resign because of what they allowed management
to do.
Price: Wish you'd never heard of it?
Gabelli: Wait till you go up, Michael. A quarter for your cup. I rest.
Q: Well, thank heavens. I mean, thanks, Mario.
Reprinted by Permission.
The views expressed in this article
reflect those of the portfolio
manager as of its writing. The
manager's views are subject to
change at any time based on market
and other conditions.
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Let's Talk Stocks
The following are company specifics on selected holdings of our Fund.
Favorable EBITDA prospects do not necessarily translate into higher stock
prices, but they do express a positive trend which we believe will develop over
time.
AirTouch Communications Corp. (ATI - $25.25- NYSE) is one of the premier players
in global wireless communications. Operating in attractive cellular markets in
the U.S. and overseas (including Germany, Japan, Portugal, Sweden, Belgium,
Italy, Spain and South Korea), the company is well-positioned to participate in
the world-wide expansion of wireless communications. There are currently 100
million cellular customers world-wide, with half of those in the U.S. Annual
growth is estimated at 40% to 50%. To strengthen its cellular position in the
U.S., AirTouch has formed a joint venture with U.S. West Media Group (UMG -
$18.50 - NYSE) to merge the two companies' domestic cellular and personal
communications services (PCS) properties.
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Alexander & Alexander Services Inc. (AAL - $17.375 - NYSE) signed a definitive
agreement to be acquired by Aon Corp. (AOC - $62.125 - NYSE) for about $1.23
billion, creating one of the nation's largest insurance brokerage companies. The
acquisition gives Aon a larger share of the market for insurance brokering and
for advising companies on how to assess, control and cover risk. The merger
comes amid a wave of consolidation in the insurance industry, as many companies
seek to sell out rather than make investments needed to compete with larger
rivals. The $17.50 per share cash tender offer was completed on January 14,
1997.
FlightSafety International Inc. (FSI - $50.00 - NYSE) was acquired by Berkshire
Hathaway Inc. (BRK - $34,100 - NYSE) for about $1.5 billion in cash and stock.
Berkshire bought the pilot training company to tap growing world-wide travel and
the need for pilots who can fly the newest aircraft. Under terms of the
agreement, FlightSafety holders had the option to receive $50 a share in cash or
$48 in Class A or Class B Berkshire stock. A maximum of 58% of the purchase
price, or $870 million, would be paid in cash and the rest in Berkshire stock.
FlightSafety provides high-technology simulator-based training to airlines and
ship owners throughout the world. It also makes full-motion flight simulators
and other training equipment. The merger closed at year-end and shareholders who
elected cash received $50 per share for 100% of their stock.
Genentech, Inc. (GNE - $53.625 - NYSE) is a leading player in the biotechnology
industry, making and marketing such products as Activase thrombolytic agent,
Nutropin growth hormones and Actimmune. Hoffman-La Roche owns 66% of GNE's
stock. Roche's option agreement to buy the outstanding 34% has been revised by
extending the option to 1999, and by increasing the purchase price to $82 per
share. The new agreement has an attractive feature permitting GNE's shareholders
to "put" their shares to Roche at $60 per share one month after the expiration
date if Roche doesn't elect to buy the remaining shares then outstanding.
Giant Food Inc. (GFS'A - $34.50 - ASE) operates 174 supermarkets, mostly food
and drug combination stores, primarily in the Washington, DC and Baltimore
metropolitan areas. The company is expanding from this base into New Jersey,
Pennsylvania, and Delaware which should drive growth. Giant has a solid
management team and is considered to be a leading innovator in the food
retailing industry. J. Sainsbury PLC, one of the largest supermarket retailers
in the United Kingdom, owns a non-controlling 50% of Giant's voting shares, in
addition to approximately 20% of the non-voting shares.
Katy Industries, Inc. (KT - $14.50 - NYSE) is a diversified company, operating
its business through three principal groups: industrial machinery, industrial
components and consumer products. The industrial machinery group manufactures
and sells die-cutting machinery, food packaging machinery and production
machinery for the shoemaking industry. The industrial components group
manufactures and sells components such as specialty metals and testing and
measuring instruments. The consumer products group manufactures and sells
sanitary maintenance supplies and air filter and electronic components. Katy
also has a substantial investment portfolio, owning 39% of BeeGee Holding
Company, 37.5% of Schon & Cie, AG and 135,000 shares of Union Pacific
Corporation. The company now holds over $55 million ($6.50 per share) in cash
and marketable securities.
9
<PAGE>
Loctite Corp. (LOC - $60.875 - NYSE) accepted a sweetened $1.27 billion takeover
bid from Henkel KGaA for the 65% of the adhesives maker Henkel didn't already
own. German chemical maker Henkel, which had been seeking to expand its share of
the U.S. adhesives market, boosted its offer on December 4 to $61 per share.
Loctite, in November, had rejected Henkel's $57.75 per share bid, saying it was
too low. Loctite's initial resistance to Henkel's overtures was successful in
increasing the price by 9% from the $56 per share its largest shareholder said
it was willing to pay in late October. The acquisition will significantly boost
Henkel's share of the U.S. market and reduce its dependence on the European
market, which accounts for 80% of its sales. The tender offer closed on January
3, 1997.
Renaissance Communications Corp. (RRR - $35.75 - NYSE) owns and operates a
diversified group of six television stations in Dallas/Ft. Worth, Miami/Ft.
Lauderdale, Sacramento, Hartford/New Haven, Indianapolis and Harrisburg. Four
are affiliates of the Fox Network and the other two are affiliates of the WB
Network. The company has agreed to merge with a subsidiary of the Tribune
Company by receiving $36.00 per share in cash.
Pacific Telecom, Inc. is a Vancouver, WA-based telecommunications company, whose
primary business is delivering local exchange services to rural and suburban
markets across the western and mid-western states. Pacific Telecom also has
cellular telephone interests in 29 rural and metropolitan markets representing
about two million POPS. Effective September 27, 1995, Pacific Telecom's majority
shareholder, PacifiCorp., acquired the remaining shares it did not previously
own at a price of $30.00. We believe the intrinsic value of Pacific Telecom to
be in excess of $50.00 and are seeking dissenters rights to capture this value
for our shareholders. We placed PacifiCorp in our Hall of Shame for the way it
froze out minority shareholders.
Providence Journal Company (PRJ - $30.625 - NYSE) signed a definitive agreement
to be acquired by A.H. Belo Corp. (BLC - $34.875 -NYSE) for about $1.5 billion
in cash and stock, making Belo one of the nation's largest television
broadcasters and expanding its newspaper operations. The purchase will give Belo
nine television stations, making it the 10th-biggest U.S. broadcaster, reaching
12.3% of the nation's TV viewers. Belo, the publisher of the Dallas Morning
News, will also get two newspapers, including the Providence Journal-Bulletin,
and cable programming businesses. The purchase follows a string of newspaper
acquisitions by Belo in the past year. It also comes amid an acquisition frenzy
in the television industry as companies take advantage of changes in ownership
rules. Under terms of the agreement, Providence Journal shareholders will
receive $12.33 in cash and 0.5333 shares of Belo Series A common stock for each
of their shares. That values Providence Journal at $30.93 a share, based on
Belo's price of $37.875. Providence Journal shareholders also have the option of
receiving all cash or all stock for their shares subject to certain proration
mechanisms. The transaction is expected to close during the first quarter of
1997.
Internet
You can now visit us on the Internet. Our home page at
http://www.gabelli.com contains information about Gabelli Funds, Inc., the
Gabelli Mutual Funds, quarterly reports, closing prices, IRAs, 401(k)s and other
current news. You can also send us e-mail at [email protected].
10
<PAGE>
In Conclusion
If we may borrow former N.Y. Knicks and current Miami Heat coach Pat
Riley's trademarked expression, we don't think the market will "three-peat" in
1997. We see less risk and higher return potential in selected small and mid cap
stocks, which are priced much more reasonably than the large cap growth stocks
that benefited most from the "irrational exuberance" that so concerns Fed
Chairman Greenspan. Corporate restructurings of every variety from mergers to
asset sales and spin-offs will provide a tailwind for value oriented investors.
We remind ourselves and our shareholders that investing is not a sprint
but a marathon. The swift hare will shine during many stages. But, the tortoise,
who carries the heavy protective shell of fundamental discipline, will triumph
in the end. We will continue to do what we do best: work hard to identify
fundamentally undervalued companies that will, over the long term, provide
consistently attractive investment returns.
The Fund's daily net asset value is available in the financial press and
each evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI
(1-800-422-3554). The Fund's NASDAQ symbol is GABCX. Please call us during the
day for further information.
We thank you for your confidence in our investing abilities and wish you a
productive and financially rewarding 1997.
Sincerely,
/s/ Mario J. Gabelli
Mario J. Gabelli, CFA
President and Chief
Investment Officer
February 3, 1997
- --------------------------------------------------------------------------------
Top Ten Holdings
December 31, 1996
Loctite Corporation AirTouch Communications, Inc.
Renaissance Communications Genentech, Inc.
FlightSafety International, Inc. Pacific Telecom, Inc.
Alexander & Alexander Services, Inc. Giant Food, Inc.
The Providence Journal Company Katy Industries, Inc.
- --------------------------------------------------------------------------------
NOTE: The views expressed in this report reflect those of the portfolio manager,
only through the end of the period of this report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions.
11
<PAGE>
The Gabelli ABC Fund
Portfolio of Investments -- December 31, 1996
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS -- 46.00%
AUTOMOTIVE: PARTS AND ACCESSORIES -- 1.21%
10,000 GenCorp Inc.......................... $ 129,250 $ 181,250
4,500 Wynn's International, Inc............ 79,650 142,313
----------- -----------
208,900 323,563
----------- -----------
AVIATION: PARTS AND SERVICES -- 8.04%
40,000 FlightSafety International, Inc...... 1,985,750 2,000,000
2,500 General Motors Corp.
Class H............................. 149,375 140,625
6,000 Hi-Shear Industries Inc.+............ 7,300 15,750
----------- -----------
2,142,425 2,156,375
----------- -----------
BROADCASTING -- 11.00%
1,000 Cox Radio, Inc.+..................... 18,500 17,500
10,000 Frontier Corp........................ 205,186 226,250
2,000 Gray Communications
System, Inc......................... 32,262 37,750
57,500 Renaissance
Communications Corp................. 2,000,062 2,055,625
20,000 The Providence Journal
Co. - Cl A+......................... 591,000 612,500
----------- -----------
2,847,010 2,949,625
----------- -----------
CABLE -- 0.43%
4,000 Tele-Communications, Inc./
Liberty Media Group................. 102,825 114,250
----------- -----------
CONSUMER PRODUCTS -- 1.64%
15,000 Carter-Wallace, Inc.................. 159,853 234,375
3,000 Culbro Corporation................... 150,345 194,625
4,000 Kerr Group, Inc.+.................... 28,262 9,500
----------- -----------
338,460 438,500
----------- -----------
DIVERSIFIED INDUSTRIAL -- 0.97%
18,000 Katy Industries, Inc................. 448,400 261,000
----------- -----------
ENERGY -- 0.50%
7,000 Southwest Gas Corporation............ 117,387 134,750
----------- -----------
EQUIPMENT AND SUPPLIES -- 12.81%
7,000 Ampco-Pittsburgh
Corporation......................... 48,500 84,000
55,000 Loctite Corp......................... 3,344,625 3,348,125
----------- -----------
3,393,125 3,432,125
----------- -----------
FINANCIAL SERVICES -- 4.68%
72,200 Alexander & Alexander
Services, Inc....................... 1,246,785 1,254,475
----------- -----------
HEALTH CARE -- 1.20%
6,000 Genentech, Inc.+..................... 287,149 321,750
----------- -----------
HOTELS/GAMING -- 0.24%
1,500 ITT Corporation+..................... 64,887 65,063
----------- -----------
Principal
Amount Market
of Shares Cost Value
--------- ---- -----
HOUSING RELATED -- 0.15%
2,000 Nortek, Inc.+........................ $ 21,600 $ 40,000
----------- -----------
RETAIL -- 1.78%
2,000 Burlington Coat Factory
Warehouse Corp...................... 24,600 26,000
3,927 Eckerd Corp.......................... 131,750 125,664
8,000 Giant Food, Inc. - Class A........... 263,775 276,000
2,000 Lillian Vernon Corp.................. 26,100 24,500
6,000 Topps Co., Inc....................... 32,990 24,000
----------- -----------
479,215 476,164
----------- -----------
WIRELESS COMMUNICATIONS -- 1.35%
2,500 COMSAT Corporation................... 51,419 61,563
10,000 Pacific Telecom, Inc.(a)............. 297,400 300,000
----------- -----------
348,819 361,563
----------- -----------
TOTAL COMMON STOCKS.................. 12,046,987 12,329,203
----------- -----------
CONVERTIBLE CORPORATE BONDS -- 1.35%
ELECTRONIC EQUIPMENT -- 0.36%
$ 94,000 Trans-Lux Corporation
Sub. Deb. Cv.
9.00%, 12/01/05..................... 95,992 95,880
----------- -----------
EQUIPMENT AND SUPPLIES -- 0.11%
30,000 Fedders Corp.
8.50%, 6/15/12...................... 26,327 29,400
----------- -----------
FOOD AND BEVERAGE -- 0.49%
450,000 Flagstar Companies, Inc.
Sub. Deb. Cv.
10.00%, 11/01/14.................... 173,293 132,188
----------- -----------
RETAIL -- 0.39%
100,000 General Host Corporation
8.00%, 02/15/02..................... 71,266 77,438
20,000 Ingles Markets, Incorporated
Sub. Deb. Cv.
10.00%, 10/15/08.................... 20,874 25,500
----------- -----------
` 92,140 102,938
----------- -----------
TOTAL CONVERTIBLE
CORPORATE BONDS..................... 387,752 360,406
----------- -----------
CONVERTIBLE PREFERRED STOCKS -- 1.70%
PUBLISHING -- 0.21%
1,000 Golden Books Family
Entertainment, Inc.................. 50,000 56,750
----------- -----------
WIRELESS COMMUNICATIONS -- 1.49%
8,000 AirTouch Communications Inc.-
Class B............................. 234,500 218,000
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
The Gabelli ABC Fund
Portfolio of Investments (Continued) -- December 31, 1996
================================================================================
Principal
Amount Market
of Shares Cost Value
--------- ---- -----
CONVERTIBLE PREFERRED STOCKS (Continued)
4,000 AirTouch Communications Inc.-
Class C............................. $ 193,000 $ 181,000
----------- -----------
427,500 399,000
----------- -----------
TOTAL CONVERTIBLE
PREFERRED STOCKS.................... 477,500 455,750
----------- -----------
CORPORATE BONDS -- 0.23%
FOOD AND BEVERAGE -- 0.23%
$ 150,000 Flagstar Companies, Inc.
11.25%, 11/01/04.................... 127,428 60,748
----------- -----------
TOTAL CORPORATE BONDS................ 127,428 60,748
----------- -----------
U.S. GOVERNMENT OBLIGATIONS -- 56.00%
15,090,000 U.S. Treasury Bills,
4.80% to 4.84%
Due 02/06/97 to 02/13/97............ 15,009,827 15,009,827
----------- -----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS......................... 15,009,827 15,009,827
----------- -----------
TOTAL
INVESTMENTS -- 105.28%.............. $28,049,494* 28,215,934
===========
Liabilities in excess
of other assets -- (5.28)%.......... (1,414,224)
-----------
NET ASSETS -- 100.00%
(2,723,940 shares outstanding)...... $26,801,710
===========
Net Asset Value And Redemption
Price Per Share..................... $9.84
===========
- ----------
+ Non-income producing security.
(a) Security fair valued as determined by Board of Directors.
*For Federal Income Tax purposes:
Aggregate cost ..................... $ 28,049,494
============
Gross unrealized appreciation ...... $ 534,938
Gross unrealized depreciation ...... (368,985)
------------
Net unrealized appreciation ........ $ 165,953
------------
------------
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
The Gabelli ABC Fund
Statement of Assets and Liabilities
December 31, 1996
================================================================================
Assets:
Investments in securities, at value
(Cost $28,049,494) .................................... $28,215,934
Receivable for Fund shares sold ........................... 4,575
Accrued interest receivable ............................... 33,518
Dividends receivable ...................................... 13,805
Deferred organizational expenses .......................... 33,208
-----------
Total Assets .......................................... 28,301,040
-----------
Liabilities:
Payable to Advisor ........................................ 25,324
Payable for distribution fees ............................. 6,316
Payable for Fund shares redeemed .......................... 1,442,618
Other accrued expenses .................................... 25,072
-----------
Total Liabilities ..................................... 1,499,330
-----------
Net Assets (applicable to 2,723,940
shares outstanding) .................................. $26,801,710
===========
Net asset value and redemption
price per share ...................................... $ 9.84
===========
Net Assets Consist of:
Capital Stock, at par value ............................... $ 2,724
Additional paid-in-capital ................................ 26,613,382
Accumulated undistributed
net investment income ................................. 765
Accumulated net realized gain on
investments and foreign currency
transactions .......................................... 18,886
Net unrealized appreciation on investments
and assets and liabilities denominated
in foreign currencies ................................. 165,953
-----------
Net Assets ............................................ $26,801,710
===========
Statement of Operations
For the Year Ended December 31, 1996
================================================================================
Income:
Interest .................................................. $1,088,822
Dividends ................................................. 48,462
----------
Total Income .......................................... 1,137,284
----------
Expenses:
Investment advisory fees .................................. 270,747
Transfer & shareholder servicing agent .................... 89,116
Distribution expenses ..................................... 67,611
Legal and audit fees ...................................... 29,985
Custodian fees and expenses ............................... 27,952
Printing and mailing ...................................... 27,244
Amortization of organization expenses ..................... 24,454
Registration fees ......................................... 10,880
Directors' fees ........................................... 7,996
Miscellaneous ............................................. 10,872
----------
Total Expenses ........................................ 566,857
----------
Investment income - net ................................... 570,427
----------
Net Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain on investments and
foreign currency transactions ......................... 1,086,110
Net change in unrealized appreciation ..................... 374,989
----------
1,461,099
----------
Net increase in net assets resulting
from operations ...................................... $2,031,526
==========
Statement of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Increase (decrease) in Net Assets:
Net Investment Income ..................................... $ 570,427 $ 406,885
Net realized gain on investments and
foreign currency transactions ........................... 1,086,110 1,476,151
Net realized loss on futures .............................. -- (44,165)
Net change in unrealized appreciation ..................... 374,989 527,684
------------ ------------
Net increase in net assets resulting from operations .... 2,031,526 2,366,555
------------ ------------
Distributions to shareholders from:
Net investment income ................................... (559,000) (406,885)
Net realized gain ....................................... (1,090,311) (1,404,069)
Distributions in excess of net investment income .......... -- (2,698)
------------ ------------
(1,649,311) (1,813,652)
------------ ------------
Share transactions - net .................................. 6,557,281 (5,109,412)
------------ ------------
Net increase (decrease) in net assets ................... 6,939,496 (4,556,509)
Net Assets:
Beginning of year ......................................... 19,862,214 24,418,723
------------ ------------
End of year (Includes undistributed net
investment income of $765 in 1996) ...................... $ 26,801,710 $ 19,862,214
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies. The objective of The Gabelli ABC Fund (the
"Fund") is to achieve total returns that are attractive to investors in various
market conditions without excessive risk of capital loss. The Fund is a series
of Gabelli Investor Funds, Inc. (the "Corporation"), incorporated in Maryland on
October 30, 1992. The Fund is an open-end, non-diversified management investment
company. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies followed by the Fund:
Security Valuation. Portfolio securities listed or traded on the New York or
American Stock Exchanges, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("NASDAQ") or traded on foreign exchanges are
valued at the last sale price on that exchange (if there were no sales that day,
the security is valued at the average of the bid and asked prices). All other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest average of their bid and asked prices. When
market quotations are not readily available, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Corporation's Directors. Short-term debt
securities with remaining maturities of 60 days or less are valued at amortized
cost, unless the Directors determine such does not reflect the securities' fair
value, in which case these securities will be valued at their fair value as
determined by the Directors. Options are valued at the last sale price on the
exchange on which they are listed, unless no sales of of such options have taken
place that day, in which case they will be valued at the mean between their
closing bid and asked prices.
Foreign Currency Transactions. The books and records of the Fund are maintained
in U.S. dollars as follows:
(i) market value of investment securities and other assets and liabilities are
recorded at the exchange rate on the valuation date.
(ii) purchases and sales of investment securities, income and expenses are
recorded at the exchange rate prevailing on the respective date of such
transactions. The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments
from the fluctuation arising from changes in market prices of securities
held. Such fluctuations are included with the net realized and unrealized
gain or loss from investments.
Security Transactions and Investment Income. Security transactions are accounted
for on the dates the securities are purchased or sold (the trade dates), with
realized gain or loss on investments determined by using specific identification
as the cost method. Interest income (including amortization of premium and
discount) is recorded as earned. Dividend income and dividend and capital gain
distributions to shareholders are recorded on the ex-dividend date.
Federal Income Taxes. The Fund intends to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986 and
distribute all of its taxable income to its shareholders. Therefore, no Federal
income tax provision is required.
15
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements (Continued)
================================================================================
2. Capital Stock Transactions. The Articles of Incorporation, dated October 30,
1992, permit the Fund to issue 1 billion shares (par value $0.001). Transactions
in shares of common stock were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------------------- ----------------------
Shares Amount Shares Amount
---------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Shares sold ..................................... 1,737,678 $ 17,232,605 276,536 $ 2,700,619
Shares issued upon reinvestment of dividends .... 159,323 1,558,644 181,381 1,761,175
Shares redeemed ................................. (1,219,557) (12,233,968) (963,429) (9,571,206)
---------- ------------ -------- -----------
Net increase (decrease) ........................ 677,444 $ 6,557,281 (505,512) $(5,109,412)
========== ============ ======== ===========
</TABLE>
3. Purchases and Sales of Securities. Purchases and sales of securities for the
year ended December 31, 1996, other than U.S. government obligations and
short-term securities, aggregated $32,360,863 and $34,069,699, respectively.
Short Selling. The Fund is authorized to engage in short-selling, which
obligates the Fund to replace the security borrowed by purchasing the security
at current market value. The Fund would incur a loss if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund would realize a gain if the price
of the security declines between those dates. Until the Fund replaces the
borrowed security, the Fund will maintain daily, a segregated account with cash
and/or U.S. Government securities sufficient to cover its short position.
Repurchase Agreements. The Fund may enter into repurchase agreements with
government securities dealers recognized by the Federal Reserve Board, with
member banks of the Federal Reserve System or with other brokers or dealers that
meet the credit guidelines established by the Directors. The Fund will always
receive and maintain securities as collateral whose market value, including
accrued interest, will be at least equal to 100% of the dollar amount invested
by the Fund in each agreement, and the Fund will make payment for such
securities only upon physical delivery or upon evidence of book entry transfer,
of the collateral to the account of the custodian. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to maintain the adequacy of the collateral. If
the seller defaults and the value of the collateral declines, or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
4. Investment Advisory Contract. The Fund employs Gabelli Funds, Inc., (the
"Advisor") to provide a continuous investment program for the Fund's portfolio,
provide all facilities and personnel, including officers, required for its
administrative management, and to pay the compensation of all officers and
Directors of the Fund who are its affiliates. As compensation for the services
rendered and related expenses borne by the Advisor, the Fund pays the Advisor a
fee, computed and accrued daily and payable monthly, equal to 1.00% per annum of
the Fund's average daily net assets. The Advisor is obligated to reimburse the
Fund in the event the Fund's expenses exceed the most restrictive expense ratio
limitation imposed by any state, cur-
16
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements (Continued)
================================================================================
rently believed to be 2.5% of the first $30 million of the Fund's average daily
net assets (excluding taxes, interest, distribution expenses and extraordinary
items). No such reimbursement was required during the year ended December 31,
1996.
5. Organization Expenses. The organization expenses of the Fund are being
amortized on a straight-line basis over a period of 60 months. The Advisor has
agreed that in the event that any of the initial 10,000 shares it acquired on
April 23, 1993 are redeemed during the period of amortization of the Fund's
organization expenses, the redemption proceeds will be reduced by any such
unamortized organization expenses in the same proportion as the number of
initial shares being redeemed bears to the number of initial shares outstanding
at the time of redemption.
6. Distribution Plan. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") under Section 12(b) of the Investment Company Act of 1940 and
Rule 12b-1 thereunder. For the year ended December 31, 1996, the Fund has
incurred distribution costs of $67,611, or 0.25% of average net assets the
annual limitation under the Plan. The Board of Directors has approved that
Distribution costs incurred by Gabelli & Company, Inc., totaling $223,715, which
are in excess of the 0.25% limitation, may be recovered from the Fund in future
periods, subject to such limitation.
7. Transactions with Affiliates. The Fund paid brokerage commissions during the
year ended December 31, 1996 of $16,011 to Gabelli & Company, Inc. and its
affiliates. For the same period, Gabelli & Company, Inc. has informed the Fund
that it received $2,306 from investors in commissions (sales charges and
underwriting fees) on sales of Fund shares.
17
<PAGE>
The Gabelli ABC Fund
Financial Highlights
================================================================================
Selected data for a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
May 14, 1993
(Commencement
of Operations)
through
Year Ended December 31, December 31,
1996 1995 1994 1993
------- ------- ------- ------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of period ....................... $ 9.71 $ 9.57 $ 10.03 $10.00
------- ------- ------- ------
Net investment income ...................................... 0.21 0.21 0.33 0.29
Net realized and unrealized gain on securities ............. 0.54 0.86 0.12 0.62
------- ------- ------- ------
Total from investment operations ........................... 0.75 1.07 0.45 0.91
------- ------- ------- ------
Less Distributions:
Dividends from net investment income ....................... (0.21) (0.21) (0.33) (0.29)
Distributions from net realized gain on investments ........ (0.41) (0.72) (0.58) (0.59)
------- ------- ------- ------
Total distributions ........................................ (0.62) (0.93) (0.91) (0.88)
------- ------- ------- ------
Net Asset Value, End of Period ............................. $ 9.84 $ 9.71 $ 9.57 $10.03
======= ======= ======= ======
Total Return(a) ............................................ 7.8% 11.2% 4.5% 9.1%
Ratios to average net assets/supplemental data:
Net assets, end of Period (in thousands) ................... $26,801 $19,862 $24,419 $8,847
Ratio of operating expenses to average net assets(b) ....... 2.09% 2.10% 2.09% 2.75%(c)
Ratio of net investment income to average net assets(b) .... 2.11% 1.83% 2.95% 2.96%(c)
Portfolio Turnover Rate .................................... 343% 508% 490% 232%
Average commission rate(d) ................................. $0.0499 -- -- --
</TABLE>
- --------
(a) 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. (b) Net of expenses assumed by the Advisor
equivalent to 0.14% and 0.82%, for 1994 and 1993, respectively.
(c) Annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate paid per share for purchases and sales
of investment securities.
18
<PAGE>
The Gabelli ABC Fund
Report of Grant Thornton LLP, Independent Auditors
================================================================================
Shareholders and Board of Directors
The Gabelli ABC Fund
We have audited the accompanying statement of assets and liabilities
including the portfolio of investments, of The Gabelli ABC Fund (one of the
Funds constituting Gabelli Investor Funds, Inc.) as of December 31, 1996, the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Gabelli ABC Fund at December 31, 1996, and the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
New York, New York
February 27, 1997
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1996 TAX NOTICE TO SHAREHOLDERS (Unaudited)
For the year ended December 31, 1996, the Fund paid to shareholders, on
September 30, 1996 and December 27, 1996, ordinary income dividends (comprised
of net investment income and short-term capital gains) totaling $0.616 per
share. For 1996, 2.53% of the ordinary income dividends qualifies for the
dividend received deduction available to corporations.
U.S. Government Income:
The percentage of the ordinary income dividends paid by the Fund during 1996
which was derived from U.S. Treasury securities was 54.07%. Such income is
exempt from state and local income tax in all states. However, many states,
including New York and California, allow a tax exemption for a portion of the
income earned only if a mutual fund has invested at least 50% of its assets at
the end of each quarter of the Fund's fiscal year in U.S. Government securities.
The Gabelli ABC Fund met this strict requirement in 1996. Due to the diversity
in state and local tax law, it is recommended that you consult your personal tax
advisor for the applicability of the information provided as to your own
situation.
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19
<PAGE>
The Gabelli ABC Fund
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
fax: 1-914-921-5118
e-mail: [email protected]
http://www.gabelli.com
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 P.M.)
Board of Directors
Mario J. Gabelli, CFA
Chairman and Chief
Investment Officer
Gabelli Funds, Inc.
Anthony J. Colavita
Attorney-at-Law
Anthony J. Colavita, P.C.
Vincent D. Enright
Senior Vice President
and Chief Financial Officer
The Brooklyn Union Gas Company
Karl Otto Pohl
Former President
Deutsche Bundesbank
Werner J. Roeder, MD
Director of Surgery
Lawrence Hospital
Officers
Mario J. Gabelli, CFA
President and
Chief Investment Officer
James E. McKee
Secretary
Bruce N. Alpert
Vice President
and Treasurer
Distributor
Gabelli & Company, Inc.
Custodian, Transfer Agent and Dividend Agent
State Street Bank and Trust Company
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom
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This report is submitted for the general information of the shareholders of The
Gabelli ABC Fund. It is not authorized for distribution to prospective investors
unless preceded or accompanied by an effective prospectus.
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