[GRAPHIC OMITTED]
The
Gabelli
[GRAPHIC OMITTED]
ABC
Fund
ANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
The Gabelli ABC Fund
One Corporate Center
Rye, New York 10580-1434
Annual Report
December 31, 1997
To Our Shareholders,
The Gabelli ABC Fund's portfolio manager, Mario J. Gabelli, was recently
named the Domestic Equity Fund Manager of the Year for 1997 by Morningstar.
Driven by low inflation, low interest rates, good corporate earnings
gains, deals, stock repurchase programs and liquidity (the continuing strong
flow of cash into U.S. equity funds), stocks posted strong gains in 1997. Until
correcting in late December, large cap growth stocks continued to lead the
market parade. However, large cap value and mid and small cap indices also
posted solid gains.
INVESTMENT RESULTS (a)
- --------------------------------------------------------------------------------
Quarter
----------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
1997: Net Asset Value ..... $9.98 $10.45 $10.74 $10.23 $10.23
Total Return ........ 1.4% 4.7% 2.8% 3.3% 12.8%
------------------------------------------------------------------------------
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%
------------------------------------------------------------------------------
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%
------------------------------------------------------------------------------
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%
------------------------------------------------------------------------------
1993: Net Asset Value ..... -- $10.10 $10.63 $10.03 $10.03
Total Return ........ -- 1.0%(b) 5.2% 2.6% 9.1%(b)
------------------------------------------------------------------------------
- ------------------------------------------------
Average Annual Returns - December 31, 1997(a)
---------------------------------------------
1 Year............................. 12.8%
3 Year............................. 10.6%
Life of Fund (b)................... 9.8%
- ------------------------------------------------
Dividend History
- ----------------------------------------------------------
Payment (ex) Date Rate Per Share Reinvestment Price
- ----------------- -------------- ------------ -----
December 29, 1997 $0.860 $10.17
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 returns and average annual returns reflect changes in share price and
reinvestment of dividends and are net of expenses. The net asset value of the
Fund is reduced on the ex-dividend (payment) date by the amount of the dividend
paid. Of course, returns represent past performance and do not guarantee future
results. Investment returns and the principal value of an investment will
fluctuate. When shares are redeemed they may be worth more or less than their
original cost. (b) From commencement of operations on May 14, 1993.
- --------------------------------------------------------------------------------
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE GABELLI ABC FUND,
THE LIPPER U.S. TREASURY MONEY MARKET AVERAGE AND THE S&P 500 INDEX
[The following table was depicted as a line chart in the printed material.]
Lipper U.S. Treasury
Gabelli ABC Fund* Money Market Average S&P 500 Index
----------------- -------------------- -------------
5/14/93 $10,000 10000 10000
12/31/93 $10,910 10163 10659
12/31/94 $11,401 10530 10798
12/31/95 $12,278 11091 14858
12/31/96 $13,667 11618 18275
12/31/97 $15,410 12139 24370
- ----------
* Past Performance is not predictive of future performance.
In the fourth quarter of 1997, the U.S. stock market suffered repeated
bouts of the Asian Flu. As we write, the patient remains unstable. While the
International Monetary Fund is ministering to ailing Asian economies, the ever
vigilant Dr. Greenspan is carefully monitoring the U.S. economy's vital signs.
As we head into 1998, we will be making our rounds as well. We are relatively
pleased with the patient's condition, but as always, are on the lookout for any
symptoms of a relapse.
Investment Performance
For the fourth quarter ended December 31, 1997, the Gabelli ABC Fund's
total return was 3.3%. The Fund was up 12.8% for 1997. Since inception on May
14, 1993 through December 31, 1997, the Fund has a total return of 54.1%, which
equates to an average annual return of 9.8%. The Fund seeks to achieve a
positive return in various market environments. We see ourselves as an "enhanced
money market."
What We Do
The Gabelli ABC Fund and its unique Performance Guaranty Program was
created for conservative investors who had been reluctant to participate in the
equity markets. In other words, it was a vehicle to allow investors to "get
their feet wet" in the stock market without risking loss of capital. Our
approach has been to maintain a diversified portfolio of value oriented
equities, convertible preferred stocks, convertible bonds and U.S. Government
securities. Conceptually, the upside potential of stocks would help produce
greater total return potential than a straight bond or government securities
fund and the risk in the equity portion of the portfolio would be diminished by
the combination of lower risk convertible securities
[GRAPHIC OMITTED]
2
<PAGE>
and virtually risk free U.S. Treasury Bills. To date, this approach has worked
quite well. Although we have indefinitely suspended the Performance Guaranty
Program, we believe the Fund's investment strategy can continue to produce
favorable results.
History of the Fund
The Gabelli ABC Fund was launched on May 14, 1993 with a minimum
guaranteed total return of 6% through May 13, 1994. For 1994, 1995 and 1996, 5%
Performance Guaranty Programs were in place. These programs were unique because
they provided investors the full upside potential of the investment while
guaranteeing a minimum total return. Gabelli Funds, Inc.'s fourth Performance
Guaranty Program concluded on December 31, 1996 and a new program was not in
effect for 1997. Although the Performance Guaranty Program is not being offered
for 1998, the Fund continues striving to achieve the same objectives. In a
market with the S&P 500 gaining over 30%, a minimum return guaranty of 5%
appears dull and unattractive. However, in terms of market volatility, the Fund
has provided comfort to the risk averse.
The Adviser and Board of Directors are exploring several options as we
move into 1998. We are considering a longer term guaranty program in a closed
end structure. This would require shareholder approval and would be an
attractive format for initial investors. The program would be available to all
investors in the Fund as of December 31, 1997.
The Fund will continue to be managed, as it has been over the past four
and one-half years, to provide an attractive rate of return without excessive
risk of capital.
COMMENTARY
1997 Revisited
Year ends are always time for reflection. We look back over the last
twelve months and assess what went right and what went wrong. To borrow from
Joseph Heller's classic novel Catch 22, we tally the "feathers in our cap" and
"black eyes". In 1997, the former vastly outnumber the latter. Heading our
"feathers in the cap" list is deals. During the year, the Fund bid a cheerful
farewell to five portfolio holdings which found new homes under other corporate
roofs--materially enhancing our equity returns. Niche industrial companies
including Ampco-Pittsburgh (AP - $19.5625 - NYSE) and Hudson General (HGC -
$48.00 - ASE) were near the top of our leader board. On the equity/convertible
preferred front, our "black eyes" included publishers like Reader's Digest (RDB
- - $24.375 - NYSE) and Golden Books, both solid franchises experiencing what we
believe are temporary difficulties. The Fund's U.S. Treasury holdings,
approximately 50% of the portfolio at year end 1997, served their purpose of
contributing yield and safety of principle in what was a strong, but volatile
stock market.
1998: Will it be Another Good Year?
Despite a roller coaster ride featuring some breathtaking ascents and
declines, equity investors enjoyed themselves in 1997. Will 1998 be equally
thrilling? We expect to continue to experience considerable market volatility as
investors react to economic and market developments overseas and attempt to
assess the impact on the U.S. economy and corporate earnings.
Looking ahead, many of the favorable economic factors that propelled
stocks in recent years will likely remain intact. Asian currency devaluation
will probably diminish inflationary pressure on the U.S. economy and delay the
need for a Federal Reserve interest rate hike. Long interest rates should remain
low and perhaps trend lower. Deals, restructurings and share repurchase programs
should continue to buoy stocks.
3
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Flow of Funds
($ Billions)
Sources 1993 1994 1995 1996 1997E
- ------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
U.S. Deals $234 $340 $ 511 $ 652 $ 919
Stock Buybacks 37 46 99 176 179
Equity Mutual Funds Net 130 119 128 222 231
Dividends 204 230 274 309 333
---- ---- ------ ------ ------
Sources: 605 735 1,012 1,359 1,662
---- ---- ------ ------ ------
Uses
IPOs 103 62 82 115 118
U.S./International Equity Capital Flow
U.S. Purchases of Non-U.S. Equities 309 434 396 514 734
International Purchases of U.S. Equities 246 387 346 457 679
---- ---- ------ ------ ------
Net Flow: 63 47 50 57 55
---- ---- ------ ------ ------
Uses: 166 109 132 172 173
---- ---- ------ ------ ------
Net Flow of Funds: $439 $626 $ 880 $1,187 $1,489
==== ==== ====== ====== ======
Sources: Securities Data Corp, Investment Company Institute, Birinyi Associates.
- ------------------------------------------------------------------------------------------
</TABLE>
The wild cards are corporate earnings and investor psychology. In general,
we believe corporate earnings growth from U.S. operations will be relatively
strong--in the 8% to 9% range. However, the non-U.S. portion of earnings is
likely to be as much as 10% lower in 1998. With earnings expectations high
across the board, we suspect we will see more earnings disappointments in the
year ahead. Other issues on our "Bear Watch" include:
o The Asian Flu spreading to Latin American currencies and economies.
o An upswing in wage inflation not offset by productivity gains.
o The emergence of trade barriers that cause a global political
backlash.
o A disruption of oil flow from the Middle East.
o The lame duck administration. Will Greenspan and Rubin retire before
2000 causing a crisis in confidence, if not in the economy?
o Last, but not least, the level of the market -- valuations are high
and the margin of safety relatively low.
How will investors react if any or all of our concerns prove justified? We
will just have to wait and see. Investors have become conditioned to buying on
market dips. That's understandable because it's worked quite well since this
bull market began in 1982. Indeed, we saw the market rebound strongly from the
sharp correction we experienced in late October. However, if the problems in
Asia continue to escalate and we see more widespread earnings disappointments
from U.S. companies, investors may be somewhat more reluctant to view each
market dip as a buying opportunity. Bear in mind, liquidity itself does not
drive markets higher. It is liquidity combined with favorable investor
psychology that fuels a rising market. In other words, if greed turns to fear,
we could see a more substantial and prolonged market slump than we have become
accustomed to.
4
<PAGE>
Our conclusion after all this conjecture is that in 1998, the market will
be up 5% to down 15%. We hope the market surprises on the upside. However, we
believe in the Boy Scout motto: "be prepared". Although value stocks will not
likely be immune to a substantial market correction, we believe they will
perform significantly better than the more fully valued market darlings.
Consequently, we are carefully monitoring the Fund portfolio, trimming or
eliminating holdings that have become more fully priced in this market advance
and adding to positions that offer better fundamental value. We are also being
more patient in re-deploying cash reserves. Additionally, we are maintaining the
portfolio's substantial position in U.S. Treasury securities to mitigate risk
should the stock market prove less generous in the year ahead.
Merger Mania
We believe we are in the relatively early stages of the third great wave
of merger and acquisition activity. In the 1950s, it was the conglomerateers
buying businesses to build large diversified companies. In the 1980s, it was
financial engineers -- the leveraged buyout firms -- gobbling up and then paring
down undervalued companies. Today, it is the strategic corporate buyer looking
to extend franchises and build global distribution systems. We are seeing two to
three deals almost daily. We are seeing an increase in deal activity overseas as
well, including hostile takeover bids (Germany's Krupp Hoesch taking a shot at
Thyssen). What does this mean for the Fund? In selecting equities for our
portfolio, we focus on dominant market share companies in niche industries
trading at a discount to our appraisal of their "real world" economic value. In
other words, the kind of companies that may prove quite attractive to strategic
corporate buyers. We expect the Fund's performance to be buoyed by the takeovers
of selected portfolio holdings in the years ahead.
----------------------------------------------------------------
Deals - "Third Wave of Takeovers"
($ Billions)
1993 1994 1995 1996 1997E
---- ---- ---- ------ ------
Worldwide Deals $452 $575 $950 $1,140 $1,600
U.S. Deals 234 340 511 652 919
52% 59% 54% 57% 57%
U.S. Deals $234 $340 $511 $652 $919
Cash Deals 131 212 254 356 414
56% 62% 50% 55% 45%
Sources: Securities Data Corp, Investment Company Institute,
Birinyi Associates.
----------------------------------------------------------------
And the Winner Is?
Despite giving up a lot of financial weight and reach to its better known
opponent, little Starwood Lodging (HOT - $57.875 - NYSE) upset Hilton Hotels
(HLT - $29.75 - NYSE) in the battle for ITT (ITT - $82.625 - NYSE). The deal,
which is scheduled to close in February 1998, is for $25.50 in cash and the
balance in Starwood stock -- about an $83 per share value at year end. We sided
with the heavily favored Hilton, primarily due to the higher cash component of
its offer. However, since the cost per share of the Fund's ITT holdings was
approximately $71 per share, we were hardly distraught over the outcome.
Bottoms Up
We believe the biblical adage "those that are last shall be first" may be
prophetic for several of the laggards in the Fund's portfolio. Viacom (VIA
$40.875 - ASE) is the portfolio's most prominent loaded laggard. We think the
new management is making progress at Blockbuster Video and can re-invigorate
5
<PAGE>
cash flows from this troubled division. Simon & Schuster and Prentice Hall are
well-positioned in the educational publishing business, but we believe Viacom
will liquefy these assets. Paramount is doing just fine. And, the value of the
MTV, VH1 and Nickelodeon cable networks just keeps growing. Chairman Sumner
Redstone is a proud and competitive man -- this is a fellow who survived a hotel
fire by hanging by his finger tips from a balcony. We don't think he will give
up until he gets Viacom stock back up to where it belongs.
Let's Talk Stocks
The following are company specifics on selected holdings of our Fund.
Favorable earnings prospects do not necessarily translate into higher stock
prices, but they do express a positive trend which we believe will develop over
time.
LIN Television Corp. (LNTV - $54.50 - Nasdaq) owns and operates eight
network-affiliated television stations. In October, LIN agreed to be acquired by
Hicks, Muse, Tate & Furst, a Dallas-based investment firm for $55 a share, or
approximately $1.9 billion. The transaction gives AT&T, which owns 45% of LIN,
the vehicle to cash out its investment before the 1998 deadline by which it had
to either buy the rest of LIN or put the company up for sale. Hicks Muse is
paying a multiple of over 13 times LIN's broadcast cash flow.
Shared Technologies Fairchild Inc. (STCH - $14.625 - Nasdaq) agreed to be
acquired by Intermedia Communications for $15 per share, or $713 million in cash
and assumed debt, ending Tel-Save Holdings' bid. Tel-Save agreed in July to buy
Shared Technologies for stock valued at roughly $12 per share. All three
companies offer phone services, mainly as a package, to businesses. Tel-Save
agreed to drop its bid and will receive $63 million in breakup fees.
Intermedia's move to buy Shared Technologies illustrates the urgency among phone
companies of all sizes to get bigger in order to stay competitive. As part of
the transaction, Intermedia initiated a $15 cash tender offer for four million
shares, or 23%, of Shared Technologies' common shares. The offer expired on
December 26, 1997 with shareholders receiving approximately 25% of their
position in cash. The remaining shares will be acquired in a second-step $15
cash merger, subject to shareholder and regulatory approvals. The deal is
expected to close by the end of the first quarter of 1998.
Syratech Corp. (SYRA - $35.50 - Nasdaq) was acquired by Boston financier Thomas
H. Lee for approximately $281 million, expanding his portfolio of small to
mid-size growth companies. Lee paid $32 per share for Syratech, a maker of
gifts, silverware and Faberware pots and pans. Leonard Florence, Chairman and
CEO of Syratech, and certain other executive officers of the company retained
equity interests in the surviving entity having an aggregate value of at least
$24 million. There were approximately nine million Syratech shares outstanding,
of which Mr. Florence owned approximately 32%. Shareholders could have elected
to receive $32 per share in cash or retain as much as 32% of their holdings in
the form of the new company created after the merger. The transaction was
completed in April 1997.
Tejas Gas Corp. (TEJ - $61.25- NYSE) signed a definitive agreement to be
acquired by The Royal Dutch Shell Group's U.S. arm for $2.35 billion in cash and
debt, giving Shell Oil the pipelines it needs to transport natural gas
production from the Gulf of Mexico. Shell Oil, the U.S. unit, is paying $61.50
per share in cash ($1.45 billion) and assuming approximately $900 million in
debt and preferred stock. Tejas has 10,500 miles of natural gas pipelines,
including extensive networks in Texas and Louisiana that Shell will link with
its Gulf pipelines. Many companies in the natural gas industry have been sold in
the last two years, largely to utilities who want to sell both natural gas and
electricity and secure sources of fuel for power generation. In addition to its
pipelines, Tejas owns underground storage facilities that can hold 155 billion
cubic feet of natural gas and 14 processing plants used to separate liquid fuels
such as propane and butane from natural gas before it is shipped.
TriMas Corp. (TMS - $34.375 - NYSE) agreed to be acquired by MascoTech in a
$34.50 per share cash tender offer. MascoTech is lessening its reliance on the
auto industry by acquiring TriMas Corp. at a time
6
<PAGE>
when automakers are pressuring suppliers to cut prices. TriMas, based in Ann
Arbor, Michigan, produces car-towing systems, fasteners and specialty
insulation. MascoTech currently owns approximately 15.2 million shares, or 37%
of the outstanding shares, of TriMas and certain Masco Tech-related parties own
approximately 8% of the outstanding shares of TriMas.
USX-Delhi Group (DGP - $20.50 - NYSE) announced that USX Corp. completed the
sale of its USX-Delhi Group natural gas pipeline unit to closely held Koch
Industries for $762 million as part of an effort to focus on its steel and oil
businesses. USX-Delhi Group indicated to its shareholders at the time of the
close of the transaction on November 25, 1997 that they would receive between
$19 and $21 per share, depending on how much of the proceeds were used to pay
down debt and other obligations. On December 26, 1997, USX-Delhi announced after
its completed audit that it would redeem its shares for $20.60 per share.
Minimum Initial Investment - $1,000
The Fund's minimum initial investment for both regular and retirement
accounts is $1,000. There are no subsequent investment minimums. No initial
minimum is required for those establishing an Automatic Investment Plan.
No Load - Effective January 2, 1997
Effective January 2, 1997, the Fund no longer imposes a front end sales
charge. All purchases made after January 1, 1997 are no load, that is, without a
sales charge. New and current shareholders may purchase shares of the Fund at
any time.
In Conclusion
1997 was yet another very good year for equity investors. If earnings
expectations are realized, 1998 may be a reasonably good year as well. We do
have our reservations and are mindful that at current valuations, stocks are
well above the safety net. As always, we are focusing on value stocks trading at
a material discount to their longer term intrinsic value and on insulating the
portfolio from market drops by maintaining a substantial weighting in U.S.
Treasuries. We believe this discipline will effectively preserve and enhance the
value of the assets you have entrusted to us.
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
business day for further information.
Sincerely,
/s/ Mario J. Gabelli
Mario J. Gabelli, CFA
Portfolio Manager and
February 1, 1998 Chief Investment Officer
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.
7
<PAGE>
The Gabelli ABC Fund
Portfolio of Investments -- December 31, 1997
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS-- 56.5%
AUTOMOTIVE: PARTS and ACCESSORIES -- 0.3%
3,000 Modine Manufacturing Co. ............. $ 93,120 $ 102,375
----------- -----------
AVIATION: PARTS and SERVICES -- 1.6%
20,000 Fairchild Corp., Cl. A+ .............. 400,802 497,500
6,000 Hi-Shear Industries Inc.+ ............ 7,300 12,375
1,000 Hudson General Corp. ................. 48,237 48,000
----------- -----------
456,339 557,875
----------- -----------
BROADCASTING -- 8.1%
2,000 American Radio Systems Corp.+ ........ 97,163 106,625
50,000 LIN Television Corp.+ ................ 2,402,666 2,725,000
----------- -----------
2,499,829 2,831,625
----------- -----------
BUSINESS SERVICES -- 5.1%
1,000 Fisher Scientific International Inc. . 44,550 47,750
150,000 Nashua Corp.+ ........................ 1,931,250 1,762,500
----------- -----------
1,975,800 1,810,250
----------- -----------
COMMUNICATIONS EQUIPMENT -- 0.5%
4,000 Dynatech Corp.+ ...................... 188,950 187,500
----------- -----------
COMPUTER SOFTWARE and SERVICES-- 0.0%
138 DecisionOne Holdings Corp.+ ...... 3,085 3,450
----------- -----------
CONSUMER PRODUCTS -- 0.6%
13,000 Carter-Wallace Inc. .................. 141,766 219,375
----------- -----------
DIVERSIFIED INDUSTRIAL -- 6.1%
10,000 Katy Industries Inc. ................. 239,250 203,750
8,000 Lukens Inc. .......................... 227,900 228,500
50,000 TriMas Corp. ......................... 1,715,000 1,718,750
----------- -----------
2,182,150 2,151,000
----------- -----------
ENERGY -- 19.4%
3,000 Pennzoil Co. ......................... 217,870 200,438
16,000 Southwest Gas Corp. .................. 302,563 299,000
60,532 Tejas Gas Corp.+ ..................... 3,647,054 3,707,584
10,000 Texaco Inc. .......................... 588,735 543,750
100,000 USX - Delhi Group .................... 1,902,280 2,050,000
----------- -----------
6,658,502 6,800,772
----------- -----------
ENTERTAINMENT -- 1.4%
8,000 Topps Co. Inc.+ ...................... 40,990 17,750
11,800 Viacom Inc., Cl. A+ .................. 349,920 482,325
----------- -----------
390,910 500,075
----------- -----------
EQUIPMENT and SUPPLIES -- 1.3%
2,800 Ampco-Pittsburgh Corp. ............... 19,415 54,775
7,000 Amphenol Corp., Cl. A+ ............... 177,975 389,813
----------- -----------
197,390 444,588
----------- -----------
HEALTH CARE -- 1.0%
6,000 Genentech Inc.+ ...................... 287,150 363,750
----------- -----------
HOTELS and GAMING -- 0.7%
2,000 Aztar Corp.+ ......................... 13,975 12,500
3,000 ITT Corp., New+ ...................... 213,860 248,625
----------- -----------
227,835 261,125
----------- -----------
METALS and MINING -- 0.1%
30,000 Pegasus Gold Inc.+ ................... 16,325 18,750
10,000 Royal Oak Mines Inc.+ ................ 11,858 15,625
----------- -----------
28,183 34,375
----------- -----------
PUBLISHING -- 0.2%
1,000 Dow Jones & Co. Inc. ................. 46,820 53,688
1,000 Reader's Digest
Association Inc., Cl. B .............. 22,024 24,375
----------- -----------
68,844 78,063
----------- -----------
REAL ESTATE -- 3.7%
50,000 Catellus Development Corp.+ .......... 900,000 1,000,000
20,000 Griffin Land & Nurseries Inc.+ ....... 322,381 310,000
1,000 Property Capital Trust ............... 6,613 1,125
----------- -----------
1,228,994 1,311,125
----------- -----------
RETAIL -- 3.1%
20,000 Bruno's Inc.+ ........................ 159,746 41,250
6,000 Giant Food Inc., Cl. A ............... 198,175 202,125
23,630 Syratech Corp.+ ...................... 752,757 838,865
----------- -----------
1,110,678 1,082,240
----------- -----------
TELECOMMUNICATIONS -- 0.9%
20,000 Citizens Utilities Co., Cl. B+ ....... 195,753 192,500
2,000 Southern New England
Telecommunications Corp. ............ 79,100 100,625
1,000 Startec Global Communications
Corp.+ .............................. 12,000 22,375
----------- -----------
286,853 315,500
----------- -----------
WIRELESS COMMUNICATIONS -- 2.4%
1,000 CommNet Cellular Inc.+ ............... 34,540 35,562
55,000 Shared Technologies
Fairchild Inc.+ ..................... 800,725 804,375
2,500 TCI Satellite Entertainment
Inc., Cl. A+ ........................ 16,484 17,188
----------- -----------
815,749 857,125
----------- -----------
TOTAL COMMON STOCKS .................. 18,878,127 19,912,188
----------- -----------
CONVERTIBLE PREFERRED STOCKS -- 1.9%
PUBLISHING -- 0.1%
500 Golden Books Family Entertainment
Inc. 8.75% Cv. Pfd. (a) 25,000 26,500
----------- -----------
The accompanying notes are an integral part of the financial statements.
8
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The Gabelli ABC Fund
Portfolio of Investments (Continued) -- December 31, 1997
================================================================================
Market
Shares Cost Value
------ ---- -----
CONVERTIBLE PREFERRED STOCKS (continued)
TELECOMMUNICATIONS -- 1.8%
1,000 Citizens Utilities Co. 5.00% Cv.
Pfd. ................................ $ 47,300 $ 47,750
13,500 Sprint Corp. 8.25% Cv. Pfd. .......... 500,507 604,125
----------- ------------
547,807 651,875
----------- ------------
TOTAL CONVERTIBLE
PREFERRED STOCKS .................... 572,807 678,375
----------- ------------
RIGHTS -- 0.0%
COMPUTER SOFTWARE and SERVICES -- 0.0%
17,500 Fusion Systems Corp.+ ................ 0 12,032
----------- ------------
TOTAL RIGHTS ......................... 0 12,032
----------- ------------
Principal
Amount
------
CONVERTIBLE CORPORATE BONDS -- 0.7%
CONSUMER PRODUCTS -- 0.0%
$ 17,000 Fieldcrest Cannon Inc. Sub.
Deb. Cv. 6.00%, 03/15/12 ............ 13,931 13,821
----------- ------------
FOOD and BEVERAGE -- 0.4%
500,000 Flagstar Companies Inc. Sub.
Deb. Cv. 10.00%, 11/01/14 ........... 183,095 120,000
----------- ------------
RETAIL -- 0.3%
100,000 General Host Corp. Sub. Deb. Cv.
8.00%, 02/15/02...................... 75,172 100,250
200,000 RDM Sports Group Inc. Cv.
8.00%, 08/15/03...................... 4,000 2,000
----------- ------------
79,172 102,250
----------- ------------
TOTAL CONVERTIBLE
CORPORATE BONDS ..................... 276,198 236,071
----------- ------------
CORPORATE BONDS -- 0.2%
FOOD and BEVERAGE -- 0.2%
150,000 Flagstar Companies Inc.
11.25%, 11/01/04 .................... 128,176 57,750
----------- ------------
TOTAL CORPORATE BONDS ................ 128,176 57,750
----------- ------------
U.S. GOVERNMENT OBLIGATIONS -- 30.4%
10,756,000 U.S. Treasury Bills, 4.982% to
5.359%, due 01/02/98 to
02/26/98 ............................ 10,706,318 10,705,168
----------- ------------
TOTAL U.S. GOVERNMENT
OBLIGATIONS ......................... 10,706,318 10,705,168
----------- ------------
REPURCHASE AGREEMENTS -- 4.3%
1,500,000 State Street Bank & Trust, dated
12/31/97, with a maturity value
of $1,500,529 (Collateralized by
$1,525,000 U. S. Treasury
Notes, 5.50%, due 11/15/98,
market value $1,532,625) ............ $ 1,500,000 $ 1,500,000
----------- ------------
TOTAL REPURCHASE
AGREEMENTS .......................... 1,500,000 1,500,000
----------- ------------
TOTAL INVESTMENTS --
94.0% ............................... $32,061,626 33,101,584
===========
Other Assets and Liabilities
(Net)-- 6.0% ........................ 2,126,423
------------
NET ASSETS -- 100.0%
(3,442,361 shares outstanding) ...... $ 35,228,007
------------
NET ASSET VALUE, Offering
and Redemption Price
Per Share............................ $10.23
======
- ----------------------
For Federal income tax purposes:
Aggregate cost ............................... $ 32,061,626
===========
Gross unrealized appreciation ................ $ 1,612,987
Gross unrealized depreciation ................ (573,029)
------------
Net unrealized appreciation .................. $ 1,039,958
============
- ----------
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At December
31, 1997, the market value of Rule 144A securities amounted to $26,500 or
0.1% of net assets.
+ Non-income producing security.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
The Gabelli ABC Fund
Statement of Assets and Liabilities
December 31, 1997
================================================================================
Assets:
Investments, at value (cost $32,061,626) ............... $33,101,584
Receivable for Fund shares sold ........................ 2,713,849
Dividends and interest receivable ...................... 2,036
Deferred organizational expenses ....................... 8,822
-----------
Total Assets ....................................... 35,826,291
-----------
Liabilities:
Payable to custodian ................................... 423,678
Payable for Fund shares redeemed ....................... 59,144
Payable for investment advisory fees ................... 30,640
Payable for distribution fees .......................... 21,155
Other accrued expenses ................................. 63,667
-----------
Total Liabilities .................................. 598,284
-----------
Net A ssets (applicable to 3,442,361
shares outstanding) ............................... $35,228,007
===========
Net Asset Value, offering and
redemption price per share ........................ $10.23
======
Net Assets consist of:
Capital stock, at par value ............................ $ 3,442
Additional paid-in-capital ............................. 34,186,713
Distributions in excess of
net investment income .............................. (5,775)
Accumulated undistributed net realized
gain on investments ................................ 3,669
Net unrealized appreciation on
investments ........................................ 1,039,958
-----------
Total Net Assets ................................... $35,228,007
===========
Statement of Operations
For the Year Ended December 31, 1997
======================================
Investment Income:
Dividends .............................................. $ 266,748
Interest ............................................... 610,136
-----------
Total Investment Income ............................ 876,884
-----------
Expenses:
Investment advisory fees ............................... 281,337
Distribution fees ...................................... 70,695
Shareholder services fees .............................. 69,009
Shareholder report expenses ............................ 43,702
Legal and audit fees ................................... 42,829
Custodian fees and expenses ............................ 42,350
Registration fees ...................................... 41,545
Amortization of organizational expenses ................ 24,454
Directors' fees ........................................ 9,721
Miscellaneous expenses ................................. 10,596
-----------
Total Expenses ..................................... 636,238
Custodian fee credit ................................... (4,165)
-----------
Total Net Expenses ................................. 632,073
-----------
Net Investment Income ..................................... 244,811
-----------
Net Realized and Unrealized Gain
on Investments:
Net realized gain on investments ....................... 2,253,030
Net change in unrealized appreciation
on investments ..................................... 873,518
-----------
Net realized and unrealized gain
on investments ..................................... 3,126,548
-----------
Net increase in net assets resulting
from operations ........................................ $ 3,371,359
===========
Statement of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996
---- ----
<S> <C> <C>
Operations:
Net investment income ................................. $ 244,811 $ 570,427
Net realized gain on investments ...................... 2,253,030 1,086,110
Net change in unrealized appreciation on investments .. 873,518 374,989
----------- -----------
Net increase in net assets resulting from operations 3,371,359 2,031,526
----------- -----------
Distributions to shareholders:
From net investment income ............................ (244,811) (559,000)
From net realized gain on investments ................. (2,253,030) (1,090,311)
In excess of net investment income .................... (21,105) --
In excess of net realized gain on investments ......... (165) --
----------- -----------
Total distributions to shareholders ................. (2,519,111) (1,649,311)
----------- -----------
Share transactions:
Net increase in net assets from Fund share transactions 7,574,049 6,557,281
----------- -----------
Net increase in net assets .......................... 8,426,297 6,939,496
Net Assets:
Beginning of period ................................... 26,801,710 19,862,214
----------- -----------
End of period ......................................... $35,228,007 $26,801,710
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies. The Gabelli ABC Fund (the "Fund"), a series
of Gabelli Investor Funds, Inc. (the "Corporation"), was organized on October
30, 1992 as a Maryland corporation. The Fund is a non-diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "Act"), whose primary objective is to achieve total
returns that are attractive to investors in various market conditions without
excessive risk of capital loss. The Fund commenced operations on May 14, 1993.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies followed by the Fund in the preparation of its
financial statements.
Security Valuation. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are
valued at the last sale price on that exchange (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 the 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. If no sales of such options have taken place
that day, they will be valued at the mean between their closing bid and asked
prices.
Repurchase Agreements. The Fund may enter into repurchase agreements with
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 credit guidelines established by the Directors. Under the terms of a
typical repurchase agreement, the Fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. The Fund will always receive and
maintain securities as collateral whose market value, including accrued
interest, will be at least equal to 100% of the dollar amount invested by the
Fund in each agreement. The Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer of the collateral to
the account of the custodian. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to maintain the adequacy of the collateral. If the seller defaults
and the value of the collateral declines or if bankruptcy proceedings are
commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
11
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements (Continued)
================================================================================
Short Sales. The Fund is authorized to engage in short-selling, which obligates
the Fund to replace the security borrowed by purchasing the security at the
current market value sometime in the future. 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 a segregated account with
cash and/or U.S. Government securities sufficient to cover its short position on
a daily basis. At December 31, 1997, there were no short positions.
Securities Transactions and Investment Income. Securities transactions are
accounted for on the trade date, with realized gain or loss on the sale of
investments determined by using the identified cost method. Interest income
(including amortization of premium and accretion of discount) is recorded as
earned. Dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders. Dividends and distributions to
shareholders are recorded on the ex-dividend date. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund.
As of December 31, 1997, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to additional
paid-in-capital:
Distributions in
Excess of Accumulated Undistributed Net
Net Investment Income Realized Gain on Investments
--------------------- ----------------------------
$14,513 $(14,513)
Provision for Income Taxes. The Fund has qualified and intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision is
not required.
2. Investment Advisory Agreement. The Fund has entered into an investment
advisory agreement (the "Advisory Agreement") with the Adviser which provides
that the Fund will pay the Adviser a fee, computed daily and paid monthly, at
the annual rate of 1.00% of the value of the Fund's average daily net assets. In
accordance with the Advisory Agreement, the Adviser provides a continuous
investment program for the Fund's portfolio, oversees the administration of all
aspects of the Fund's business and affairs and pays the compensation of all
Officers and Directors of the Fund who are its affiliates.
12
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements (Continued)
================================================================================
3. Organizational Expenses. The organizational expenses of the Fund are being
amortized on a straight-line basis over a period of 60 months.
4. Distribution Plan. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940. For the year ended December 31, 1997, the Fund incurred distribution costs
payable to Gabelli & Company, Inc., an indirect wholly-owned subsidiary of the
Adviser, of $70,695, or 0.25% of average net assets, the annual limitation under
the Plan.
5. Portfolio Securities. Purchases and sales of securities for the year ended
December 31, 1997, other than short term securities and securities sold short,
aggregated $85,095,853 and $80,546,734, respectively.
6. Transactions with Affiliates. During the year ended December 31, 1997, the
Fund paid brokerage commissions of $51,269 to Gabelli & Company, Inc. and other
affiliates of the Adviser.
7. Capital Stock Transactions. Transactions in shares of common stock were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------------- -----------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold ................................ 3,121,544 $33,066,126 1,737,678 $17,232,605
Shares issued upon reinvestment of dividends 205,614 2,091,093 159,323 1,558,644
Shares redeemed ............................ (2,608,737) (27,583,170) (1,219,557) (12,233,968)
---------- ----------- ---------- -----------
Net increase .............................. 718,421 $ 7,574,049 677,444 $ 6,557,281
========== =========== ========== ===========
</TABLE>
13
<PAGE>
The Gabelli ABC Fund
Financial Highlights
================================================================================
Selected data for a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996 1995 1994 1993+
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period ............... $ 9.84 $ 9.71 $ 9.57 $ 10.03 $10.00
------- ------- ------- ------- ------
Net investment income .............................. 0.08 0.21 0.21 0.33 0.29
Net realized and unrealized gain on investments .... 1.17 0.54 0.86 0.12 0.62
------- ------- ------- ------- ------
Total from investment operations ................... 1.25 0.75 1.07 0.45 0.91
------- ------- ------- ------- ------
Distributions to shareholders:
From net investment income ......................... (0.08) (0.21) (0.21) (0.33) (0.29)
From net realized gain on investments .............. (0.77) (0.41) (0.72) (0.58) (0.59)
In excess of net investment income ................. (0.01) -- -- -- --
------- ------- ------- ------- ------
Total distributions ................................ (0.86) (0.62) (0.93) (0.91) (0.88)
------- ------- ------- ------- ------
Net asset value, end of period ....................... $ 10.23 $ 9.84 $ 9.71 $ 9.57 $10.03
------- ------- ------- ------- ------
Total return(a) .................................... 12.8% 7.8% 11.2% 4.5% 9.1%
======= ======= ======= ======= ======
Ratios to average net assets and supplemental data:
Net assets, end of period (in 000's) ............... $35,228 $26,801 $19,862 $24,419 $8,847
Ratio of net investment income to average net assets 0.87% 2.11% 1.83% 2.95% 2.96%(c)
Ratio of operating expenses to average net assets(b) 2.26% 2.09% 2.10% 2.09% 2.75%(c)
Portfolio turnover rate ............................ 493% 343% 508% 490% 232%
Average commission rate per share(d) ............... $0.0464 $0.0499 -- -- --
</TABLE>
- ----------
+ From commencement of operations on May 14, 1993.
(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. Total return for the period of
less than one year is not annualized.
(b) The ratio of operating expenses to average net assets for the year ended
December 31, 1997 does not include a reduction of expenses for custodian
fee credits. Including such credits, the ratio would have been 2.25%.
(c) Annualized.
(d) For fiscal years beginning on or after September 1, 1995, the SEC requires
a fund to disclose its average commission rate paid per share.
-----------------------------------------------------------
Top Ten Holdings
December 31, 1997
Tejas Gas Corp. Catellus Development Corp.
LIN Television Corp. Syratech Corp.
USX-Delhi Group Shared Technologies Fairchild Inc.
Nashua Corp. Sprint Corp. 8.25% Cv. Pfd.
TriMas Corp. Texaco Inc.
-----------------------------------------------------------
14
<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, 1997, 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, 1997 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, 1997, 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 26, 1998
- --------------------------------------------------------------------------------
1997 TAX NOTICE TO SHAREHOLDERS (Unaudited)
For the year ended December 31, 1997, the Fund paid to shareholders, on
December 29, 1997, an ordinary income dividend (comprised of net
investment income and short-term capital gains) totalling $0.793 per share
and long-term capital gains totaling $0.067 per share. For the year ended
December 31, 1997, 11.73% of the ordinary income dividend qualifies for
the dividend received deduction available to corporations.
U.S. Government Income:
The percentage of the ordinary income dividend paid by the Fund during
1997 which was derived from U.S. Treasury securities was 20.12%. Such
income is exempt from state and local tax in all states. However, many
states, including New York and California, allow a tax exemption for a
portion of the income earned only if a mutual fund has invested at least
50% of its assets at the end of each quarter of the Fund's fiscal year in
U.S. Government securities. The Gabelli ABC Fund did not meet this strict
requirement in 1997. 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.
- --------------------------------------------------------------------------------
15
<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 Karl Otto Pohl
Chairman and Chief Former President
Investment Officer Deutsche Bundesbank
Gabelli Funds, Inc.
Anthony J. Colavita Werner J. Roeder, MD
Attorney-at-Law Director of Surgery
Anthony J. Colavita, P.C. Lawrence Hospital
Vincent D. Enright
Senior Vice President and
Chief Financial Officer
KeySpan Energy Corp.
Officers
Mario J. Gabelli, CFA Bruce N. Alpert
President and Chief Vice President
Investment Officer and Treasurer
James E. McKee
Secretary
Distributor
Gabelli & Company, Inc.
Custodian, Transfer Agent and Dividend Agent
State Street Bank and Trust Company
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom LLP
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of The
Gabelli ABC Fund. It is not authorized for distribution to prospective investors
unless preceded or accompanied by an effective prospectus.
- --------------------------------------------------------------------------------
