[PHOTO OMITTED]
THE
Gabelli
ABC
FUND
ANNUAL REPORT
DECEMBER 31, 1998
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The Gabelli ABC Fund
Annual Report
December 31, 1998
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Business Week gave
The Gabelli ABC Fund an A for superior
risk-adjusted total return in their
1999 Mutual Fund Scoreboard.
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To Our Shareholders,
In the fourth quarter of 1998, the stock market came roaring back.
Emboldened by three Federal Reserve interest rate cuts, investors forgot all
about the world's problems and dove back into equities. Treasury bond prices
retreated from 30 year highs as investors migrated back to stocks.
Despite global economic turmoil and lingering concern over its impact on
the U.S. economy and corporate profits, the Standard & Poor's 500 Index recorded
its fourth consecutive year of double digit gains. Mid-cap and small cap stocks
did not fare nearly as well, with the S&P Mid-Cap Index posting a modest gain
and the Russell 2000 Index closing the year with a loss.
Investment Performance
For the fourth quarter ended December 31, 1998, the Gabelli ABC Fund's
(the "Fund") total return was 11.9%. The Standard & Poor's ("S&P") 500 Index and
Lipper Analytical Services U.S. Treasury Money Market Average had returns of
21.4% and 1.1%, respectively, over the same period. Each index is an unmanaged
indicator of investment performance. The Fund was up 11.1% for 1998. The S&P 500
and Lipper U.S. Treasury Money Market Average rose 28.7% and 4.7%, respectively,
over the same twelve month period.
For the five year period ended December 31, 1998, the Fund's total return
averaged 9.4% annually versus average annual total returns of 24.1% and 4.6% for
the S&P 500 and Lipper U.S. Treasury Money Market Average, respectively. Since
inception on May 14, 1993 through December 31, 1998, the Fund had a cumulative
total return of 71.3%, which equates to an average annual return of 10.0%.
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Past performance is no guarantee of future results. Business Week's annual
Mutual Fund Scoreboard rated mutual funds based on five year performance
adjusted for downside volatility. The top 7.5% of these funds earned A's for
superior risk-adjusted total returns. For 1998, 104 funds earned A's among
nearly 1,400 equity funds with a five year history, the minimum history required
for a rating.
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INVESTMENT RESULTS (a)
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<TABLE>
<CAPTION>
Quarter
---------------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
1998: Net Asset Value ....... $10.64 $10.68 $10.16 $ 9.59 $ 9.59
Total Return .......... 4.0% 0.4% (4.9)% 11.9% 11.1%
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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%
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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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</TABLE>
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Average Annual Returns - December 31, 1998 (a)
1 Year .................................................................. 11.1%
5 Year .................................................................. 9.4%
Life of Fund (b) ........................................................ 10.0%
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Dividend History
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Payment (ex) Date Rate Per Share Reinvestment Price
- ----------------- -------------- ------------------
December 28, 1998 $1.763 $9.50
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 investment operations on May 14, 1993.
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What We Do
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The Gabelli ABC Fund and its unique Performance Guaranty Program was
created in 1993 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. We see
ourselves as an "enhanced money market". 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 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
2
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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
12/93 $10,910 10163 10659
12/94 $11,401 10530 10798
12/95 $12,278 11091 14858
12/96 $13,667 11618 18275
12/97 $15,410 12139 24370
12/98 17,127 12706 31374
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 14, 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 or 1998. The Fund's annual total returns were 12.8% and 11.1%,
respectively, for those two years. Although the Performance Guaranty Program is
not being offered for 1999, the Fund continues striving to achieve the same
objectives. During the most recent four year period in which the S&P 500 has
delivered 25% plus annual returns, a minimum return guarantee of 5% appeared
dull and unattractive. However, in terms of market volatility, the Fund has
provided comfort to the risk averse.
The Adviser and Board of Directors continue to explore several options
involving a longer term guaranty program in a closed end structure. This would
require shareholder approval. Meanwhile, the
3
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COMMENTARY
Outlook for 1999
Mario Gabelli, our Chief Investment Officer, has appeared in the
prestigious Barron's Roundtable discussion annually since 1980. Many of our
readers have enjoyed the inclusion of selected and edited comments from Barron's
Roundtable in previous reports to shareholders. Once again, we are including
selected comments of Mario Gabelli from Barron's 1999 Roundtable. For our
shareholders who prefer to view the entire interview, the complete text is
available on the Internet at www.barrons.com.
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January 18, 1999 BARRON'S o Roundtable'99
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======================================
BARRON'S
ROUNDTABLE
----------------------------
Mario Gabelli
Chairman and Chief Investment Officer,
Gabelli Funds, Rye, New York
======================================
Barron's ("Q"): A new year, a new market environment? Meaning, are investors
going to have to grapple with seismic economic shifts as well as impeachment and
Y2K?
Gabelli ("G"): Let's focus on the U.S. economy. I'm in the camp that argues that
consumers are going to get another tailwind. There is going to be a major tax
cut that is going to be very stimulative to the consumer. If I'm a consumer
today, I feel good. I'm working. Gasoline, I just went and bought a tankful. I
paid 20 cents a gallon less than it cost me the last time I filled up.
Q: You obviously don't do it often.
G: What I mean is that on 500 gallons of gas, I save 100 bucks. That's two bucks
a week. That's terrific. There are 50 million vehicles on the road. At two bucks
a week, that's $100 million a week, that's around $5 billion annually going back
into consumers' pockets. I just refinanced my mortgage. I got a jumbo $240,000
loan at 6 7/8%. I'm saving 1%, that's $2,400, that's another $45 or so a week
and I'm going to get a tax cut. And I own Internet stocks. I think this is
terrific.
Q: But you could see long-term interest rates going up soon because Japan may be
asking for their savings back.
G: Well, they have gone up to 5.3%, but still, I just refinanced my house, so I
feel good. You can talk about long-term rates, but my mortgage is what I look at
as a consumer. Besides, looking at the redressing of imbalances, one of the
concerns we had was that the dollar was too strong. Now if you look at the
dollar versus the euro, this morning it was 114, and versus the yen it was 107.
So when translating Euroland earnings into U.S. dollars, companies that are
operating there could get a terrific tailwind.
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January 18, 1999 BARRON'S o Roundtable'99
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Reported S&P earnings, I think, could be a lot better than people expect,
because they've forgotten the currency factor. Especially if I have 2% real
growth in Euroland and I have companies that are now rationalizing and getting
the benefit of synergies. The companies I talk to in the U.S. that have big
operations in Europe are all saying, "Hey, in the last couple of months, we are
getting a big benefit from currency." That could continue for the next half. So
the U.S. economy is reasonably good. Earnings and cash flow for the companies I
follow should be up 5%, 7%, 8% in 1999. I think the U.S. portion of non-U.S.
earnings could translate better. So I can't make anything but an optimistic
case, let's put it that way, for corporate profits. The other element in 1999
that I have to factor in is that some of the companies I'm talking to and
listening to say they are worried about a Y2K problem. So the fourth quarter of
1999 will likely have a big inventory bulge. That is certainly a plus, from what
I see, for shipments.
Let me give you one other element on earnings: A lot of corporate
controllers and a lot of CFOs squirreled away earnings in the first and second
quarters of last year. Then the accounting problems of Cendant and others
emerged. So now you will not squirrel away earnings in that fourth quarter or in
the first half anymore. You are not going to play that game -- as much. I can
see reported earnings doing better than economic earnings over the next couple
of quarters, just because you are not going to use the other side of your pencil
or whatever they use nowadays.
Another item to consider is that virtually every country in Europe now has
a socialist government. The Italians probably have a Communist government. I
mean, how are they going to sit back and not undo what they've done? They've
constrained, they constrained, until they could introduce their single economic
unit. Now, why not do the reverse of that? Why don't you factor that into your
thinking?
Q: It may be bullish for those economies. But it means reflation, it means
higher interest rates, lower P/E ratios.
G:: Oh, yes. That's what I'm saying. It's the reflationary theme.
Changing gears to the manufacturing sector of the economy -- people are
asking, "Where is it?" It is being transported outside of the United States.
Machine-tool orders in November were $440 million, down from $532 million.
You see it in the farm-equipment industry, the domestic construction equipment
industry; and manufacturing jobs are disappearing, probably. When Cuba opens up,
labor rates will go from $1 an hour to $1 a day, if you are looking at Mexico
versus Cuba.
Q: But is this a hollowing-out of the economy? Or is this a transition to the
brave new Internet Age?
G: Adam Smith is alive and well.
I have to stay with the bullish interpretation of all these dynamics. The
notion of globalization of the economy and the movement of capital around to the
lowest cost . . . every country, as long as you have free trade, is going to
contribute to global wealth at some point. What's more, the Japanese, as they
come out of their problems, eventually will be going from seeking share of
market on a global basis to seeking share of profits. That has to be good for
corporate profitability around the world.
Q: What is your conclusion on the market?
G: Let me give you some numbers on the flow of funds. Cash into the market from
stock buybacks in 1998 was $207 billion, up from $181 billion. Mutual-fund
inflow was $176 billion, down from $232 billion. IPOs, which hit a big air
pocket, are starting to accelerate again but were $108 billion last year, down
from $118 billion. Other elements were foreign purchases of U.S. stocks and U.S.
purchases of non-stock assets. But the big element that makes those flows look
tiny was that deals in the U.S. alone amounted to $1.6 trillion. Now, for you
cynics
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January 18, 1999 BARRON'S o Roundtable'99
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who'd argue how much was in cash, the cash portion was $672 billion, up from
$414 billion last year. So money moving from savers into the stock market wasn't
as dynamic a flow-of-funds element as how much came into the market being
recycled from transactions. Again, incrementally in 1998 an unprecedented $250
billion came into the market from the cash portion of deals, that's 1 1/2 times
the amount that came in via mutual funds -- U.S. only, not globally. It is just
a phenomenon that has to be constantly hammered away at.
Q: [Some of the biggest cap stocks are up over 100%. Such moves are clearly
unsustainable.]
G: Some of that is part of the migration of money into indexing -- which is
mindlessly buying stocks based on their index weightings. It's just
self-reinforcing. I don't know the numbers for 1998, but the trend has been more
mutual-fund purchases of index funds. More defined-benefit plans going into the
index funds. And those funds have to, by definition, buy mindlessly based on
capitalization. And that is going to continue.
Q: Until you get to the last guy.
G: I will tell you a story. I'm creating this. But in 1973, it was conventional
wisdom that McDonald's had a market capitalization greater than all of the steel
industry's, and that we were going to become a nation of hamburger flippers --
indeed, that the world was going that way. Every cycle has the same thing. You
know, somebody sits up and says AOL and Amazon.com have caps greater than the
steel industry's. But that is what Schumpeter said, creative destruction is one
of the great virtues of capitalism. It's very positive.
Q: [How about what is going on in Washington?]
G: Going back to interest rates, I think there's plenty of margin of flexibility
on the short end. Real rates are much too high here. They should migrate down.
The dollar -- I don't know how Greenspan handles it. It is a challenge. The
balance-of-payments deficit is going to go way up. I believe, based on last
month's deficit, the run rate was about $180 billion. But $250 billion sounds
like a reasonable number. That has got to, with a new currency bloc in Europe,
create all sorts of question marks that I don't have an answer to. Those are
moving parts. We don't invest that way. We just think about these things.
Q: Doesn't anyone find all this blind faith in Greenspan and Rubin "doing the
right thing" a mite discomforting?
G: The concern isn't that they won't do the right thing, but that Rubin and
Greenspan retire like Mantle and Maris.
Q: But in general, you are bullish?
G: On the world economy.
Q: And on equities?
G: No, not on equities. There is no margin of safety in stocks. Absolutely none.
But I do think Adam Smith is alive and well. Once you can start migrating labor
and goods to the highest efficiency, you create incredible opportunities on a
global scale. We don't have those efficiencies baked into the system. But there
are enormous birthing pains. You saw these birthing pains in Southeast Asia. But
I don't think that's a big depressive because the sunshine in the valley is that
we'll come out in a world in which profits are the driver. That is pretty
interesting.
Q: But Mario, where will rates go?
G: Like 5 3/4%-6%. Long rates have already started up. But I see short rates
coming down.
Q: If Ed Hyman is right and there isn't much nominal growth in the economy,
won't that make it difficult for small companies?
G: The comment I want to make -- this is very important -- is that the business
people I talk to really were shocked by the virtual shutdown of the capital
markets following the [John] Meriwether debacle. Not only did the spreads widen,
but the market started closing on them. That is creating a backlash in terms of
either selling out -- the option which I happen to be fond of -- and also in
terms of bringing back a margin of safety to their balance
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January 18, 1999 BARRON'S o Roundtable'99
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sheets and their perspectives on how to run their businesses. From the market's
point of view, looking out over the next five years, I still think we are in a
world in which corporate profits can rise -- not return on equity, where I can't
see much improvement, not return on sales, where I can't see much improvement
from here. But I can see maintaining some of these levels. I see these global
synergies, the Exxon-Mobils, adding to profitability. There won't necessarily be
revenue synergies in some of these, but there will certainly be margin
synergies, capital synergies, and efficiency elements. So I still see a 6%-8%
secular growth rate over the next five years in corporate profits. For 1999 I am
in the camp that has S&P earnings up, because over one-third of the earnings mix
in the S&P is non-U.S. Now, that's leaving Brazil aside, because it is part of
my wall of worry -- I have my A-B-C-D issues: Asia, Brazil, Clinton and the
Dollar are the things I worry about. But in terms of my model, where I have
interest rates backing up, and earnings at that level, the market has absolutely
no margin of safety. So we could see it up 3%, down 20%. Probably somewhere
in-between at the end of the year. With much more volatility. I think volatility
is increased by the new generation of traders. Individuals now come in to work
and trade. Or they don't even come in to work. There is nothing between them and
a buy/sell decision except their finger on a mouse. There is no broker who has a
boss asking, "Hey, is he churning? Is he overinvesting?" There is nothing there.
So the volatility you saw from July through the beginning of January I think is
just the way the world's going to be. As long as you are treating stocks like
commodities, you have to expect that to continue. And they are trading stocks
like they are soybeans.
Q: So the stock market will be the pits?
G: There will be great opportunities to make a lot of money if you short. If you
go long, then it's just going to be a terrific eclectic market.
Q: What will make the small-fry go up, especially if the S&P sells off and the
economy is no great shakes?
G: Forcing transactions, by managements, that narrow the spreads between their
intrinsic values and the stock prices.
Q: It looks like Mario wants to talk tulips next.
G: Our goal always has been to make 10% real by picking stocks that we hope,
after taxes, after inflation, accomplish that. So we try to find companies at a
significant margin of safety to intrinsic value. The second part of our strategy
is to try to buy things for the long term, because it's not only what you make,
but what you keep. We'd rather pay 20% long-term capital-gains taxes than 40% on
ordinary income from trading. But we're here in January of 1999, and even 25%
looks awfully dull when you make that in one week -- 50%, in Amazon. So I have
succumbed and I am going to recommend only stocks that have grown to the sky --
Excite, uBid, eBay, Amazon and that's it. Nothing else! You can also have my
tulips, Arthur. Don't say I never gave you anything. They're starting to wilt --
Art Samberg: Am I allowed to eat them?
G: Do anything you like. Charles MacKay wrote about all this in 1841, in
Extraordinary Popular Delusions and the Madness of Crowds.
Anyway, when we look at stocks, we also look for a catalyst. Forcing
transactions. That is, a management, if they are alert and sensitive, can do
things like buying back stock, like LBOs or financial engineering. One of the
dynamics that have been in place for the last four years is deals. Deals will
continue in 1999 -- a year in which the Exxons and the Mobils are driving values
by becoming global, further reinforcing their positions. There are a lot of
areas where that's happening.
Q: Thanks , Mario. o
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7
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Winners and Losers
For 1998, we had our usual eclectic mix of winners. Near the top of our
performance list were a trading card/candy company (Topps Co.), a cellular
telephone operator (Centennial Cellular), a cable television programming company
(Tele-Communications Inc./Liberty Media Group) and a telecommunications giant
(Sprint). From an industry group perspective, utility companies including,
Southwest Gas, Florida Public Utilities and Orange & Rockland Utilities,
generated solid returns as consolidation in the utility industry intensified.
The losers ledger was dominated by industrial cyclicals (Fairchild,
Aeroquip-Vickers and Ampco-Pittsburgh). Industrial companies may continue to
face stiff competition from low cost Asian imports and their earnings will
likely remain under pressure. However, at this stage, we believe most of the bad
news is already baked into stock prices. Our limited gold stock holdings
(Pegasus Gold and Royal Oak Mines) performed poorly as gold continued to lose
its luster. Our modest positions in energy (PennzEnergy and Pennzoil-Quaker
State) also declined substantially as oil prices hit 15 year lows.
Deals: "The Europeans Are Coming! The Europeans Are Coming!"
Daimler Benz/Chrysler, British Petroleum/Amoco, Deutsche Bank/Bankers
Trust and Scottish Power/Pacificorp--Europe is discovering America all over
again! In 1998, there were a significant number of announced European
acquisitions of American companies. This transatlantic deal volume exceeds that
of the last three years combined. Euroland is here and leading European
companies are beginning to flex their financial muscles. December's coordinated
European interest rate cuts should help invigorate the Euro economy and embolden
more European companies to grab footholds in the American market. We have a
portfolio of red blooded American companies that could be targets. The "Third
Great Wave of Takeovers" is far from cresting. In fact, with Europe now
contributing, its mass and power is growing. Investors in undervalued U.S.
companies will continue to ride this wave.
The Role of Arbitrage in the ABC Fund Strategy
Arbitrage continues to be one of the investment strategies we employ to
preserve and enhance shareholder assets. So, we feel it appropriate to once
again explain arbitrage and the role it plays in our investment approach.
What is arbitrage? We define arbitrage as investing in "event" driven
situations; primarily, but not exclusively, in announced mergers, acquisitions,
reorganizations and other "work-out" opportunities. When a company agrees to be
acquired by another company, its stock price generally immediately rises to just
below the stated acquisition price. We look at the spread between the seller's
stock price and the announced deal price and the time frame in which the
acquisition is expected to close. If we are confident the acquisition will be
consummated on schedule at the full deal price and we can earn a annualized rate
of return materially higher than that likely to be realized through investing in
cash equivalents, then we are interested.
Then, we do the research. We value the target company to see if it is
really worth what the acquiring company has announced it will pay. Sometimes we
find it is worth even more, increasing the odds that some other company might
make a higher bid. We also research the acquiring company to ensure that it can
finance the deal. If it is a stock transaction, we need to know that we will be
receiving good value in return. We look at merger agreements to see if there are
any loopholes. We review any
8
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antitrust concerns raised by the government. In short, we make judgments to
assure that what we see will be what we get.
There is greater risk in this strategy than in simply owning money market
instruments because announced acquisitions are not always completed and, in
situations where the deal currency is the acquirer's stock as opposed to cash,
the ultimate acquisition price may vary in value. However, if we do a thorough
job evaluating the downside risk, we can often earn very generous returns
relative to the money markets, particularly with today's low money market
yields. In summation, we think arbitrage, as we practice it in the ABC Fund,
represents an attractive investment opportunity with historically low
correlation to the performance of the overall stock market.
We borrow a quote from Warren Buffet to explain our use of arbitrage in
the Fund: "Our subsidiaries sometimes engage in arbitrage as an alternative to
holding short term cash equivalents. We prefer, of course, to make major long
term commitments. But we often have more cash than good ideas. At such times
arbitrage sometimes promises much greater returns than Treasury bills and,
equally important, cools any temptation we may have to relax our standards for
long term investments".
Let's Talk Stocks
The following are stock specifics on selected holdings of our Fund.
Favorable earnings prospects do not necessarily translate into higher stock
prices, but they do express a positive trend which we believe will develop over
time. American Bankers Insurance Group Inc. (ABI - $48.375 - NYSE), based in
Miami, is a leading provider of credit insurance and credit-related insurance
products both in the U.S. and abroad. Founded in 1949, ABI now has $3.3 billion
in assets and should collect $2.8 billion in gross premiums in 1998. ABI has a
heavy emphasis on contingent commission and captive reinsurance plans, which
help to preserve the company's margins, mitigate volatility and ensure highly
visible earnings. Because of such plans, ABI is not so much an insurer but a
distribution company servicing an insurance product. Since the termination of
its agreement to be acquired by Cendant Corp., ABI has focused on closing new
business in its pipeline. As such, top line growth is expected to improve in the
near future and return to a more normal 10% to 12% growth rate in 1999.
BA Merchant Services Inc. (BPI - $20.125 - NYSE) has agreed to be acquired by
BankAmerica Co. (BAC - $60.125 - NYSE) for $333 million in cash. BAC will pay
$20.50 for each of BA Merchant's 16.2 million Class A shares. BankAmerica, which
spun off BA Merchant two years ago, owns all of the company's Class B shares,
representing 67 percent of its capital. The transaction is expected to close in
the first quarter of 1999. BA Merchant rejected a $252 million, $15.50 per
share, offer from BankAmerica in November. BAC raised its offer after an
independent committee determined the original offer was too low. BankAmerica
owns 95.2 percent of the voting power of BA Merchant's common stock. BA Merchant
is the fifth-largest processor of merchant credit transactions in the country
and the exclusive provider of such services for Bank of America.
Centennial Cellular Corp. (CYCLD - $41.00 - Nasdaq) provides wireless
telecommunications services to 355,000 subscribers in the U.S. and Puerto Rico.
The company's cellular licenses cover 7.1 million population equivalents
("POPs") domestically and 3.8 million POPs in Puerto Rico. On January 7, 1999,
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a group of investors led by Welsh, Carson, Anderson & Stowe completed an
acquisition of a 92.9% stake in Centennial Cellular in a deal valued at $1.9
billion.
Kuhlman Corp. (KUH - $37.875 - NYSE) has agreed to be acquired by Borg-Warner
Automotive (BWA - $55.75 - NYSE), the world's largest maker of automatic
transmission parts, for $750 million in cash and stock ($39 per share). The
Kuhlman purchase allows Borg-Warner to expand into the market for turbochargers,
which add power to diesel engines, on trucks and buses. Auto parts and truck
parts makers have been consolidating to broaden their product lines and to offer
complete parts systems as automakers seek to cut manufacturing costs. The
transaction price includes $150 million of Borg-Warner shares to be issued to
Kuhlman shareholders. In addition, Borg-Warner is to pay $510 million in cash
and assume $80 million to $90 million of Kuhlman's debt. The transaction is
subject to Kuhlman shareholders' approval, as well as regulatory approvals, and
is expected to close in the first quarter of 1999.
LCS Industries Inc. (LCSI - $17.1875 - Nasdaq) has agreed to be acquired by Onex
Corp.'s (OCX - $28.41 - TSE) CustomerOne Holding Corp. through a $17.50 cash
tender offer, expanding Onex's outsourcing services for direct marketers. LCSI
provides catalog-order fulfillment and other services for direct-marketing
companies. Onex, a Toronto merchant bank with 1997 revenue of $11.2 billion,
also has investments in steel-component making, construction and food services.
The acquisition will expand the business of CustomerOne, a holding company for
Softbank Services Group and North Direct Response. Onex acquired those two
companies earlier this year to provide outsourcing services to Internet and
computer companies and consumer packaging groups.
Orange & Rockland Utilities Inc. (ORU - $57.00 - NYSE) has agreed to be acquired
by Consolidated Edison (ED - $52.875 - NYSE) for $1.15 billion in cash and
assumed debt, allowing Con Edison to boost its power transmission business in a
growing part of the New York City area. Orange & Rockland is a small utility,
with most of its customers in New York's northern suburbs. Con Edison is to pay
$58.50 per share for all of Orange & Rockland's 13.5 million outstanding shares.
Orange & Rockland shareholders approved the merger on August 20, 1998 and the
companies have filed all necessary regulatory applications. The transaction is
expected to be completed once all state and federal regulatory approvals are
obtained which is expected during the second quarter of 1999. In addition to the
$58.50 per share, we will also receive Orange & Rockland's $0.645 quarterly
dividend.
Petersen Companies (PTN - $33.875 - NYSE) agreed to be acquired by Emap plc, the
U.K.'s second largest publisher of consumer magazines, for $1.2 billion in cash.
The merger combines two companies with popular, male-oriented magazines. Emap
will gain access to a U.S. database of 16 million young males, a group that
spends heavily on lifestyle magazines focusing on cars, surfing, skateboards and
hunting. Petersen shareholders will receive $34 per share through a cash tender
offer. the merger is expected to be completed in the first quarter of 1999.
Southwest Gas Corp. (SWX - $26.875 - NYSE) is a natural gas utility based in Las
Vegas, providing natural gas service to over 1.2 million residential, commercial
and industrial customers in one of the most economically vibrant areas of the
United States: Arizona, Nevada and parts of northeastern and southeastern
California. The company added more than 59,000 customers during 1997. This
represents the fourth year in a row in which Southwest's customer growth rate
has been at least double the industry average. Southwest is the nation's
fastest-growing natural gas distribution company. Southwest and
10
<PAGE>
Oneok (OKE - $36.125 - NYSE) have announced that their boards of directors have
approved a definitive merger agreement. Oneok, headquartered in Tulsa, Oklahoma,
has offered to purchase all outstanding SWX shares for $28.50 per share in cash.
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.
Additionally, The Gabelli ABC Fund and other Gabelli Funds are available through
the no-transaction fee programs at many major discount brokerage firms.
In Conclusion
Once again in 1998, the ABC Fund delivered solid returns while employing a
risk averse investment strategy featuring a significant weighting in U.S.
Treasury securities (25.7% of the portfolio at the close of this reporting
period) and equity risk arbitrage positions. We remain committed to our risk
averse approach to the equity markets and confident we can achieve our long term
objective of preserving and enhancing 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
Chief Investment Officer
January 29, 1999
- --------------------------------------------------------------------------------
Top Ten Holdings
December 31, 1998
-----------------
Orange & Rockland Utilities Inc. Sprint Corp.
BA Merchant Services Inc. Centennial Cellular Corp.
Kuhlman Corp. Telephone & Data Systems
American Bankers Insurance Group LCS Industries Inc.
Petersen Companies Southwest Gas Corp.
- --------------------------------------------------------------------------------
NOTE: The views expressed in this report reflect those of the portfolio manager,
only through the end of the period stated in this report. 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, 1998
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS - 63.2%
Aviation: Parts and Services - 2.5%
18,000 Fairchild Corp., Cl. A+ .......... $ 360,525 $ 283,500
7,000 Hi-Shear Industries Inc.+ ........ 10,215 18,156
5,000 Hudson General Corp. ............. 231,825 315,000
22,000 Kaman Corp., Cl. A ............... 395,473 353,375
--------- ---------
998,038 970,031
--------- ---------
Broadcasting - 0.5%
2,000 Infinity Broadcasting Corp.+ ..... 41,000 54,750
2,500 Liberty Corp. .................... 121,108 123,125
--------- ---------
162,108 177,875
--------- ---------
Business Services - 2.3%
2,580 Fisher Scientific
International Inc.+ ............. 24,892 51,439
50,000 LCS Industries Inc. .............. 864,825 859,375
--------- ---------
889,717 910,814
--------- ---------
Cable - 0.1%
2,000 TCI Ventures Group Inc.+ ......... 30,833 47,125
--------- ---------
Communications Equipment - 0.5%
5,000 Dynatech Corp.+ .................. 122,000 13,750
2,500 Gemstar International
Group Ltd.+ ..................... 97,793 143,125
1,000 L - 3 Communications
Holdings Inc.+ .................. 22,000 46,563
--------- ---------
241,793 203,438
--------- ---------
Computer Software and Services - 0.0%
438 Decision One
Holding Corp.+ .................. 4,891 2,081
--------- ---------
Consumer Products - 1.8%
12,500 Carter-Wallace Inc. .............. 147,694 245,313
1,000 General Housewares Corp. ......... 10,988 12,000
28,442 Syratech Corp.+ .................. 907,944 455,072
--------- ---------
1,066,626 712,385
--------- ---------
Consumer Services - 0.2%
10,000 Loewen Group Inc. ................ 138,344 84,375
--------- ---------
Diversified Industrial - 0.8%
6,000 Ampco-Pittsburgh Corp. ........... 69,606 65,250
10,000 Katy Industries Inc. ............. 239,250 175,625
1,000 Myers Industries Inc. ............ 20,300 28,625
3,000 WHX Corp.+ ....................... 34,650 30,188
--------- ---------
363,806 299,688
--------- ---------
Electronics - 0.3%
7,000 UCAR International Inc.+ ......... 143,919 124,688
--------- ---------
Energy and Utilities - 14.3%
7,600 AGL Resources Inc. ............... $ 138,346 $ 175,275
10,000 Cilcorp Inc. ..................... 609,244 611,875
30,604 Citizens Utilities Co., Cl. B+ ... 301,251 248,656
6,500 Florida Public Utilities Co. ..... 89,415 111,313
500 MidAmerican Energy
Holdings Co. .................... 13,025 13,438
1,000 Nevada Power Co. ................. 25,113 26,000
8,000 New England Electric System ...... 387,615 385,000
44,000 Orange & Rockland
Utilities Inc. .................. 2,356,166 2,507,999
10,000 PennzEnergy Co. .................. 269,957 163,125
10,000 Pennzoil-Quaker State Co.+ ....... 276,514 148,125
2,000 Piedmont Natural Gas Co. ......... 68,444 72,250
1,000 Sierra Pacific Resources ......... 34,613 38,000
30,000 Southwest Gas Corp. .............. 718,474 806,249
10,000 United Water Resources Inc. ...... 181,813 239,375
4,000 Wicor Inc. ....................... 91,878 87,250
--------- ---------
5,561,868 5,633,930
--------- ---------
Entertainment - 5.0%
8,500 Fisher Companies Inc. ............ 592,055 582,249
3,000 Florida Panthers
Holdings Inc.+ .................. 49,819 27,938
3,000 Tele-Communications Inc./
Liberty Media Group, Cl. A+ ..... 111,750 138,188
12,000 Topps Co. Inc.+ .................. 51,348 60,000
15,000 USA Networks Inc.+ ............... 330,476 496,875
9,000 Viacom Inc., Cl. A+ .............. 260,880 662,062
--------- ---------
1,396,328 1,967,312
--------- ---------
Equipment and Supplies - 7.0%
3,000 Aeroquip-Vickers Inc. ............ 85,275 89,813
4,500 Amphenol Corp., Cl. A+ ........... 124,282 135,844
80,000 Interlake Corp.+ ................. 573,375 559,999
50,000 Kuhlman Corp. .................... 1,873,125 1,893,749
3,000 Navistar International Corp.+ .... 89,775 85,500
--------- ---------
2,745,832 2,764,905
--------- ---------
Financial Services - 12.4%
37,000 American Bankers
Insurance Group Inc. ............ 2,386,545 1,789,875
30,000 Argonaut Group Inc. .............. 1,015,593 735,000
100,000 BA Merchant Services Inc.+ ....... 2,004,460 2,012,499
1,200 Bankers Trust Corp. .............. 103,785 102,525
4,000 Leucadia National Corp.+ ......... 144,006 126,000
500 MONY Group Inc.+ ................. 11,750 15,656
5,000 Pioneer Group Inc. ............... 109,640 98,750
--------- ---------
5,775,779 4,880,305
--------- ---------
Food and Beverage - 0.6%
25,000 Advantica Restaurant Group Inc.+ . 286,432 154,688
3,000 Whitman Corp. .................... 52,228 76,125
--------- ---------
338,660 230,813
--------- ---------
See accompanying notes to financial statements.
12
<PAGE>
The Gabelli ABC Fund
Portfolio of Investments -- December 31, 1998
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS (Continued)
Health Care - 1.2%
6,000 Genentech Inc.+ .................. $ 287,150 $ 478,125
----------- -----------
Hotels and Gaming - 0.2%
15,000 Aztar Corp.+ ..................... 117,813 75,938
----------- -----------
Metals and Mining - 0.0%
155,000 Pegasus Gold Inc.+ ............... 31,425 2,713
10,000 Royal Oak Mines Inc.+ ............ 11,858 2,500
----------- -----------
43,283 5,213
----------- -----------
Publishing - 3.6%
40,000 Golden Books Family
Entertainment Inc.+ ............. 7,500 12,500
40,000 Petersen Cos.+ ................... 1,344,564 1,355,000
2,000 Reader's Digest
Association Inc., Cl. B ......... 49,574 48,250
----------- -----------
1,401,638 1,415,750
----------- -----------
Real Estate - 2.6%
55,000 Catellus Development Corp.+ ...... 963,048 787,188
20,000 Griffin Land & Nurseries Inc.+ ... 322,381 255,000
----------- -----------
1,285,429 1,042,188
----------- -----------
Retail - 0.8%
133,000 Bruno's Inc.+ .................... 195,546 101,080
6,000 Lillian Vernon Corp. ............. 103,965 99,000
8,000 Republic Industries Inc.+ ........ 129,439 118,000
----------- -----------
428,950 318,080
----------- -----------
Satellite - 0.0%
4,000 TCI Satellite Entertainment
Inc., Cl. A+ .................... 25,859 5,750
----------- -----------
Specialty Chemicals - 0.3%
3,000 Bush Boake Allen Inc.+ ........... 96,517 105,750
----------- -----------
Telecommunications - 0.0%
1,000 Startec Global
Communications Corp.+ ........... 5,040 9,625
----------- -----------
Textiles - 0.9%
321,974 Carlyle Industries Inc.+ ......... 150,941 362,221
----------- -----------
Wireless Communications - 5.3%
2,000 American Tower Corp.,
Cl. A+ .......................... 31,009 59,125
22,000 Centennial Cellular Corp.,
Cl. A+ .......................... 731,425 901,999
18,000 CommNet Cellular Inc.+ ........... 174,924 220,500
20,000 Telephone & Data
Systems Inc. .................... 840,563 898,750
----------- -----------
1,777,921 2,080,374
----------- -----------
TOTAL COMMON STOCKS .............. 25,479,083 24,908,779
----------- -----------
PREFERRED STOCKS - 1.7%
Diversified Industrial - 1.7%
11,000 WHX Corp., Pfd., Ser. A .......... $ 519,238 $ 439,313
6,000 WHX Corp., Pfd., Ser. B .......... 259,432 222,750
----------- -----------
TOTAL PREFERRED STOCKS ........... 778,670 662,063
----------- -----------
CONVERTIBLE PREFERRED STOCKS - 3.2%
Telecommunications - 3.2%
4,000 Citizens Utilities Co.,
5.00% Cv. Pfd. .................. 194,320 170,500
13,000 Sprint Corp., 8.25% Cv. Pfd. ..... 481,674 1,072,500
----------- -----------
TOTAL CONVERTIBLE
PREFERRED STOCKS ................. 675,994 1,243,000
----------- -----------
RIGHTS - 0.0%
Computer Software and Services - 0.0%
17,500 Fusion Systems Corp.+ ............ 0 273
----------- -----------
Principal
Amount
------
CONVERTIBLE CORPORATE BONDS - 0.0%
Retail - 0.0%
$ 200,000 RDM Sports Group Inc., Cv ........
8.00%, 08/15/03 ................. 4,000 13,000
----------- -----------
U.S. GOVERNMENT OBLIGATIONS - 25.7%
10,205,000 U.S. Treasury Bills, 4.45%++,
due 03/25/99 .................... 10,101,476 10,107,481
----------- -----------
TOTAL INVESTMENTS -
93.8% .......................... $37,039,223 36,934,596
===========
Other Assets and
Liabilities (Net) - 6.2% ....... 2,423,542
-----------
NET ASSETS - 100.0%
(4,105,158 shares outstanding) .. $39,358,138
===========
NET ASSET VALUE,
Offering and Redemption
Price Per Share ................ $ 9.59
===========
- ---------------
For Federal tax purposes:
Aggregate cost ................... $37,079,421
===========
Gross unrealized appreciation .... $ 2,709,001
Gross unrealized depreciation .... (2,853,826)
-----------
Net unrealized depreciation ...... $ (144,825)
===========
- ----------
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
See accompanying notes to financial statements.
13
<PAGE>
The Gabelli ABC Fund
Statement of Assets and Liabilities
December 31, 1998
================================================================================
Assets:
Investments, at value (Cost $37,039,223) ........... $36,934,596
Cash ............................................... 33,624
Dividends and interest receivable .................. 28,513
Receivable for investments sold .................... 2,480,000
-----------
Total Assets ..................................... 39,476,733
-----------
Liabilities:
Payable for investment advisory fees ............... 24,612
Payable for distribution fees ...................... 6,140
Other accrued expenses ............................. 87,843
-----------
Total Liabilities ................................ 118,595
-----------
Net Assets applicable to 4,105,158
shares outstanding ............................. $39,358,138
===========
Net Assets consist of:
Capital stock, at par value ........................ $ 4,105
Additional paid-in capital ......................... 39,479,462
Accumulated distributions in excess
of net realized gain on investments ............... (20,802)
Net unrealized depreciation on investments .......... (104,627)
-----------
Total Net Assets ................................. $39,358,138
===========
Net Asset Value, offering and redemption
price per share ($39,358,138 / 4,105,158
shares outstanding; 1,000,000,000 shares
authorized of $0.001 par value) ................ $ 9.59
===========
Statement of Operations
For the Year Ended December 31, 1998
================================================================================
Investment Income:
Dividends .......................................... $ 344,728
Interest ........................................... 960,708
-----------
Total Investment Income .......................... 1,305,436
-----------
Expenses:
Investment advisory fees ........................... 488,100
Distribution fees .................................. 122,025
Legal and audit fees ............................... 56,968
Shareholder services fees .......................... 41,515
Custodian fees ..................................... 35,163
Shareholder report expenses ........................ 24,386
Registration fees .................................. 24,075
Directors' fees .................................... 14,130
Organizational expenses ............................ 8,868
Interest expense ................................... 2,868
Miscellaneous expenses ............................. 4,571
-----------
Total Expenses ................................... 822,669
Custodian fee credits .............................. (3,881)
-----------
Total Net Expenses ............................... 818,788
-----------
Net Investment Income ............................ 486,648
-----------
Net Realized and Unrealized Gain
on Investments:
Net realized gain on investments ................... 3,415,128
Net change in unrealized depreciation
on investments ..................................... (1,144,585)
-----------
Net realized and unrealized gain on
investments ........................................ 2,270,543
-----------
Net increase in net assets resulting
from operations .................................... $ 2,757,191
===========
Statement of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------- -------------
Operations:
<S> <C> <C>
Net investment income ................................................... $ 486,648 $ 244,811
Net realized gain on investments ........................................ 3,415,128 2,253,030
Net change in unrealized appreciation / (depreciation) on investments ... (1,144,585) 873,518
----------- -----------
Net increase in net assets resulting from operations .................. 2,757,191 3,371,359
----------- -----------
Distributions to shareholders:
Net investment income ................................................... (480,873) (244,811)
In excess of net investment income ...................................... (8,540) (21,105)
Net realized gain on investments ........................................ (3,418,797) (2,253,030)
In excess of net realized gain on investments ........................... (13,798) (165)
----------- -----------
Total distributions to shareholders ................................... (3,922,008) (2,519,111)
----------- -----------
Capital share transactions:
Net increase in net assets from capital share transactions .............. 5,294,948 7,574,049
----------- -----------
Net increase in net assets ............................................ 4,130,131 8,426,297
Net Assets:
Beginning of period ..................................................... 35,228,007 26,801,710
----------- -----------
End of period ........................................................... $39,358,138 $35,228,007
=========== ===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements
================================================================================
1. Description. 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
"1940 Act"). The Fund's 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 investment operations on May 14, 1993.
2. Significant Accounting Policies. 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 as of the close of business on
the day the securities are being valued (if there were no sales that day, the
security is valued at the average of the closing bid and asked prices or, if
there were no asked prices quoted on that day, then the security is valued at
the closing bid price on that day). 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. Portfolio securities traded on more
than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by Gabelli Funds, Inc.
(the "Adviser"). Securities and assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of 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. Debt instruments
having a greater maturity are valued at the highest bid price obtained from a
dealer maintaining an active market in those securities. 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
primary government securities dealers recognized by the Federal Reserve Bank of
New York, 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
15
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements
================================================================================
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.
Futures Contracts. The Fund may engage in futures contracts for the purpose of
hedging against changes in the value of its portfolio securities and in the
value of securities it intends to purchase. Upon entering into a futures
contract, the Fund is required to deposit with the broker an amount of cash or
cash equivalents equal to a certain percentage of the contract amount. This is
known as the "initial margin". Subsequent payments ("variation margin") are made
or received by the Fund each day, depending on the daily fluctuation of the
value of the contract. The daily changes in the contract are included in
unrealized gains or losses. The Fund recognizes a realized gain or loss when the
contract is closed. At December 31, 1998, there were no open futures contracts.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
Securities Transactions and Investment Income. Securities transactions are
accounted for on the trade date with realized gain or loss on 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.
For the year ended December 31, 1998, reclassifications were made to increase
accumulated distributions in excess of net investment income for $8,540 and
decrease accumulated distributions in excess of net realized gain on investments
for $7,004 with an offsetting adjustment to additional paid-in capital.
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.
3. 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
16
<PAGE>
The Gabelli ABC Fund
Notes to Financial Statements
================================================================================
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.
4. Distribution Plan. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. For the year ended
December 31, 1998, the Fund incurred distribution costs payable to Gabelli &
Company, Inc., an indirect wholly-owned subsidiary of the Adviser, of $122,025,
or 0.25% of average daily net assets, the annual limitation under the Plan. Such
payments are accrued daily and paid monthly.
5. Organizational Expenses. The organizational expenses of the Fund are being
amortized on a straight-line basis over a period of 60 months.
6. Portfolio Securities. Purchases and sales of securities for the year ended
December 31, 1998, other than short term securities, aggregated $93,576,473 and
$89,954,303, respectively.
7. Transactions with Affiliates. During the year ended December 31, 1998, the
Fund paid brokerage commissions of $66,777 to Gabelli & Company, Inc. and its
affiliates.
8. Capital Stock Transactions. Transactions in shares of capital stock were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
-------------------- --------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold .................................. 6,122,609 $62,705,757 3,121,544 $33,066,126
Shares issued upon reinvestment
of dividends ............................... 313,982 2,982,885 205,614 2,091,093
Shares redeemed .............................. (5,773,794) (60,393,694) (2,608,737) (27,583,170)
--------- ---------- --------- ----------
Net increase .............................. 662,797 $ 5,294,948 718,421 $ 7,574,049
========= =========== ========= ===========
</TABLE>
9. Subsequent Event. On February 9, 1999, the Adviser reorganized its operations
and corporate structure by transferring a portion of its assets and liabilities
to a successor adviser, Gabelli Funds, LLC, which is wholly owned by Gabelli
Asset Management Inc., a newly formed publicly traded company that is 80% owned
by the former Adviser. Counsel to the former Adviser has concluded that the
ownership change does not constitute an assignment as defined by the Investment
Company Act of 1940, as amended.
17
<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,
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period ............ $10.23 $ 9.84 $ 9.71 $ 9.57 $10.03
------- ------- ------- ------- -------
Net investment income ........................... 0.22 0.08 0.21 0.21 0.33
Net realized and unrealized gain
on investments ................................. 0.90 1.17 0.54 0.86 0.12
------- ------- ------- ------- -------
Total from investment operations ................ 1.12 1.25 0.75 1.07 0.45
------- ------- ------- ------- -------
Distributions to shareholders:
Net investment income ........................... (0.22) (0.08) (0.21) (0.21) (0.33)
In excess of net investment income .............. (0.00)(a) (0.01) -- -- --
Net realized gain on investments ................ (1.54) (0.77) (0.41) (0.72) (0.58)
In excess of net realized gain on investments ... (0.00)(a) -- -- -- --
------- ------- ------- ------- -------
Total distributions ............................. (1.76) (0.86) (0.62) (0.93) (0.91)
------- ------- ------- ------- -------
Net asset value, end of period .................. $ 9.59 $10.23 $ 9.84 $ 9.71 $ 9.57
======= ======= ======= ======= =======
Total return+ ................................... 11.1% 12.8% 7.8% 11.2% 4.5%
======= ======= ======= ======= =======
Ratios to average net assets and
supplemental data:
Net assets, end of period (in 000's) ............ $39,358 $35,228 $26,801 $19,862 $24,419
Ratio of net investment income
to average net assets .......................... 1.00% 0.87% 2.11% 1.83% 2.95%
Ratio of operating expenses
to average net assets (b) ...................... 1.69% 2.26% 2.09% 2.10% 2.09%
Portfolio turnover rate ......................... 299% 493% 343% 508% 490%
</TABLE>
- ----------
+ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the
period including reinvestment of dividends.
(a) Amount represents less than $0.005 per share.
(b) The ratios of operating expenses to average net assets for the years ended
December 31, 1998 and 1997 do not include a reduction of expenses for
custodian fee credits. Including such credits, the ratios would have been
1.68% and 2.25%, respectively.
See accompanying notes to financial statements.
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 series
constituting Gabelli Investor Funds, Inc.) as of December 31, 1998, 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 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, 1998 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, 1998, 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.
New York, New York
February 19, 1999 /s/ Gant Thornton LLP
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1998 TAX NOTICE TO SHAREHOLDERS (Unaudited)
For the year ended December 31, 1998, the Fund paid to shareholders, on December
28, 1998, an ordinary income dividend (comprised of net investment income and
short term capital gains) totaling $1.407 per share and long term capital gains
totaling $0.356 per share. For the year ended December 31, 1998, 6.39% 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 fiscal
year 1998 which was derived from U.S. Treasury securities was 58.36%. 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 1998. 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 specific situation.
- --------------------------------------------------------------------------------
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 Karl Otto Pohl
Chairman and Chief Former President
Investment Officer Deutsche Bundesbank
Gabelli Asset Management Inc.
Anthony J. Colavita Werner J. Roeder, MD
Attorney-at-Law Director of Surgery
Anthony J. Colavita, P.C. Lawrence Hospital
Vincent D. Enright
Former 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.
- --------------------------------------------------------------------------------
20
