First Quarter Report
[LOGO]
THE GABELLI
CONVERTIBLE
SECURITIES
FUND, INC.
March 31, 1997
<PAGE>
[LOGO]
THE GABELLI
CONVERTIBLE
SECURITIES
FUND, INC.
Our cover icon represents the underpinnings of Gabelli. The Teton mountains in
Wyoming represent what we believe in in America -- that creativity, ingenuity,
hard work and a global uniqueness provide enduring values and returns in an
increasingly complex, interconnected and inter-dependent economic world.
INVESTMENT OBJECTIVE:
The Gabelli Convertible Securities Fund, Inc. is a closed-end, diversified
management investment company whose primary objective is to seek a high level of
total return through a combination of current income and capital appreciation by
investing in convertible securities.
This report is printed on recycled paper.
<PAGE>
TO OUR SHAREHOLDERS:
The stock market roared out of the blocks in January,
but quickly lost momentum as inflation jitters and a
slumping bond market muddied the track. In late March, a
rate hike by the Federal Reserve and much stronger than [PHOTO]
expected economic data stampeded equities investors, eroding
most of the market's earlier gains. The Dow Jones Industrial
Average and Standard & Poor's 500 Index closed the quarter
with modest gains of 1.7% and 2.7%, respectively. Smaller
stocks continued to lag as evidenced by the Russell 2000
Index's 5.2% decline.
For the three months ended March 31, 1997, The Gabelli [LOGO]
Convertible Securities Fund, Inc.'s ("Convertible Securities THE GABELLI
Fund") net asset value increased to $11.13 after adjusting CONVERTIBLE
for the $0.12 per share dividend paid on March 27, 1997. SECURITIES
This represents an increase of 1.7% for the past quarter and FUND, INC.
6.4% for the twelve months and compares to the average
returns of 0.5% and 10.4% for the Lipper Analytical
Services, Inc. Convertible Securities Fund Index over these
respective periods.
The three- and five-year average annual returns of the Convertible
Securities Fund were 8.1% and 9.3%, respectively. Since inception on July 3,
1989 through March 31, 1997, the Convertible Securities Fund achieved a 105.2%
total return which represents an average annual return of 9.7%. Strong bond and
equity markets in the U.S. helped to enhance the performance of convertible
securities. Such an environment enables us to maintain the Fund's long-term
profitability.
The Fund's common shares on the New York Stock Exchange ended the quarter
at $9.375, up 2.6% for the quarter, down 2.6% for the past twelve months and up
0.6% from its initial price of $11.25 on March 31, 1995 after adjusting for the
dividends of $2.005 per share which were paid during this period.
Our Fund is managed with the goal of achieving a 600-800 basis point spread
above long-term treasury yields. We hope to generate these returns over the long
term. This is the type of performance that our Fund has been known for and we
anticipate will continue in the future. Of course, there are no guarantees.
Over the past few months the Fund's shares have traded at an average
discount of approximately 15% to the net asset value. At these price levels, the
Fund is an ideal opportunity for investors to add to their positions. Our
monthly cash purchase program provides an easy way for registered Shareholders
to acquire additional shares at the current market price at no commission. In
addition, to underscore that "we eat our own cooking", the Advisor and its
affiliates have announced their intention to buy up to one million shares in the
open market (535,664 of which have been acquired to date).
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INVESTMENT RESULTS (a)(c)
<TABLE>
<CAPTION>
==========================================================================================================================
Quarter
---------------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
1997: Net Asset Value .......................... $11.13 -- -- -- --
Total Return ............................. 1.7% -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
1996: Net Asset Value .......................... $11.28 $11.33 $11.23 $11.08 $11.08
Total Return ............................. 3.6% 1.6% 0.3% 2.6% 8.4%
- --------------------------------------------------------------------------------------------------------------------------
1995: Net Asset Value .......................... $11.14 $11.51 $11.64 $11.01 $11.01
Total Return ............................. 5.1% 5.2% 3.0% 1.1% 15.0%
- --------------------------------------------------------------------------------------------------------------------------
1994: Net Asset Value .......................... $11.54 $11.39 $11.60 $10.60 $10.60
Total Return ............................. 0.2% (1.3)% 1.8% (0.9)% (0.2)%
- --------------------------------------------------------------------------------------------------------------------------
1993: Net Asset Value .......................... $12.07 $12.36 $12.75 $11.52 $11.52
Total Return ............................. 5.4% 2.4% 3.2% 1.5% 13.1%
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1992: Net Asset Value .......................... $11.29 $11.52 $11.90 $11.45 $11.45
Total Return ............................. 3.5% 2.0% 3.3% 3.6% 13.0%
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1991: Net Asset Value .......................... $11.06 $11.27 $11.57 $10.91 $10.91
Total Return ............................. 5.6% 1.9% 2.7% 1.8% 12.5%
- --------------------------------------------------------------------------------------------------------------------------
1990: Net Asset Value .......................... $10.56 $10.68 $10.56 $10.47 $10.47
Total Return ............................. 1.5% 2.1% (1.1)% 3.8% 6.3%
- --------------------------------------------------------------------------------------------------------------------------
1989: Net Asset Value .......................... -- -- $10.54 $10.51 $10.51
Total Return ............................. -- -- 5.4%(b) 0.8% 6.3%(b)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------------------------------
Average Annual Returns - March 31, 1997 (a)
1 Year ...................................... 6.4%
5 Year ...................................... 9.3%
Life of Fund (b) ............................ 9.7%
- -----------------------------------------------------------------
(a) Total return and average annual return reflect changes in net asset value
and reinvestment of dividends and are net of expenses. Of course, the returns
noted represent past performance and do not guarantee future results. Investment
returns and the principal value of an investment will fluctuate. When shares are
sold they may be worth more or less than their original cost. (b) From
commencement of operations on July 3, 1989. (c) The Fund converted to closed-end
status on March 31, 1995.
Dividend History
- -------------------------------------------------------------------
Payment Date Rate Per Share Reinvestment Price
- ------------ -------------- ------------------
March 27, 1997 $0.120 $ 9.63
December 27, 1996 $0.375 $ 9.51
September 23, 1996 $0.120 $ 9.73
June 24, 1996 $0.120 $10.17
March 25, 1996 $0.120 $10.41
December 27, 1995 $0.750 $10.95
September 27, 1995 $0.200 $11.10
June 27, 1995 $0.200 $11.21
December 31, 1994 $0.900 $10.60
December 31, 1993 $1.425 $11.52
December 31, 1992 $0.876 $11.45
December 31, 1991 $0.865 $10.91
December 31, 1990 $0.490 $10.47
June 28, 1990 $0.100 $10.68
March 29, 1990 $0.100 $10.55
December 29, 1989 $0.115 $10.51
================================================================================
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WHAT WE DO
We do what is described as bottom up research: we read
annual reports; we visit the competition; we talk to
customers; we go belly to belly with management. In past
reports, we have tried to articulate our investment [GRAPHIC]
philosophy and methodology. The following graphic further
illustrates the interplay among the four components of our
valuation approach.
Our focus is on free cash flow; earnings before interest, taxes,
depreciation and amortization (EBITDA) minus the capital expenditures necessary
to grow the business. We believe free cash flow is the best barometer of a
business' value. Rising free cash flow often foreshadows net earnings
improvement. We also look at earnings per share trends. Unlike Wall Street's
ubiquitous earnings momentum players, we do not try to forecast earnings with
accounting precision and then trade stocks based on quarterly expectations and
realities. We simply try to position ourselves in front of long-term earnings
uptrends. In addition, we analyze on and off balance sheet assets and
liabilities such as plant and equipment, inventories, receivables, and legal,
environmental and health care issues. We want to know everything and anything
that will add to or detract from our private market value (PMV) estimates.
Finally, we look for a catalyst; something happening in the company's industry
or indigenous to the company itself that will surface value. In the case of the
independent telephone stocks, the catalyst is a regulatory change. In the
agricultural equipment business, it is the increasing world-wide demand for
American food and feed crops. In other instances, it may be a change in
management, sale or spin-off of a division or the development of a profitable
new business.
Once we identify securities that qualify as fundamental and conceptual
bargains, we then become patient investors. This has been a proven long-term
method for preserving and enhancing wealth in the U.S. securities market. At the
margin, our new investments are focused on businesses that are well-managed and
will benefit from sustainable long-term economic dynamics. These include macro
trends, such as globalization of the market in filmed entertainment and
telecommunications, and micro trends, such as increased focus on productivity
enhancing goods and services.
OUR INVESTMENT OBJECTIVES
Our mandate is to preserve and enhance our shareholders' wealth through a
conservative, disciplined approach to convertible securities investing. Our goal
is to generate profitable returns in strong markets and protect principal in
weak markets by taking advantage of the unique characteristics of convertible
securities.
CONVERTIBLE SECURITIES ARE "HYBRIDS"
The convertible securities market consists of bonds, debentures, corporate
notes, preferred stocks and warrants or other similar securities which may be
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converted into or exchanged for a prescribed amount of common stock or other
equity security of the same or a different issuer within a particular period of
time at a specified price or formula. Converts are "hybrid" securities that
combine the capital appreciation potential of equities with the higher yield of
fixed income instruments.
Our strategy incorporates the purchase of convertible securities which are
trading at a premium above parity with the common stock but which generally
provide a higher yield and, over time, capital appreciation. We will also seek
out "busted" converts, where the underlying common stock has dropped
significantly and the values of both the conversion privilege and the convert
are down. Such securities will provide both high yields and long-term capital
appreciation potential.
COMMENTARY
THE ECONOMY AND THE STOCK MARKET: TOO MUCH OF A GOOD THING
Once again, the economy confounded the Wall Street economists by growing
much faster than consensus expectations. Although inflation has not yet shown up
in the Producer Price and Consumer Price indices, Federal Reserve Chairman Alan
Greenspan and bond investors decided to err on the side of caution by taking
short- and long-term interest rates higher.
We applaud Fed Chairman Greenspan's preemptive strike against inflation. We
believe he will continue to take the steps necessary to combat inflation and, in
the process, provide confidence in Soft Landing - Part II. Over the short-term,
this may not be pleasant for equities investors. However, with the elimination
of some of the speculative excesses, the market will be on much better
fundamental footing going forward. We do not believe this is the beginning of a
secular bear market, but rather a healthy correction that is arguably long
overdue.
What can we expect over the balance of this year? We should continue to see
a volatile market as skittish investors wrestle with the latest economic data
trying to determine if inflation is a real threat. While the jury may still be
out on inflation, higher interest rates are a reality and will be problematic
for stocks on several levels. Higher interest rates might trim the economy and
restrain corporate earnings growth putting consensus estimates of 9% to 10%
gains for 1997 in jeopardy. Higher rates also boost the U.S. dollar, further
crimping the U.S. dollar value of international earnings. Whether you are
looking at stocks on the basis of asset values or using a dividend discount
model, public prices of equities tend to decline as interest rates rise, all
else constant. So, price/cash flow and price/earnings multiples would contract,
should interest rates rise.
The wild card will be how investors react to any sustained decline in stock
prices. A tremendous amount of money has flowed into the equities market in the
last three years. Will it back out at the first sign of serious trouble? It may
not be how the great unwashed public reacts, but rather how the great unwashed
professional investors--those twenty and thirty something mutual fund managers
who have never experienced even a substantial market correction--respond to the
perceived crisis. Will they see the glass half empty or half full? We don't
know.
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While we are dwelling on things on our watch list, we should also mention
the strong dollar. Despite the enormous advances in the quality of American made
goods in a wide variety of industries, the strong dollar will restrain exports
and currency translation will have an adverse impact on the earnings of U.S.
based multi-national companies. Longer term, we must also be sensitive to the
fact that the substantial cost reductions and productivity gains in American
industry over the last five years may be close to running their course. In other
words, profit margins are unlikely to advance further.
We don't view a market correction as bad news. In general, we are not
exposed to those sectors and individual companies that have benefited most from
investor euphoria and which are, therefore, most vulnerable to a dramatic change
in investor sentiment. If anything, a market correction should provide a more
level playing field for disciplined investors focusing on the fundamental value
of individual stocks. We are just now emerging from a two year period in which
fundamentals mattered much less than market momentum. We are entering what may
prove to be an extended period in which stock pickers excel.
TO INDEX OR NOT INDEX - THE NEW RHETORIC
In 1995 and 1996, the S&P 500 Index proved to be a difficult benchmark for
active managers of all stripes. It has been a particularly tough hurdle for
value investors who have been unwilling to pay sky high price/earnings multiples
for the mega-cap market darlings that have such an enormous impact on S&P 500
returns.
There are several dynamics that have favored the largest S&P 500 stocks
over the last several years. The first is the growth of S&P 500 Index funds
themselves. S&P 500 Index mutual funds have grown at four times the rate of
actively managed mutual funds over the last five years. So, we have seen an
increasing amount of money chasing a finite number of large cap stocks and thus,
on a pure supply/demand basis, indexing has been a self fulfilling prophecy. In
addition, the substantial foreign money coming into the market is largely
devoted to the big cap, household name stocks that dominate the S&P. Finally,
active portfolio managers who have been under increasing pressure to be fully
invested regardless of their concerns over equity valuations have pumped money
into the large liquid stocks that comprise the S&P so that if something does go
wrong, they can get out in a hurry. Finally, stocks like Microsoft, Intel, P&G,
Coca-Cola and General Electric do benefit from faster growth in developing
economies.
With all of these factors favoring S&P 500 indexing, why bother doing
anything else? We offer two answers. The first is that longer term, valuations
do matter. Supply and demand are powerful forces in the market, but at some
stage, economic reality always asserts itself. In the early 1970's the "Nifty
Fifty", a group of terrific large cap growth companies, dominated the market.
The consensus was that these were "one decision" stocks which you simply had to
own and didn't ever have to worry about selling. At the peak, these stocks sold
at ludicrous multiples relative to their economic value. When the fertilizer hit
the market fan in 1973-74, they fell off a cliff. Even after one of the great
long-term bull markets in history, some of these original "nifty-fifty" stocks
still have market capitalizations below their 1972-73 peaks. We have not yet
witnessed that level of speculative excess in today's market favorites, but we
are seeing heady multiples that don't make economic sense. At some point,
investors will come to their senses and realize that even the best (soft drink,
household product, software, semi-conductor, movie company--pick one or more) is
5
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not worth a price/earnings multiple two to three times its annual earnings
growth rate. Moreover, if earnings do not expand faster than revenues, and
interest rates continue to provide present "real" rates of return, then overall
stocks are unlikely to generate double-digit returns to investors.
Our second response is simply that what has gone up the most is likely to
fall the farthest with a major shift in investor sentiment. If and when we do
see net cash outflows from equities mutual funds, we suspect index funds will
get hit the hardest. Supply and demand is a two way street.
IN THIS CORNER WEARING THE RED TRUNKS . . .
A heavyweight battle is unfolding between Hilton Hotels Corporation (HLT -
$24.25 - NYSE) CEO Stephen Bollenbach and ITT Corporation (ITT - $58.875 - NYSE)
Chairman Rand Araskog. Bollenbach landed the first punch with an unsolicited $56
per share offer for ITT. Araskog responded by selling off non-core assets like
ITT's 50% ownership of MSG (Madison Square Garden, the Knicks, and the Rangers)
to partner Cablevision Systems Corporation (CVC - $29.75 - ASE) and ITT's 6%
stake in French telecommunications giant Alsthom SA (ALA - $23.75 - NYSE). ITT's
Educational Services and Worldwide Yellow Pages businesses are also on the
block. For the time being, Bollenbach is circling the ring waiting for Araskog
to counter-attack. What does this wily veteran of many takeover battles have up
his sleeve? Our guess is that, aside from serving K-rations to corporate staff,
he will further build up his cash reserves for a self tender in the $60 plus per
share range. If this happens, we expect Bollenbach to wade in looking for a
merger. It's still too early in what should be a full fifteen rounder to predict
the winner. We're betting that shareholders of both these firms will benefit
from these corporate heavyweights slugging it out.
PREFERRED STOCK - Q & A
The Board of Directors of The Gabelli Convertible Securities Fund has
authorized management to consider an offering of preferred stock. The actual
amount of capital to be raised, the dividend rate and the timing of the offering
have not been determined and would be announced at a later date. The proceeds
raised would be used for investment purposes and the offering would be made only
by means of a prospectus. We thought we would discuss some questions about
preferred stock.
Q: WHAT IS PREFERRED STOCK?
Preferred stock is a form of equity investment which has certain rights
that differ from those of common stock. In our case, the Preferred Stock would
typically be issued at $25 per share with a fixed dividend rate. The Fund is
obligated to pay this dividend to the Preferred Shareholders before any
dividends are paid to the common shares. Thereafter, any return earned in excess
of this dividend rate would work to benefit the Common Shareholders.
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Q: HOW WOULD PREFERRED SHARES BENEFIT COMMON SHAREHOLDERS?
Through March 31, 1997, the Fund has earned a 9.7% average annual return
from its inception. The only obligation that the Fund would have to the
Preferred Shareholders is to pay the stated dividend rate. Given the current
market environment, we feel that this is an opportunity to take advantage of
relatively low long-term interest rates and to earn an excess return for our
common shareholders consistent with our conservative investment approach. We
expect that the Preferred Shares will be issued with a dividend rate which is
less than the Fund's 9.7% average annual return. Any return earned in excess of
the stated dividend rate would directly benefit Common Shareholders; however,
any shortfall from the stated rate would impact the common shareholder in the
opposite fashion. Therefore, by taking advantage of the current relatively low
interest rate environment and achieving our investment objectives, a Preferred
Share issuance offers what we believe is a conservative method of creating added
wealth for our Common Shareholders.
As an additional benefit, since a Preferred Offering would increase the
Fund's overall capital base, fixed costs of the Fund would be spread over more
assets. Thus, a lower expense ratio would work to benefit Common Shareholders.
Furthermore, Common Shareholders stand to receive certain tax benefits as a
result of a Preferred Stock offering. Since taxable income is allocated to the
Preferred Shareholders before Common Shareholders, taxable distributions to
Common Shareholders would not be required to the extent they would be if the
Preferred Shares were not outstanding. Common Shareholders would avoid having to
pay taxes on that portion of taxable income that previously would have been
distributed to them. By deferring these taxable distributions and taxes
associated therewith, the net asset value of the common shares would grow at a
faster rate.
Q: WHY IS THE FUND CONSIDERING PREFERRED SHARES?
We feel this is in the best interest of our Common Shareholders. Right now,
long-term interest rates are at relatively low levels. The dividend rate that
the Fund would be required to pay on the Preferred Shares is directly related to
long-term rates. In this environment, we have a great opportunity to create
value by earning a return in excess of the Preferred's dividend rate over the
long term. Therefore, we believe this represents an opportunistic time for the
Fund to take advantage of these low rates.
Q: WILL GABELLI FUNDS, INC. BE PAID A MANAGEMENT FEE ON THE PREFERRED CAPITAL?
If such an offering was completed, the Adviser has agreed to waive the
management fee on the incremental assets if the return on the Fund does not
exceed the stated dividend rate on the preferred shares.
LET'S TALK CONVERTS
The following are specifics on selected holdings of our Fund. Favorable
EBITDA prospects do not necessarily translate into higher prices, but they do
express a positive trend which we believe will develop over time.
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AIRTOUCH COMMUNICATIONS CORP. (ATI.B - $25.625; ATI.C - $43.75 - NYSE) is one of
the premier players in global wireless communications. Operating in attractive
cellular markets in the U.S. and overseas (including Germany, Japan, Portugal,
Sweden, Belgium, Italy, Spain and South Korea), the company is well-positioned
to participate in the world-wide expansion of wireless communications. Roughly
half of the company's current 8.5 million world-wide cellular customers are
located in the U.S. Annual growth is estimated at 30% to 40%. AirTouch is in the
process of strengthening its cellular position in the U.S. with the acquisition
of U.S. West Media Group's cellular and personal communications services (PCS)
properties previously held in a shared joint venture.
ATLANTIC RICHFIELD COMPANY (ARCO) (ARC.C - $317.625 - NYSE) is a diversified
company operating globally in the energy business with major interests in
chemical businesses. Included are ventures in China and Russia. Over 40% of
ARCO's 1996 revenues were derived from oil, gas and coal resources, 39% from
refining, marketing and transportation and 20% from intermediate chemicals and
specialty products. Earnings have been increasing due to rising world-wide
demand for energy and petrochemical products. This growth is expected to carry
through the rest of the decade. ARCO's strong cash flow, approximately $3.5
billion, readily supports the shares' $2.80 dividend.
CHOCK FULL O'NUTS CORPORATION (SUB. DEB. CV., 8.00%, 09/15/06; 7.00%, 04/01/12)
roasts, packages and distributes regular, instant and specialty coffees and
teas. The company also has a growing institutional distribution business that
supplies coffee and food products to restaurants and businesses. Chock Full is
developing a chain of retail drive-through coffee outlets called Quikava. Both
the 8% convertible bonds due in 2006 and the 7% convertible bonds, due 2012,
offer investors an attractive way to participate in Chock Full o'Nuts' future.
CONRAIL INC. (CRR - $112.75 - NYSE) has announced that it has re-negotiated its
agreement to be acquired by CSX Corp. and Norfolk Southern Corp. so that Conrail
shareholders will receive $115 a share in cash, or about $10.5 billion. The move
cleared the way for CSX and Norfolk Southern to negotiate to split up Conrail
between them. The split up should allow CSX and Norfolk Southern to dominate
rail freight traffic in the East. Under the revised agreement, CSX is amending
its outstanding tender offer to increase the price and number of shares sought.
The tender is not subject to any financing conditions and is no longer subject
to a Conrail shareholder opt-out vote of certain Pennsylvania statutory
provisions. The offer is also not subject to approval by the Surface
Transportation Board since shares purchased in the offer will be put in a voting
trust until the STB approves the merger. The new tender offer expiration for all
Conrail's outstanding shares at $115 will be extended to May 23, 1997.
FIELDCREST CANNON, INC. (SUB. DEB. CV., 6.00%, 03/15/12) is a well-known
manufacturer of household textile products; sheets, pillow cases, towels,
bedspreads and blankets. Management has undertaken several restructuring steps
which are anticipated to result in significant increases in operating margins
and net income. We believe stable cotton prices, higher mill activity, lower
interest expenses and an improving economic environment will accelerate
Fieldcrest's earnings recovery. Fieldcrest's 6% convertible debentures, due in
March 2012, provide an attractive alternative to Fieldcrest's common stock.
8
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GENERAL HOST CORPORATION (SUB. DEB. CV., 8.00%, 02/15/02), through its
wholly-owned subsidiary, Frank's Nursery & Crafts Inc., is the nation's largest
specialty retailer of lawn, garden and craft products. With 261 stores located
in 16 states east of the Mississippi, we believe General Host is well-positioned
to benefit from the growing crafts market as well as the attractive lawn and
garden market. Management has revised its cost structure. We believe
management's focus on cost reduction will help the company to maximize cash
flow. General Host's 8% Convertible Subordinated Notes, maturing February 15,
2002, are convertible into common stock at a conversion price of $10.375.
HSN, INC. (SUB. DEB. CV., 5.875%, 03/01/06) is the new name for the surviving
company resulting from the merger of Silver King Communications Inc., Home
Shopping Network Inc. and Savoy Pictures Entertainment. The combined companies
will be guided by a new board, chaired by Barry Diller.
NAVISTAR INTERNATIONAL CORPORATION (NAV - $9.375 - NYSE; CV. PFD., SERIES G) is
the leading North American producer of heavy-duty trucks, medium-duty trucks and
school buses. The company also manufacturers mid-range, 175 to 300 horsepower,
diesel engines. NAV has a leading 35% share of the medium-duty truck market and
an 18% share (#3 in that market) of the heavy-duty truck market. NAV
participates in cyclical industries. When the recovery commences, the company
should generate substantial cash flow - which would not be taxed due to its
large (almost $2 billion) tax-loss carryforwards.
SEQUA CORP. (SQA.A - $44.625 - NYSE; SQA.B - $48.50 - NYSE) is a conglomerate
with businesses ranging from overhauling jet engines to manufacturing specialty
chemicals. Its Chromalloy division, which generates over $900 million in
revenue, is the largest factor in the repair, replacement and overhaul of gas
turbine engines. Sequa has begun a program to divest less profitable operations,
thereby unmasking this crown jewel. Sequa's estimated private market value is
over $100 per share.
DIVIDENDS
The Fund recently distributed a dividend of $0.12 per share on March 27,
1997. For the twelve months ended March 31, 1997, the Fund distributed a total
of $0.735 per share.
NO COMMISSION PURCHASES
When the Convertible Securities Fund converted to closed-end status on
March 31, 1995, we offered shareholders the opportunity to sell their shares at
no commission for up to two years. On March 31, 1997, this ability to sell your
convertible shares at no commission expires. However, we would like to offer
shareholders the opportunity to buy shares at no commission for the next year
through our Voluntary Cash Purchase Plan which is available every month. Please
see the details of this Plan at the end of this report.
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INTERNET
You can now visit us on the Internet. Our home page at
http://www.gabelli.com contains information about Gabelli Funds, Inc., the
Gabelli Mutual Funds, quarterly reports, closing prices, IRAs, 401(k)s and other
current news. You can also send us e-mail at [email protected].
IN CONCLUSION
As always, we are focusing on the individual assets in the Fund's
portfolio. By concentrating on niche industry groups and individual companies
that can do well independent of prevailing economic and broad market trends, we
believe we are well-positioned to prosper, even in a less generous market
environment. Our investment philosophy is simple and straightforward: buying
good businesses cheap will generate consistently superior returns.
Sincerely,
/s/ Mario J. Gabelli
--------------------
MARIO J. GABELLI
President and
Chief Investment Officer
May 1, 1997
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Top Ten Convertible Holdings
March 31, 1997
--------------
Fieldcrest Cannon, Inc.
HSN, Inc.
Chock Full o'Nuts Corporation
AirTouch Communications, Inc.
Atlantic Richfield Company
Navistar International Corporation
Sequa Corporation
General Host Corporation
GATX Corporation
Thomas Nelson Inc.
- --------------------------------------------------------------------------------
NOTE: The views expressed in this report reflect those of the portfolio manager,
only through the end of the period of this report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions.
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THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 1997 (UNAUDITED)
================================================================================
Principal Market
Amount Value
--------- ------
CONVERTIBLE SECURITIES - 44.81%
CONVERTIBLE CORPORATE BONDS - 30.10%
AUTOMOTIVE: PARTS AND ACCESSORIES - 1.75%
$ 400,000 Exide Corporation
Sub. Deb. Cv. 2.90%, 12/15/05(d). $ 230,000
1,150,000 GenCorp, Inc.
Sub. Deb. Cv. 8.00%, 08/01/02.... 1,348,375
----------
1,578,375
----------
AVIATION: PARTS AND SERVICES - 1.74%
242,000 Kaman Corporation
Sub. Deb. Cv. 6.00%, 03/15/12.... 222,640
1,350,000 UNC Incorporated
Sub. Deb. Cv. 7.50%, 03/31/06.... 1,341,563
----------
1,564,203
----------
BUILDING AND CONSTRUCTION - 0.01%
10,000 Hofi International Finance Ltd.
Sub. Deb. Cv. 4.50%, 08/11/08..... 13,400
----------
BUSINESS SERVICES - 0.81% 325,000
BBN Corp.
Sub. Deb. Cv. 6.00%, 04/01/12..... 290,875
850,000 Builders Transport, Incorporated
Sub. Deb. Cv. 6.50%, 05/01/11.... 442,000
----------
732,875
----------
CABLE DISTRIBUTION - 0.49%
250,000 Comcast Corporation
Sub. Deb. Cv. 3.375%, 09/09/05... 234,375
400,000 Comcast Corporation
Sub. Deb. Cv. 1.125%, 04/15/07... 208,000
----------
442,375
----------
COMPUTER SOFTWARE AND SERVICES - 0.13%
40,000 Sierra On-Line, Inc.
Sub. Deb. Cv. 6.50%, 04/15/02(d). 118,200
----------
CONSUMER PRODUCTS - 4.22%
600,000 Borden, Inc.
Sub. Deb. Cv. Zero Cpn.,
05/21/02(d) ..................... 448,875
2,800,000 Fieldcrest Cannon, Inc.
Sub. Deb. Cv. 6.00%, 03/15/12.... 2,100,000
564,000 Masco Corporation
Sub. Deb. Cv. 5.25%, 02/15/12.... 555,540
800,000 Standard Commercial Corporation
Sub. Deb. Cv. 7.25%, 03/31/07.... 700,000
----------
3,804,415
----------
CONSUMER SERVICES - 2.31%
2,000,000 HSN, Inc.
Sub. Deb. Cv. 5.875%,
03/01/06(d) ..................... 2,080,000
----------
ELECTRONIC EQUIPMENT - 1.21%
650,000 Pacific Scientific Company
Sub. Deb. Cv. 7.75%, 06/15/03.... 666,250
400,000 Trans-Lux Corporation
Sub. Deb. Cv. 7.50%, 12/01/06.... 421,000
----------
1,087,250
----------
ENERGY - 2.25%
1,100,000 Moran Energy Inc.
Sub. Deb. Cv. 8.75%, 01/15/08.... 990,688
600,000 Pennzoil Company
Sub. Deb. Cv. 6.50%, 01/15/03.... 1,033,500
----------
2,024,188
----------
ENTERTAINMENT - 0.92%
500,000(a) Havas
Sub. Deb. Cv. 3.00%, 12/31/97.... 112,775
560,000 Savoy Pictures Entertainment, Inc.
Sub. Deb. Cv. 7.00%, 07/01/03.... 467,600
550,000 Time Warner Inc. LYONS Sr.
Sub. Notes Cv. Zero Cpn., 06/22/13 243,375
5,000 WMS Industries Inc.
Sub. Deb. Cv. 5.75%, 11/30/02.... 4,650
----------
828,400
----------
EQUIPMENT AND SUPPLIES - 3.49%
760,000 Cooper Industries, Inc.
Sub. Deb. Cv. 7.05%, 01/01/15.... 820,800
500,000 Fedders Corporation
Sub. Deb. Cv. 8.50%, 06/15/12.... 491,875
625,000 Intermagnetics General Corporation
Sub. Deb. Cv. 5.75%, 09/15/03(d). 525,000
1,259,000 Kollmorgen Corporation
Sub. Deb. Cv. 8.75%, 05/01/09.... 1,259,000
50,000 TRINOVA Corporation
6%, 10/15/02..................... 49,000
----------
3,145,675
----------
FOOD AND BEVERAGE - 2.29%
100,000 Boston Chicken, Inc.
Sub. Deb. Cv. 4.50%, 02/01/04.... 111,563
1,050,000 Chock Full o'Nuts Corporation
Sub. Deb. Cv. 8.00%, 09/15/06.... 1,042,125
1,005,000 Chock Full o'Nuts Corporation
Sub. Deb. Cv. 7.00%, 04/01/12.... 910,781
----------
2,064,469
----------
11
<PAGE>
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED) -- MARCH 31, 1997 (UNAUDITED)
================================================================================
Principal Market
Amount Value
--------- ------
HOTELS/GAMING - 0.78%
$ 700,000 Hilton Hotels Corporation
Sub. Deb. Cv. 5.00%, 05/15/06..... $ 705,250
----------
METALS AND MINING - 0.45%
450,000 Coeur d'Alene Mines Corporation
Sub. Deb. Cv. 6.00%, 06/10/02.... 407,250
----------
PAPER AND FOREST PRODUCTS - 0.26%
200,000 Riverwood International Corporation
Sub. Deb. Cv. 6.75%, 09/15/03.... 230,890
----------
PUBLISHING - 2.30%
700,000 News American Holdings Incorporated
Sub. Deb. Cv. Zero Cpn., 03/31/02 569,198
1,600,000 Thomas Nelson Inc.
Sub. Deb. Cv. 5.75%, 11/30/99(d). 1,500,000
----------
2,069,198
----------
REAL ESTATE/DEVELOPMENT - 0.09%
125,000 Rockefeller Center Properties Inc.
Sub. Deb. Cv. Zero Cpn., 12/31/00 82,189
----------
RETAIL - 2.67%
146,000 Farah U.S.A., Inc.
Sub. Deb. Cv. 8.50%, 02/01/04.... 116,800
380,000 Food Lion, Inc.
Sub. Deb. Cv. 5.00%, 06/01/03(d). 414,675
2,000,000 General Host Corporation
Sub. Deb. Cv. 8.00%, 02/15/02.... 1,640,000
110,000 JumboSports, Inc.
Sub. Deb. Cv. 4.25%, 11/01/00.... 80,575
200,000 RDM Sports Group Inc.
8.00%, 08/15/13.................. 150,000
----------
2,402,050
----------
TELECOMMUNICATIONS - 1.07%
8,000,000(b) Softe SA
Sub. Deb. Cv. 4.25%, 07/01/98 ... 960,229
----------
TRANSPORTATION - 0.62%
465,000 Greyhound Lines Inc.
Sub. Deb. Cv. 8.50%, 03/31/07.... 455,700
150,000 WorldCorp, Inc.
Sub. Deb. Cv. 7.00%, 05/15/04.... 98,250
----------
553,950
----------
WIRELESS COMMUNICATIONS - 0.24%
300,000 COMCAST Cellular
Communications Inc.
Ser. A Redeemable Notes,
Zero Cpn., 03/05/00.............. 220,500
----------
TOTAL CONVERTIBLE
CORPORATE BONDS ................... 27,115,331
----------
Shares
---------
CONVERTIBLE PREFERRED STOCKS - 14.71%
AUTOMOBILE MANUFACTURERS - 0.57%
5,000 Ford Motor Company
$4.20 Cv. Pfd. Ser. A............ 517,500
----------
AVIATION: PARTS AND SERVICES - 0.57%
9,000 Kaman Corporation
6.50% Cv. Pfd. Ser. 2............ 515,250
----------
BROADCASTING - 0.54%
10,000 Granite Broadcasting Corporation
$1.938 Cv. Pfd................... 490,000
---------
CABLE DISTRIBUTION - 0.15%
6,500 Cablevision Systems Corporation
8.50% Pfd. Ser. I................ 134,063
---------
CONSUMER PRODUCTS - 0.53%
7,500 Fieldcrest Cannon, Inc.
$3.00 Cv. Pfd. Ser. A............ 315,000
34,500 Kerr Group, Inc.
Cl. B $1.70 Cv. Pfd. Ser. D...... 159,563
---------
474,563
---------
DIVERSIFIED INDUSTRIAL - 1.77%
25,000 GATX Corporation
$3.875 Cv. Pfd................... 1,471,875
1,000 GATX Corporation
$2.50 Cv. Pfd.................... 121,000
---------
1,592,875
---------
ENERGY - 2.22%
6,000 Atlantic Richfield Company
$2.80 Cv. Pfd.................... 1,905,750
1,500 McDermott International, Inc.
Pfd. A........................... 43,875
2,000 Santa Fe Energy Resources, Inc.
7.00% Ser........................ 51,500
---------
2,001,125
---------
EQUIPMENT AND SUPPLIES - 4.08%
50,000 Fedders Corporation
Cv. Pfd.......................... 293,750
29,000 Navistar International Corporation
$6.00 Cv. Pfd. Ser. G............ 1,721,875
22,000 Sequa Corporation
$5.00 Cv. Pfd.................... 1,661,000
---------
3,676,625
---------
PUBLISHING - 0.58%
10,000 Golden Books Family Entertainment, Inc.
8.75% Cv. Pfd.(d)................ 520,000
---------
12
<PAGE>
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED) -- MARCH 31, 1997 (UNAUDITED)
================================================================================
Market
Shares Value
--------- ------
REAL ESTATE/DEVELOPMENT - 0.09%
881 Catellus Development Corporation
$3.75 Cv. Pfd. Ser. A............ $ 76,676
----------
TELECOMMUNICATIONS - 1.45%
3,000 Sprint Corporation
$1.50 Cv. Pfd. Ser. 1............ 427,500
2,200 Sprint Corporation
$1.50 Cv. Pfd. Ser. 2............ 313,500
8,000 Sprint Corporation
8.25% Cv. Pfd.................... 275,000
4,000 TCI Communications, Inc.
4.25% Cv. Pfd. Ser. A............ 155,000
1,500 TCI Pacific Communications Inc.
5.00% Cv. Pfd.................... 135,375
----------
1,306,375
----------
WIRELESS COMMUNICATIONS - 2.16%
44,000 AirTouch Communications
6.00% Cv. Pfd. Cl. B............. 1,127,500
18,600 AirTouch Communications
4.25% Cv. Pfd. Cl. C............. 813,750
----------
1,941,250
----------
TOTAL CONVERTIBLE
PREFERRED STOCKS .................. 13,246,302
----------
COMMON STOCKS - 21.30%
BROADCASTING - 1.66%
50,000 Renaissance Communications Corp.+.. 1,493,750
----------
CONSUMER PRODUCTS - 7.11%
30,000 Mafco Consolidated Group........... 960,000
170,000 Syratech Corporation............... 5,440,000
----------
6,400,000
----------
ENERGY - 0.48%
4,000 Exxon Corporation.................. 431,000
----------
EQUIPMENT AND SUPPLIES - 1.39%
50,000 Amphenol Corp-
Class A.......................... 1,250,000
----------
FOOD-RETAIL - 0.36%
22,000 Ingles Markets, Inc.
Cl A............................. 321,751
----------
HEALTH CARE - 2.77%
15,000 Genentech, Inc.*................... 856,875
80,000 Healthsource, Inc.................. 1,640,000
----------
2,496,875
----------
Principal
Amount
or Shares
- ---------
METALS & MINING - 0.49%
15,000 Freeport-McMoran Copper & Gold, Inc. 440,625
-----------
RAILROADS - 6.25%
50,000 Conrail, Inc....................... 5,637,500
-----------
REAL ESTATE/DEVELOPMENT - 0.56%
32,999 Catellus Development Corporation... 503,235
-----------
TELECOMMUNICATIONS - 0.23%
6,900 Pacific Telecom, Inc.(c)........... 207,000
-----------
TOTAL COMMON STOCKS ............... 19,181,736
-----------
CORPORATE BONDS - 0.49%
WIRELESS COMMUNICATIONS - 0.49%
$ 600,000 COMCAST Cellular
Communications Inc.
Ser. B Redeemable Notes,
Zero Cpn., 03/05/00.............. 442,500
-----------
TOTAL CORPORATE BONDS ............. 442,500
-----------
U.S. GOVERNMENT OBLIGATIONS - 37.23%
33,600,000 U.S. Treasury Bills,
4.89% to 5.00%,
Due 04/03/97 to 05/08/97......... 33,531,851
-----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS ....................... 33,531,851
-----------
TOTAL
INVESTMENTS - 103.83%
(cost $89,291,449)............... 93,517,720
Liabilities, in excess of
Other Assets - (3.83)% ............ (3,450,166)
-----------
NET ASSETS - 100.00%
(8,092,945 shares outstanding)... $90,067,554
===========
Net Asset Value Per Share ......... $11.13
======
- ---------------
(a) Principal amount denoted in French Francs.
(b) Principal amount denoted in Italian Lira.
(c) Security is fair valued pursuant to procedures established by the Board of
Directors.
(d) Security exempt from registration under Rule 144A of the Securities Act of
1933. These Securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
13
<PAGE>
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN
ENROLLMENT IN THE PLAN
It is the policy of The Gabelli Convertible Securities Fund, Inc.
("Convertible Securities Fund") to automatically reinvest dividends. As a
"registered" shareholder you automatically become a participant in the
Convertible Securities Fund's Automatic Dividend Reinvestment Plan (the "Plan").
The Plan authorizes the Convertible Securities Fund to issue shares to
participants upon an income dividend or a capital gains distribution regardless
of whether the shares are trading at a discount or a premium to net asset value.
All distributions to shareholders whose shares are registered in their own names
will be automatically reinvested pursuant to the Plan in additional shares of
the Convertible Securities Fund. Plan participants may send their stock
certificates to State Street Bank and Trust Company ("State Street") to be held
in their dividend reinvestment account. Registered shareholders wishing to
receive their distribution in cash must submit this request in writing to:
The Gabelli Convertible Securities Fund, Inc.
c/o State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
Shareholders requesting this cash election must include the shareholder's
name and address as they appear on the share certificate. Shareholders with
additional questions regarding the Plan may contact State Street at 1 (800)
336-6983.
SHAREHOLDERS WISHING TO LIQUIDATE REINVESTED SHARES held at State Street
Bank must do so in writing or by telephone. Please submit your request to the
above mentioned address or telephone number. Include in your request your name,
address and account number. The cost to liquidate shares is $2.50 per
transaction as well as the brokerage commission incurred. Brokerage charges are
expected to be less than the usual brokerage charge for such transactions.
If your shares are held in the name of a broker, bank or nominee, you
should contact such institution. If such institution is not participating in the
Plan, your account will be credited with a cash dividend. In order to
participate in the Plan through such institution, it may be necessary for you to
have your shares taken out of "street name" and re-registered in your own name.
Once registered in your own name your dividends will be automatically
reinvested. Certain brokers participate in the Plan. Shareholders holding shares
in "street name" at participating institutions will have dividends automatically
reinvested. Shareholders wishing a cash dividend at such institution must
contact their broker to make this change.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of cash dividends is determined in the following manner. Under the
Plan, whenever the market price of the Convertible Securities Fund's Common
Stock is equal to or exceeds net asset value at the time shares are valued for
purposes of determining the number of shares equivalent to the cash dividends or
capital gains distribution, participants are issued shares of Common Stock
valued at the greater of (i) the net asset value as most recently determined or
14
<PAGE>
(ii) 95% of the then current market price of the Convertible Securities Fund's
Common Stock. The valuation date is the dividend or distribution payment date
or, if that date is not a New York Stock Exchange trading day, the next trading
day. If the net asset value of the Common Stock at the time of valuation exceeds
the market price of the Common Stock, participants will receive shares from the
Convertible Securities Fund valued at market price. If the Convertible
Securities Fund should declare a dividend or capital gains distribution payable
only in cash, State Street will buy Common Stock in the open market, or on the
New York Stock Exchange or elsewhere, for the participants' accounts, except
that State Street will endeavor to terminate purchases in the open market and
cause the Convertible Securities Fund to issue shares at net asset value if,
following the commencement of such purchases, the market value of the Common
Stock exceeds the then current net asset value.
The automatic reinvestment of dividends and capital gains distributions
will not relieve participants of any income tax which may be payable on such
distributions. A participant in the Plan will be treated for Federal income tax
purposes as having received, on a dividend payment date, a dividend or
distribution in an amount equal to the cash the participant could have received
instead of shares.
The Convertible Securities Fund reserves the right to amend or terminate
the Plan as applied to any voluntary cash payments made and any dividend or
distribution paid subsequent to written notice of the change sent to the members
of the Plan at least 90 days before the record date for such dividend or
distribution. The Plan also may be amended or terminated by State Street on at
least 90 days' written notice to participants in the Plan.
VOLUNTARY CASH PURCHASE PLAN
The Voluntary Cash Purchase Plan is yet another vehicle for our
shareholders to increase their investment in the Convertible Securities Fund. In
order to participate in the Voluntary Cash Purchase Plan, shareholders must have
their shares registered in their own name.
Participants in the Voluntary Cash Purchase Plan have the option of making
additional cash payments to State Street for investments in the Convertible
Securities Fund shares at the then current market price. Shareholders may send
an amount from $250 to $10,000. State Street will use these funds to purchase
shares in the open market on or about the 15th of each month. State Street will
charge each shareholder who participates $0.75, plus a pro rata share of the
brokerage commissions. Brokerage charges for such purchases are expected to be
less than the usual brokerage charge for such transactions. The Fund's Advisor,
Gabelli Funds, has arranged that these purchases will be executed at no
commission through December 31, 1997. It is suggested that any voluntary cash
payments be sent to State Street Bank and Trust Company, P.O. Box 8200, Boston,
MA 02266-8200 such that State Street receives such payments approximately 10
days before the 15th of the month. Funds not received at least five days before
the investment date shall be held for investment in the following month. A
payment may be withdrawn without charge if notice is received by State Street at
least 48 hours before such payment is to be invested.
For more information regarding the Dividend Reinvestment Plan and
Voluntary Cash Purchase Plan, brochures are available by calling (914) 921-5070
or by writing directly to the Convertible Securities Fund.
15
<PAGE>
This page intentionally left blank.
<PAGE>
DIRECTORS AND OFFICERS
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
One Corporate Center, Rye, NY 10580-1434
DIRECTORS
Mario J. Gabelli, CFA
PRESIDENT AND CHIEF INVESTMENT OFFICER
E. Val Cerutti
CHIEF EXECUTIVE OFFICER
CERUTTI CONSULTANTS, INC.
Felix J. Christiana
FORMER SENIOR VICE PRESIDENT
DOLLAR DRY DOCK SAVINGS BANK
Anthony J. Colavita, P.C.
ATTORNEY-AT-LAW
ANTHONY J. COLAVITA, P.C.
Dugald A. Fletcher
PRESIDENT, FLETCHER & COMPANY, INC.
Karl Otto Pohl
FORMER PRESIDENT, DEUTSCHE BUNDESBANK
Anthony R. Pustorino
CERTIFIED PUBLIC ACCOUNTANT
PROFESSOR, PACE UNIVERSITY
Anthonie C. van Ekris
MANAGING DIRECTOR
BALMAC INTERNATIONAL, INC.
Salvatore J. Zizza
CHAIRMAN & CHIEF EXECUTIVE OFFICER
THE LEHIGH GROUP, INC.
OFFICERS AND PORTFOLIO MANAGERS
Mario J. Gabelli, CFA
PRESIDENT & CHIEF INVESTMENT OFFICER
Bruce N. Alpert
VICE PRESIDENT & TREASURER
A. Hartswell Woodson, III
ASSOCIATE PORTFOLIO MANAGER
James E. McKee
SECRETARY
INVESTMENT ADVISOR
Gabelli Funds, Inc.
One Corporate Center
Rye, New York 10580-1434
CUSTODIAN, TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
STOCK EXCHANGE LISTING
NYSE-Symbol: GCV
Shares Outstanding 8,092,945
The Net Asset Value appears in the Publicly Traded Funds column, under the
heading "Convertible Securities Funds," in Saturday's The New York Times and
Monday's in The Wall Street Journal.
It is also listed in Barron's Mutual Funds/Closed End Funds section under the
heading "Convertible Securities Funds".
The Net Asset Value may be obtained each day by calling (914) 921-5071.
================================================================================
For general information about the Gabelli Funds,
call 1-800-GABELLI (1-800-422-3554), fax us at 914-921-5118, visit our Internet
homepage at: http://www.gabelli.com, or e-mail us at: [email protected]
================================================================================
================================================================================
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that the Convertible Securities Fund may from
time to time purchase shares of its capital stock in the open market when the
Convertible Securities Fund shares are trading at a discount of 10% or more from
the net asset value of the shares.
================================================================================
<PAGE>
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
One Corporate Center
Rye, NY 10580-1434
914-921-5070
http://www.gabelli.com
================================================================================
First Class Mail
U.S. Postage
PAID
Rye, NY
Permit No. 109
================================================================================
First Quarter Report
March 31, 1997
3/97
