THE GABELLI
CONVERTIBLE
SECURITIES
FUND, INC.
Third Quarter Report
September 30, 1998
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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. They also stand out
in an increasingly complex, interconnected and interdependent 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.
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[PHOTO OMITTED]
THE GABELLI
CONVERTIBLE
SECURITIES
FUND, INC.
To Our Shareholders,
As hybrids, convertible securities prices are influenced by the
performance of underlying equities and the prevailing trend in corporate bond
prices. In the third quarter of 1998, stocks and corporate bonds fell as global
economic distress and a slowing domestic economy threatened to pinch profits. As
a result, convertible securities also declined. Importantly, however,
convertibles clearly demonstrated their defensive characteristics--retreating
modestly relative to stocks.
Investment Performance
For the quarter ended September 30, 1998, The Gabelli Convertible
Securities Fund, Inc.'s ("Convertible Securities Fund") net asset value declined
4.2% ending the quarter at $10.96 after adjusting for the $0.20 per share
dividend paid on September 28, 1998. This compares to a decline of 11.5% for the
Lipper Analytical Services, Inc. Convertible Securities Fund Index. For the nine
and twelve months ended September 30, 1998, the Fund increased 0.8% and 3.6%,
respectively. This compares to declines of 6.1% and 7.2% for the Lipper
Convertible Securities Fund Index over these respective periods.
The three- and five-year average annual returns of the Convertible
Securities Fund were 7.8% and 7.7%, respectively. Since inception on July 3,
1989 through September 30, 1998, the Convertible Securities Fund achieved a
131.0% total return which represents an average annual return of 9.5%.
The Fund's common shares on the New York Stock Exchange ended the quarter
at $10.1875, down 5.1% for the quarter, up 11.0% for the past twelve months and
up 25.0% from its initial price of $11.25 on March 31, 1995 after adjusting for
the reinvestment of dividends totaling $3.445 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 6% 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 Adviser and its
affiliates have announced their intention to buy up to one million common shares
in the open market (569,264 of which have been acquired to date). The Fund has
also instituted a share repurchase program which we discuss later in this
report.
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INVESTMENT RESULTS (a)(c)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Quarter
---------------------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
1998: Net Asset Value .......... $11.87 $11.66 $10.96 __ __
Total Return ............. 5.3% 0.0% (4.2)% __ __
- -----------------------------------------------------------------------------------------------
1997: Net Asset Value .......... $11.13 $11.38 $11.81 $11.48 $11.48
Total Return ............. 1.7% 3.5% 5.0% 2.8% 13.5%
- -----------------------------------------------------------------------------------------------
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%
- -----------------------------------------------------------------------------------------------
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%
- -----------------------------------------------------------------------------------------------
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>
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Average Annual Returns - September 30, 1998 (a)
1 Year .......................................................... 3.6%
5 Year .......................................................... 7.7%
Life of Fund (b) ................................................ 9.5%
- --------------------------------------------------------------------------------
(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 - Common Stock
- --------------------------------------------------------------------------------
Payment Date Rate Per Share Reinvestment Price
- ------------ -------------- ------------------
September 28, 1998 $0.200 $10.52
June 26, 1998 $0.200 $11.02
March 26, 1998 $0.200 $11.10
September 26, 1997 $0.120 $10.44
June 27, 1997 $0.120 $ 9.96
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
- --------------------------------------------------------------------------------
2
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What We Do
[GRAPHIC-DEPICTING INVESTMENT STRATEGIES]
The success of momentum investing in recent years and investors' desire
for instant gratification have combined to make value investing appear dull. At
the risk of being dull, we will once again describe the "boring" value approach
that has seen us through both good and bad markets over the last 9 years at The
Gabelli Convertible Securities Fund and for over 20 years at Gabelli Asset
Management Company. In past reports, we have tried to articulate our investment
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 stocks 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. equities 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 the globalization of the market in filmed entertainment and
telecommunications, and micro trends, such as an increased focus on productivity
enhancing goods and services.
Convertible Securities are "Hybrids"
It is important to understand our stock selection discipline because price
movement in the underlying equity will generally have the greatest impact on
convertible securities pricing. The convertible securities market consists of
bonds, debentures, corporate notes, preferred stocks and warrants or other
similar securities which may be 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.
3
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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.
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.
Good Things Come To Those Who Wait
The critical element to our success in the equities and convertible
securities markets has been patience in both the selection process and in
waiting for the values of portfolio positions to be recognized. We will continue
to be patient and opportunistic in selecting converts for the Fund and will
invest in short-term instruments (including time sensitive work-outs) when
appropriate. We bought mostly short-term U.S. Treasury obligations in the past.
However, the U.S. financial system has improved significantly and we now take
advantage of other short-term alternatives. In this regard, the Convertible
Securities Fund at times engages in risk arbitrage to generate returns. By risk
arbitrage we mean investing in "event" driven situations; primarily, but not
exclusively, in announced mergers, acquisitions, reorganizations and other
"workout" opportunities. In order to avoid overall market risk in these
opportunities, the Fund will concentrate on the lower risk transactions.
We borrow a quote from Warren Buffett to explain our occasional use of
risk 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."
In short, the high cash position in the Fund does not reflect any effort
on our part to time the convertible securities market. It is rather a
consequence of our value oriented discipline. At the same time, some of our
convertible securities have been called by the issuer and we either received
cash or stock. We are always hard at work evaluating opportunities and
identifying fundamental bargains to progress to a more fully invested posture.
However, we will not stretch our fundamental parameters and introduce greater
market risk to the portfolio.
4
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COMMENTARY
Meaningful commentary on the convertible securities market demands a
review of the macroeconomic forces impacting stocks and corporate bonds.
Looking Forward Through a Rear View Mirror
Is the stock market bottoming or has the retreat from equities just begun?
Equity valuations pivot on the outlook for earnings and on the multiple accorded
those earnings. The earnings picture has been muddied by global economic
turmoil. However, we continue to believe that on a longer term secular basis,
U.S. corporations should grow earnings at high single digit rates. In light of
this favorable long term secular earnings forecast and the positive outlook for
inflation and interest rates, we believe at current prices, most stocks are now
quite reasonably valued. So, going forward, we believe equity owners will be
adequately rewarded.
The Four M's
In the third quarter of 1998, consumers and investors focused on the Four
M's:
Market
McGwire
Monica
Meriwether
M as in Market
The sharp crack in U.S. equities during the third quarter raises several
questions. Will the economy be impacted either through a reduction in consumer
spending or a cutback in corporate expenditures? Since the U.S. economy has been
the engine of global growth, will a slow-down accentuate a global spiral?
We are concerned, but we see glimmers of relief from this conundrum
through signs that the Japanese are finally addressing the issues in their
economic system. Stimulation in Japan should buttress overall economic activity,
particularly in Southeast Asia. The same applies to Euroland (the new name for
the countries participating in European Monetary Union). Moreover, part of the
global economic disequilibrium we have been experiencing stems from the strong
dollar. With the dollar weakening against the mark and the yen, some global
economic balance should be restored. We believe the average publicly traded
security has discounted a modest profits recession in l999.
5
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There are plenty of things to worry about and in our opinion, most of
these worries are already baked into stock prices. We can not be sure that
stocks have bottomed. We do believe most U.S. companies are now priced quite
reasonably relative to their "real world" economic value and longer term
earnings prospects.
McGwire
Mark McGwire and Sammy Sosa's heroics put baseball back on the front
pages. In places other than New York, Boston, Los Angeles and San Francisco,
most people were more captivated by the historic home run record chase than what
was occurring in the economy and the stock market. Will they continue to focus
on the day-to-day elements that impact their lives and their own individual
economic expectations? Job security, low inflation, low interest rates
(resulting in much lower mortgage payments) and the prospects of reduced taxes
should make most people feel relatively good.
Monica
The histrionics associated with the President's current predicament have
also taken center stage. Will the U.S. be in a position to provide moral
leadership on such issues as nuclear armaments? (Most of us now understand
Kashmir is not a sweater). Will President Clinton be able to energize the new
Congress and focus on critical economic issues in a timely fashion? Will Robert
Rubin and Alan Greenspan resign if Clinton is not in power?
We have long maintained the view that a great democracy like ours has many
flaws. But, the underpinnings of our system, being rooted in personal freedom
and ownership of capital, will survive flaws and sometimes even flourish in the
absence of credible leadership.
Meriwether
We, like virtually everyone in the financial community, were surprised by
the extent of leverage that an organization could accomplish and the extent of
damage that leverage could have on the financial system. A shutdown in lending,
so vital to both domestic and global growth, is occurring. We have a liquidity
crisis, but one different than past "credit crunches". When asked how to become
a millionaire, Warren Buffett quipped, "Start with $1 billion and buy an
airline." We now offer our version, "Start with $1 billion and give it to a
hedge fund manager who focuses on emerging market debt with leverage."
While the first chapter is still being written on the Long Term Capital
Management debacle, we will wait for the smoke to clear, the floor boards to be
lifted and the foundation inspected before commenting further. However, we
believe global cooperation will help curtail the damage.
The Four Legged Market Stool -- Now a Rocking Chair!
In previous letters to you, we described low inflation, low interest
rates, a powerful flow of funds, and strong corporate profit growth as the four
legs supporting the stock market stool. Three of these legs remain stable, but
the
6
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forth is wobbling considerably. Inflation is low and with deflationary forces at
work overseas if not yet here, inflation may go even lower. Long government bond
yields are already at lows not seen in a generation, and if the Federal Reserve
drops short rates again, long rates could recede even farther. Individual
investors' increased use of 401(k)'s and IRAs continues to provide a relatively
steady flow of funds into stocks, seemingly irrespective of market gyrations.
However, corporate profit growth is endangered by weak Asian markets, a slowing
domestic economy and the possibility that the American consumer, who now has a
substantial portion of his/her savings invested in the stock market, may lose
confidence and stop spending.
The outlook for the domestic economy and corporate profits is further
complicated by the spreading international currency crisis. As more light is
shed on Japan's inability to crank its economic engine, the focus has shifted
from Asian currencies and the Russian ruble to Latin American currencies, in
particular the Brazilian real. The real has been under pressure and the
government's chosen remedy--much higher interest rates--may send the Brazilian
economy into recession. U.S. and international financial authorities appear
committed to supporting the real and doing everything in their power to make
sure Brazil and our other important Latin American trading partners do not go
the way of emerging market economies in Southeast Asia. It is too early to tell
whether they will succeed. Serious economic problems for our Latin American
trading partners would have a far greater impact on the American economy and
corporate profits than did economic disruption in Southeast Asia. We had looked
to Asia for future growth--the prospect of millions of new consumers for
American goods and services. We depend on Latin America for sustenance--millions
of people already buying our products.
Where Do We Go From Here?
Is the stock market bottoming or has the retreat from equities just begun?
We have opinions--not answers. Bear markets generally anticipate either a
recession or a serious crack in the financial infrastructure. While the American
economy is starting to slow, it is still advancing at a respectable pace. If
Latin America remains stable--as aforementioned, a very big and critical IF -
and if the American consumer shrugs off the market decline and continues to
spend, the economy should continue to expand, albeit at a slower pace than in
recent years. High "real interest rates" (the spread between interest rates and
inflation) would indicate the Federal Reserve has room to lower rates to provide
some stimulus if it sees the economy weakening. But, timing is an issue. This
would auger against recession.
Despite volatility and the sharp decline from this year's highs, the
market has retreated in a relatively orderly fashion--essentially doing what it
is supposed to do, respond to changing economic circumstances, most notably
diminished earnings prospects. We have not seen panic selling. If we were to
experience a real jolt to the financial infrastructure such as a major hedge
fund collapse sending shock waves through the banking system, this could change.
If the economy keeps chugging along and financial institutions remain
relatively healthy, the market should stabilize. If this is just a correction,
one would argue it is long overdue and may be setting the stage for the next leg
up in the bull market. Even if the market continues to drift, we could see
accelerated merger and acquisition activity buoying returns for value-oriented
investors.
7
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Corporate Bonds--Quietly Correcting
With all the "good news" headlines on U.S. government bonds, many
investors may not realize that corporate bonds have been declining. The very
same concern that has plagued the stock market--diminished earnings
expectations--has spooked corporate bond investors. Slower earnings growth
translates into slower dividend growth and perhaps lower credit quality. So,
corporate bonds have not benefited from the "flight to quality" out of equities
and the downtrend in corporate bond prices has not helped convertible
securities.
Barron's Closed-End Fund Section
The net asset value of the Gabelli Convertible Securities Fund appears in
Monday's The Wall Street Journal, in Sunday's The New York Times in the
Closed-End Funds section under the heading "Convertible Securities Funds", and
in Barron's Mutual Funds/Closed-End Funds section under the heading "Convertible
Securities Funds". You may also call 1-(800)-GABELLI (1-800-422-3554) to obtain
daily NAVs.
The following chart appeared in Barron's on October 19, 1998. To review
what is presented, the first column lists the fund name and its trading symbol,
with the second column indicating the exchange on which it trades. In our case
the Convertible Securities Fund trades on the New York Stock Exchange under the
symbol "GCV".
The "NAV" column illustrates what the actual portfolio value is worth per
share - total assets minus the liabilities divided by the number of shares
outstanding. The market price is simply the price at which the fund is trading
on the exchange. Closed-end funds have a limited number of shares outstanding.
To buy or sell shares investors use the NYSE to complete their transactions.
Concerning the market price, closed-end funds can either trade at a
premium or a discount to the NAV. The "Prem/Disc" column illustrates the
percentage difference the market price varies from the NAV. As of the close on
Friday, October 16, 1998, the Convertible Securities Fund's last trade was at a
3.5% discount to NAV. The final column indicates the total return (change in
market value plus an adjustment for reinvestment of dividends and distributions)
of the fund over the twelve months ending October 16, 1998.
<TABLE>
<CAPTION>
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52 Week
Stock Market Prem Market
Fund Name (Symbol) Exch NAV Price /Disc Return
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bancroft Conv (BCV) A 25.99 23 1/4 (10.5) (3.9)
Castle Conv (CVF) A 24.59 22 15/16 (6.7) (3.3)
Ellsworth Conv (ECF) A 11.11 9 13/16 (11.7) (1.3)
Gabelli Convertible Securities (GCV) N 10.62 10 1/4 (3.5) 12.4
Lincoln Conv (LNV)-ac N 14.11 13 9/16 (3.9) (17.4)
Putnam Conv Opp (PCV)-a N 22.42 21 11/16 (3.3) (7.9)
Putnam Hi Inc Cv (PCF)-a N 8.17 9 15/16 +21.6 5.3
TCW Conv Secs (CVT) N 8.18 9 1/2 +16.1 9.9
VK Conv Sec (ACS) N 20.73 18 (13.2) (7.5)
Source: Barron's
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</TABLE>
8
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Corporate Governance
The Gabelli Convertible Securities Fund continues to consider actions that
may reduce or eliminate the market discount of its shares. How do we accomplish
this? There are several factors that historically have worked to narrow the
discounts of closed-end funds. These include stock repurchase programs and
distribution policies, both of which we have instituted.
Stock Repurchase Plan - Q & A
Q: What is a stock repurchase plan?
A stock repurchase plan allows a company to buy back its own shares in the
open market (in our case, the New York Stock Exchange). This reduces the total
number of shares outstanding and increases the earnings per share.
Q: When did the Convertible Securities Fund implement a stock repurchase plan?
At a special meeting of the Board of Directors on October 27, 1997, the
Board authorized the repurchase of up to 250,000 shares of the Convertible
Securities Fund's outstanding shares. We were the first company on the New York
Stock Exchange to announce a stock repurchase program on this date when the
market declined 554.26 points, or 7.2%.
The Convertible Securities Fund may from time to time purchase shares of
its capital stock in the open market when the shares are trading at a discount
of 10% or more from the net asset value of the shares. In total, through
September 30, 1998, 171,400 shares were repurchased in the open market.
Similarly, an affiliated closed-end fund, The Gabelli Equity Trust, was
the first company on the New York Stock Exchange to implement a stock buyback
program on October 19, 1987, after the market crash. At the time, the Equity
Trust was trading at a discount to net asset value and represented an excellent
value for the Trust to acquire its own shares. This stock repurchase plan
resulted in the purchase of 800,000 shares in the open market from 1987 to 1988.
Q: What is the benefit of a stock repurchase plan?
When the Convertible Securities Fund purchases its own shares at a
discount to NAV, the Fund realizes a benefit equal to the difference between the
net asset value and the purchase price. This benefit is credited to the net
assets of the remaining shares, thus boosting the NAV. The larger the discount,
the greater the benefit on the NAV.
The market price is determined by supply and demand factors. If there are
more sellers than buyers the price will decline until buyers enter the market to
establish a sales price. A stock repurchase program increases demand for the
Convertible Securities Fund's shares in the open market. This provides a willing
buyer of fund shares which offsets, at least in part, sales of fund shares.
9
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Distribution Policy - Q & A
Q: What is a distribution policy?
A fund with a distribution policy is a fund which establishes a fixed
payment each year to its shareholders as a percentage of net assets or a
specific dollar amount. For example, a fund with a 10% distribution policy will
pay out 10% of its average net assets every year, either on an annual,
semi-annual or quarterly basis.
Q: What is the benefit of a distribution policy?
Investors usually favor funds that offer a constant stream of cash, or a
predictable yield. Thus, there is more demand for funds with a distribution
policy and historically they trade at a more narrow discount than funds without
a distribution policy.
Q: Why did the Convertible Securities Fund institute an 8% annual
distribution policy?
What are the "mechanics?"
In order to accelerate our effort to drive the current discount to a
premium, the Convertible Securities Fund, at a meeting of the Board of Directors
on May 13, 1998, instituted an 8% annual distribution policy. This distribution
policy is similar in structure to the Gabelli Equity Trust, which has employed a
10% annual distribution policy since August of 1988.
To illustrate, the Gabelli Equity Trust currently pays out 10% of its
average net asset value per share. The Fund's normal policy is to make quarterly
distributions of $0.27 per share at the end of each of the first three calendar
quarters of each year. The Fund's distribution in December for each calendar
year is an adjusting distribution. The amount is equal to the greater of 10% of
the average of the net asset value per share of the Fund as of the last day of
the four preceding calendar quarters or the minimum distribution requirements of
the Internal Revenue Code.
In the case of the Gabelli Convertible Securities Fund, the Fund will pay
out a minimum annual distribution of 8% of the net asset value. The method is to
pay $0.20 per share in each of the first three quarters of the year and a
distribution in the fourth quarter of a sufficient amount to pay 8% of the
average net assets of the Fund or to satisfy the minimum distribution
requirements of the Internal Revenue Code. The Fund recently distributed $0.20
per share on September 28, 1998 in line with this 8% annual distribution policy.
Preferred Stock - An Investment For The Future
On May 16, 1997, the Fund successfully completed its offering of
cumulative preferred stock which is rated `AAA' by Standard and Poor's. The Fund
issued 1,200,000 Preferred Shares at $25 with an annual dividend rate of $2.00
per share paying quarterly. The Preferred Shares are trading on the New York
Stock Exchange under the symbol "GCV Pr" and closed at $26.375 on September 30,
1998. We thought we would answer some questions about preferred stock.
10
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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 was
issued at $25 per share with a fixed dividend rate of $2.00. The Fund is
obligated to pay this dividend to the Preferred Shareholders before any
dividends are paid to the holders of common shares. Thereafter, any return
earned in excess of this dividend rate would work to benefit the Common
Shareholders.
Q: How would Preferred Shares benefit Common Shareholders?
Through September 30, 1998, the Convertible Securities Fund has earned a
9.5% average annual return. The only obligation that the Fund has to the
Preferred Shareholders is to pay the stated dividend rate. Given the current
market environment, we considered this to be an ideal 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. Any return earned in excess of the stated dividend rate, which is less
than the Fund's average annual return, would directly benefit Common
Shareholders; however, any shortfall from the stated rate would impact the
Common Shareholders in the opposite fashion. Therefore, by taking advantage of
the current relatively low interest rate environment and achieving our
investment objectives, the Preferred Share issuance offers what we believe is a
conservative method of adding wealth for our Common Shareholders.
Furthermore, Common Shareholders stand to receive certain tax benefits as
a result of the Preferred Stock offering. Since taxable income is allocated to
the Preferred Shareholders before Common Shareholders, taxable distributions to
Common Shareholders are not required to the extent they would be if the
Preferred Shares were not outstanding. Common Shareholders thus 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 are likely to
grow at a faster rate.
Q: Why did the Fund consider Preferred Shares?
Long-term interest rates were at relatively low levels. The dividend rate
that the Fund is required to pay on the Preferred Shares was related to
long-term rates. In this environment, we had 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 represented 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?
With the completion of the preferred offering, the Adviser has agreed to
waive the management fee on the incremental assets if the net asset value total
return on the Fund does not exceed the stated dividend rate on the Preferred
Shares.
Q: What were the offering costs involved with the Preferred Shares?
Consistent with our conservative approach, the Fund issued the Preferred
Shares in a cost efficient manner at less than $0.18 per share. This modest
investment provided the underpinnings for successful returns in the future.
11
<PAGE>
Let's Talk Converts
The following are specifics on selected holdings of our Fund. Favorable
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)
prospects do not necessarily translate into higher prices, but they do express a
positive trend which we believe will develop over time.
American Bankers Insurance Group Inc. (ABI) ($3.125 Cv. Pfd., Ser. B), based in
Miami, is a leading provider of credit insurance and credit-related insurance
products. ABI and Cendant Corp. (CD - $11.625 - NYSE) announced that they have
terminated their merger agreement, ending a nearly eleven month saga that began
with the announcement that ABI would be purchased by American International
Group (AIG - $77.00 - NYSE) for $47 per share. Cendant bid $58 per share on
January 27, 1998 and eventually won the right to acquire ABI for $67 per share.
Revelations of accounting problems at Cendant placed the deal in jeopardy and
ultimately led to the cancellation of the deal. As part of the companies'
termination agreement, Cendant paid ABI $400 million (equal to approximately
$5.50 per share). Throughout the ordeal, ABI's basic business has remained on
track, and it had significant volumes of new business in the pipeline. With the
termination of the deal, the company will be able to focus on closing the new
business in the pipeline. As such, top line growth is expected to pick up in the
near future and get back on track to a more normal 10% to 12% growth rate in
1999. Greater upside potential exists as it is possible that AIG will once again
make an offer for ABI.
AirTouch Communications Inc. (6.00% Cv. Pfd., Cl. B; 4.25% Cv. Pfd., Cl. C),
based in San Francisco, is the world's largest wireless communications provider.
With more than 32 million total venture customers in 13 countries, AirTouch and
its partners serve more than ten percent of the world's wireless subscribers. In
July, 1.2 million customers were added through international ventures. In the
future, AirTouch will offer satellite communications through its interest in the
Globalstar satellite system. Earnings in 1997, before acquisitions, almost
doubled those in 1996. Cash flow should grow by about 25% in 1998. In April, the
company completed the acquisition of MediaOne Group's (formerly US West Media
Group) U.S. wireless interests in a deal valued at almost $6 billion.
Citizens Utilities Co. (5.00% Cv. Pfd.) provides telecommunications services and
public services to approximately 1.8 million customers in 21 states. Citizens
owns 83% of Electric Lightwave (ELIX - $8.50 - Nasdaq) and has a significant
investment in Centennial Cellular Corp. (CYCL - $32.00 - Nasdaq). In May,
management authorized the separation of Citizen's telecommunications businesses
and public services businesses into two stand-alone, publicly traded companies.
Upon separation, the new company's telecommunications business will include
Citizen's stake in Electric Lightwave, as well as its interest in Centennial
Cellular, D&E Communications, Hungarian Telephone & Cable, cable television and
other telecom businesses. The company's public services businesses, consisting
of natural gas distribution, electric distribution, water distribution and
wastewater treatment facilities in 10 states, will continue to trade as Citizens
Utilities. This restructuring will be facilitated by the $215 million in cash
the company should receive from its 16% stake in Centennial Cellular Corp. when
Centennial's planned sale to Welsh, Carson, Anderson & Stowe VIII, L.P. is
concluded.
12
<PAGE>
Kaman Corp. (Sub. Deb. Cv., 6.00%, 03/15/12) was founded in 1945 as a pioneer in
the helicopter industry. Aircraft manufacturing remains at the core of the
business. Kaman services both commercial and government markets with helicopters
and aircraft components. The company also produces specialized, high-value niche
market products and services which tend to be technological leaders in their
markets. Kaman is a major national distributor of original equipment, repair and
replacement products and value-added services to nearly every sector of North
American industry. The company also manufactures and distributes musical
instruments (Ovation guitars) and accessories to independent retailers.
MediaOne Group Inc. (4.50% Cv. Pfd., Ser. D), formerly US West Media Group, has
finalized its split from the parent company US West. MediaOne Group is involved
in domestic and international cable and telephony and international wireless
communications. It is the third largest broadband cable company in the U.S. with
over 5 million subscribers and 8 million homes passed. Its Directory and
Informational business has been transferred to US West. MediaOne's strong
financial position should allow the company to be one of the leaders in the
upgrading of cable infrastructures. MediaOne has a variety of investment
interests including 25% of Time Warner Entertainment (which includes Warner
Brothers Studio and Home Box Office), 24% of PCS Prime Co. and almost 27% of
TeleWest plc.
Sequa Corp. ($5.00 Cv. Pfd.) is an aerospace, chemical, machinery and automotive
product company. Its diversified businesses range from overhauling jet engines
to manufacturing specialty chemicals. The Chromalloy division, the company's
crown jewel which generates over $800 million in revenues, is a leader in the
repair, replacement and overhaul of gas turbine engines. Sequa also has acquired
an 8.6% stake in Material Sciences Corp., a provider of specialty coatings for
steel and plastics.
Sprint Corp. ($1.50 Cv. Pfd., Ser. 1; $1.50 Cv. Pfd., Ser. 2; 8.25% Cv. Pfd.) is
the third largest long distance carrier and the second largest independent local
telephone company in the U.S. Sprint has positioned itself globally through a
joint venture called GlobalOne. Its joint venture partners, France Telecom and
Deutsche Telekom, also have a direct 20% stake in Sprint. The company has a
promising national personal communications services ("PCS") and wireless joint
venture with three major cable operators: Tele-Communications Inc., Comcast and
Cox Communications. Sprint faces risks from prospective new entrants in its long
distance business which may be offset by the PCS venture and its own pursuit of
the $100 billion local telephone market.
WHX Corp. (6.50% Cv. Pfd., Ser A; $3.75 Cv. Pfd., Ser. B) is a holding company
for wholly owned subsidiary Wheeling-Pittsburgh Steel, America's ninth largest
integrated steel producer. Wheeling-Pittsburgh develops, processes and
fabricates steel (hot/cold rolled sheets and coated products) and steel products
(roof deck, form deck, culvert, steel framing and related products). In April,
WHX completed its acquisition of Handy & Harman, a diversified industrial
manufacturing company, for a total consideration of $604 million including
assumption of $186 million in debt.
13
<PAGE>
Dividends
The Fund recently distributed a dividend of $0.20 per share to Common
Shareholders on September 28, 1998 in line with the Fund's 8% annual
distribution policy. For the twelve months ended September 30, 1998, the Fund
distributed a total of $1.20 per share to Common Shareholders. Our Preferred
Shareholders were paid a dividend of $0.50 per share on September 28, 1998. For
the twelve months ended September 30, 1998, the Preferred Shareholders received
a total distribution of $2.00 per share, which is the annual dividend rate on
the Preferred Shares.
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 expired. However, we have extended through
December 31, 1998 our offer to shareholders to buy shares through our Voluntary
Cash Purchase Plan at no commission. This Plan is available every month. Please
see the details of this Plan at the end of this report.
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, IRAs, 401(k)s, quarterly reports, closing prices and other
current news. You can send us e-mail at [email protected].
Shareholders will soon be able to receive quarterly reports from Gabelli
Funds via e-mail. We anticipate that this service will be available in early
1999. If you are interested in receiving your quarterly report via e-mail,
please send an e-mail to [email protected] with your name and address and
we will provide you with the appropriate forms. Our investor representatives are
available at 1-800-GABELLI (1-800-422-3554) to assist you as well.
14
<PAGE>
In Conclusion
In the third quarter of 1998, convertible securities lived up to their end
of the investment bargain, with our portfolio falling 4.2%, which is only about
forty percent as far as the S&P 500 and a much lower percentage relative to
broader market indices. We are not pleased at having taken a step back, but
gratified that the unique characteristics of convertible securities helped
preserve capital during this challenging investment environment. We believe they
can enhance shareholder assets when the stock and corporate bond markets
stabilize.
Sincerely,
/s/ Mario J. Gabelli
Mario J. Gabelli
President and
Chief Investment Officer
October 30, 1998
- --------------------------------------------------------------------------------
Top Ten Convertible Holdings
September 30, 1998
Sprint ($1.50 Cv. Pfd., Ser. 1; $1.50 Cv. Pfd., Ser. 2; 8.25%, Cv. Pfd.)
WHX Corp. (Cv. Pfd. Ser. A, Cv. Pfd. Ser. B)
AirTouch Communications (6.00%, Cv. Pfd., Cl. B; 4.25%, Cv. Pfd., Cl. C)
Fieldcrest Cannon Inc. (Sub. Deb. Cv., 6.00%, 03/15/12)
Citizens Utilities (5.00% Cv. Pfd.)
Thomas Nelson Inc. (Sub. Deb. Cv., 5.75%, 11/30/99)
Hilton Hotels Corp. (Sub. Deb. Cv., 5.00%, 05/15/06)
Sealed Air Corp. ($2.00 Cv. Pfd. Ser. A)
Sequa Corporation ($5.00 Cv. Pfd.)
Cendant Corp. (1.30% Cv. Pfd., 7.50% Cv. Pfd.)
- --------------------------------------------------------------------------------
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.
15
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Portfolio of Investments -- September 30, 1998 (Unaudited)
================================================================================
Principal Market
Amount Value
--------- -------
CONVERTIBLE CORPORATE BONDS -- 17.47%
Automotive: Parts and Accessories -- 0.22%
$ 500,000 Exide Corp. Sub. Deb. Cv.
2.90%, 12/15/05................................. $ 255,000
------------
Aviation: Parts and Services -- 0.86%
1,015,000 Kaman Corp. Sub. Deb. Cv.
6.00%, 03/15/12................................. 999,775
------------
Business Services -- 0.89%
900,000 BBN Corp. Sub. Deb. Cv.
6.00%, 04/01/12................................. 870,750
850,000 Builders Transport Inc. Sub. Deb. Cv.
6.50%, 05/01/11................................. 170,000
------------
1,040,750
------------
Cable -- 0.66%
Rogers Communications Inc.
Sub. Deb. Cv.
200,000 2.00%, 11/26/05................................. 128,125
1,000,000 7.50%, 09/01/99................................. 645,375
------------
773,500
------------
Consumer Products -- 2.89%
3,500,000 Fieldcrest Cannon Inc. Sub. Deb. Cv.
6.00%, 03/15/12................................. 2,834,999
750,000 Standard Commercial Corp.
Sub. Deb. Cv.
7.25%, 03/31/07................................. 547,500
------------
3,382,499
------------
Consumer Services -- 0.03%
40,000 Odgen Corp. Sub. Deb. Cv.
6.00%, 06/01/02................................. 39,400
------------
Electronic Equipment -- 0.31%
50,000 ASM Lithography Holding Cv.
2.50%, 04/09/05................................. 18,965
390,000 Trans-Lux Corp. Sub. Deb. Cv.
7.50%, 12/01/06................................. 339,788
------------
358,753
------------
Energy -- 0.89%
1,100,000 Moran Energy Inc. Sub. Deb. Cv.
8.75%, 01/15/08................................. 1,041,181
------------
Entertainment -- 0.79%
200,000 Kushner-Locke Co. Sub. Deb. Cv.
8.00%, 12/15/00 (a)............................. 120,000
800,000 Savoy Pictures Entertainment Inc.
Sub. Deb. Cv.
7.00%, 07/01/03................................. 800,000
------------
920,000
------------
Equipment and Supplies -- 1.84%
1,285,000 Intermagnetics General Corp.
Sub. Deb. Cv.
5.75%, 09/15/03 (b)............................. 976,600
1,136,000 Kollmorgen Corp. Sub. Deb. Cv.
8.75%, 05/01/09................................. 1,151,620
30,000 Robbins & Myers Inc.
Sub. Deb. Cv.
6.50%, 09/01/03................................. 28,800
------------
2,157,020
------------
Food and Beverage -- 1.69%
Boston Chicken Inc. Sub. Deb. Cv.
400,000 4.50%, 02/01/04................................. 32,000
120,000 7.75%, 05/01/04 ................................ 9,600
100,000 Chiquita Brands International Inc. Cv.
7.00%, 03/28/01................................ 92,000
Chock Full o' Nuts Corp. Sub. Deb. Cv.
1,000,000 7.00%, 04/01/12................................. 950,000
883,000 8.00%, 09/15/06................................. 891,830
------------
1,975,430
------------
Health Care -- 0.59%
750,000 Ivax Corp. Deb. Cv.
6.50%, 11/15/01................................. 689,063
------------
Hotels and Gaming -- 1.86%
2,450,000 Hilton Hotels Corp. Sub. Deb. Cv.
5.00%, 05/15/06................................. 2,168,250
------------
Metals and Mining -- 0.28%
500,000 Coeur d'Alene Mines Corp.
Sub. Deb. Cv.
6.00%, 06/10/02................................. 325,000
------------
Paper and Forest Products -- 0.20%
200,000 Riverwood International Corp.
Sub. Deb. Cv.
6.75%, 09/15/03................................. 230,800
------------
Publishing -- 2.71%
700,000 News America Holdings Inc.
Sub. Deb. Cv.
Zero Cpn., 03/31/02............................. 777,000
2,350,000 Thomas Nelson Inc. Sub. Deb. Cv.
5.75%, 11/30/99 (b) ............................ 2,311,812
50,000(c) United News & Media plc Sub. Deb. Cv.
6.125%, 12/03/03................................ 84,280
------------
3,173,092
------------
Real Estate and Development -- 0.08%
125,000 Rockefeller Center Properties Inc.
Sub. Deb. Cv.
Zero Cpn., 12/31/00............................. 95,000
------------
16
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Portfolio of Investments (Continued) -- September 30, 1998 (Unaudited)
================================================================================
Principal Market
Amount Value
--------- -------
Retail -- 0.18%
$ 50,000 Costco Companies Inc. Sub. Deb. Cv.
Zero Cpn., 08/19/17............................. $ 30,875
210,000 JumboSports Inc. Sub. Deb. Cv.
4.25%, 11/01/00................................. 53,550
180,000 Nine West Group Inc.
Sub. Deb. Cv.
5.50%, 07/15/03................................. 120,825
------------
205,250
------------
Telecommunications -- 0.09%
Amnex Inc. Sub. Deb. Cv.
20,000 8.50%, 09/25/02................................. 11,200
50,000 8.50%, 09/25/02 (b)............................. 28,000
50,000 Telefonica Europe BV Sub. Deb. Cv.
2.00%, 07/15/02 (b)............................. 64,000
------------
103,200
------------
Transportation -- 0.41%
450,000 Greyhound Lines Inc. Sub. Deb. Cv.
8.50%, 03/31/07................................. 456,750
160,000 WorldCorp Inc. Sub. Deb. Cv.
7.00%, 05/15/04................................. 19,200
------------
475,950
------------
TOTAL CONVERTIBLE
CORPORATE BONDS ................................... 20,408,913
------------
Shares
--------
CONVERTIBLE PREFERRED STOCKS -- 25.54%
Aviation: Parts and Services -- 0.65%
Coltec Capital Trust
3,000 5.25% Cv. Pfd................................... 108,000
17,000 5.25% Cv. Pfd. (b)................................ 646,000
------------
754,000
------------
Broadcasting -- 0.26%
9,000 Granite Broadcasting Corp.
$1.938 Cv. Pfd.................................. 299,250
------------
Cable -- 1.67%
4,000 Cablevision Systems Corp.
8.50% Cv. Pfd. Ser. 1........................... 264,000
18,000 MediaOne Group
4.50% Cv. Pfd. Ser. D........................... 1,689,750
4,000 TCI Communications Inc.
4.25% Cv. Pfd. Ser. A........................... 337,000
1,500 TCI Pacific Communications Inc.
5.00% Cv. Pfd................................... 322,875
------------
2,613,625
------------
Consumer Services -- 1.94%
Cendant Corp.
92,000 1.30% Cv. Pfd................................... 2,001,000
3,000 7.50% Cv. Pfd................................... 75,000
13,000 Loewen Group Inc.
6.00% Cv. Pfd. Ser C............................ 195,906
------------
2,271,906
------------
Diversified Industrial -- 0.19%
1,300 GATX Corp.
$2.50 Cv. Pfd................................... 227,500
------------
Energy -- 1.75%
6,000 Atlantic Richfield Co.
$2.80 Cv. Pfd................................... 2,044,500
------------
Entertainment -- 0.05%
2,500 Metromedia International Group Inc.
7.25% Cv. Pfd................................... 56,875
------------
Equipment and Supplies -- 1.83%
24,200 Sequa Corp.
$5.00 Cv. Pfd................................... 2,141,700
------------
Financial Services -- 0.87%
11,500 American Bankers Insurance
$3.125 Cv. Pfd. Ser. B.......................... 1,020,625
------------
Hotels and Gaming -- 0.06%
2,000 Station Casinos Inc.
$3.50 Cv. Pfd................................... 66,125
------------
Iron/Steel -- 3.00%
WHX Corp.
41,000 6.50% Cv. Pfd. Ser. A........................... 1,865,500
40,500 $3.75 Cv. Pfd. Ser. B........................... 1,640,250
------------
3,505,750
------------
Paper and Forest Products -- 1.86%
60,000 Sealed Air Corp.
$2.00 Cv. Pfd. Ser. A........................... 2,167,500
------------
Publishing -- 0.25%
17,000 Golden Books Family Entertainment Inc.
8.75% Cv. Pfd................................... 59,500
11,300 Reader's Digest
$1.034 Cv. Pfd.................................. 235,181
------------
294,681
------------
Telecommunications -- 8.63%
64,000 Citizens Utilities Co.
5.00% Cv. Pfd................................... 2,752,000
1,800 Philippine Long Distance
$3.50 Cv. Pfd. Ser. III......................... 70,200
Sprint Corp.
3,000 $1.50 Cv. Pfd. Ser. 1........................... 697,500
2,200 $1.50 Cv. Pfd. Ser. 2........................... 511,500
80,000 8.25% Cv. Pfd................................... 5,400,000
------------
9,431,200
------------
17
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Portfolio of Investments (Continued) -- September 30, 1998 (Unaudited)
================================================================================
Market
Shares Value
--------- -------
Wireless Communications -- 2.53%
AirTouch Communications Inc.
12,000 4.25% Cv. Pfd. Cl. C............................ $ 978,000
42,000 6.00% Cv. Pfd. Cl. B............................ 1,974,000
------------
2,952,000
------------
TOTAL CONVERTIBLE
PREFERRED STOCKS .................................. 29,847,237
------------
COMMON STOCKS -- 28.18%
Agriculture -- 3.46%
44,000 DeKalb Genetics Corp............................... 4,048,000
------------
Aviation: Parts and Services -- 0.26%
18,000 Kaman Corp......................................... 308,250
------------
Building and Construction -- 0.01%
17 Holderbank Financiere Glarus AG.................... 17,438
------------
Business Services -- 2.70%
100,000 SPS Transaction Services Inc.+..................... 3,150,000
------------
Computer Software and Services -- 0.00%
76 Wang Laboratories Inc.+............................ 1,473
------------
Diversified Industrial -- 0.85%
30,000 GATX Corp.......................................... 991,875
------------
Energy -- 2.57%
10,000 AGL Resources Inc. ................................ 193,750
7,000 Central Hudson Gas and Electric Corp. ............. 293,125
10,000 Chevron Corp. ..................................... 840,625
30,000 Orange & Rockland Utilities........................ 1,646,250
2,000 Santa Fe Energy Resources Inc.+ ................... 18,875
-----------
2,992,625
-----------
Equipment and Supplies -- 0.20%
50,000 Fedders Corp. Cl. A................................ 231,250
-----------
Financial Services -- 4.02%
60,000 Allied Group Inc. ................................. 2,883,750
33,000 American Bankers Insurance Group................... 1,402,500
16,000 Argonaut Group Inc. ............................... 408,000
-----------
4,694,250
-----------
Health Care -- 2.72%
60,000 DePuy Inc. ........................................ 2,100,000
15,000 Genentech Inc.+ ................................... 1,078,125
-----------
3,178,125
-----------
Retail -- 6.53%
40,000 Food Lion Inc. Cl. A............................... 425,000
167,000 Giant Food Inc. Cl. A.............................. 7,212,312
-----------
7,637,312
-----------
Specialty Chemicals -- 4.86%
82,100 BetzDearborn Inc................................... 5,675,162
------------
TOTAL COMMON STOCKS ............................... 32,925,760
------------
PREFERRED STOCKS -- 0.01%
Cable -- 0.01%
500 MediaOne Financing Trust II Pfd. .................. 13,188
------------
Principal
Amount
- -----------
CORPORATE BONDS -- 0.09%
Entertainment -- 0.09%
$ 100,000 Viacom Inc.
8.00%, 07/07/06................................. 102,125
------------
U.S. GOVERNMENT OBLIGATIONS -- 30.75%
36,135,000 U.S. Treasury Bills
4.80% to 5.13%,
due 10/22/98 to 11/27/98++ ..................... 35,929,205
------------
TOTAL INVESTMENTS -- 102.04%
(Cost $115,484,413)............................. $119,226,428
OTHER ASSETS, LIABILITIES AND
LIQUIDATION VALUE OF CUMULATIVE
PREFERRED STOCK -- (27.71)% ................... (32,383,515)
------------
NET ASSETS -- COMMON STOCK -- 74.33%
(7,921,545 common shares outstanding)........... 86,842,913
------------
NET ASSETS -- CUMULATIVE
PREFERRED STOCK -- 25.67%
(1,200,000 preferred
shares outstanding)............................. 30,000,000
------------
TOTAL NET ASSETS -- 100% .......................... $116,842,913
============
NET ASSET VALUE PER COMMON SHARE
(86,842,913 / 7,921,545
shares outstanding)............................. $10.96
======
- ---------------
(a) - Security fair valued as determined by the Board of Directors.
(b) - Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At
September 30, 1998, the market value of rule 144A securities amounted to
$4,026,412 or 3.45 % of net assets.
(c) - Principal amount denoted in British Pounds.
+ Non-income producing security.
++ Yields represent the effective yield to maturity on the date of purchase.
18
<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
(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
19
<PAGE>
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. However, the Fund's
Adviser, Gabelli Funds, Inc., has arranged that these purchases will be executed
at no commission through December 31, 1998. 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 business 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.
20
<PAGE>
DIRECTORS AND OFFICERS
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
One Corporate Center, Rye, NY 10580-1434
Directors
Mario J. Gabelli, CFA
Chairman & Chief Investment Officer
Gabelli Funds, Inc.
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, The Bethlehem Corp.
Officers and Portfolio Managers
Mario J. Gabelli, CFA
President & Chief Investment Officer
Bruce N. Alpert
Vice President & Treasurer
Peter W. Latartara
Vice President
A. Hartswell Woodson, III
Associate Portfolio Manager
James E. McKee
Secretary
Investment Adviser
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
Common 8.00% Preferred
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NYSE-Symbol: GCV GCV Pr
Shares Outstanding: 7,921,545 1,200,000
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 in
Monday's 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.
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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]
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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.
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<PAGE>
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
One Corporate Center
Rye, NY 10580-1434
914-921-5070
http://www.gabelli.com
Third Quarter Report
September 30, 1998
GVC 09/98
