THE GABELLI
CONVERTIBLE
SECURITIES
FUND, INC.
Semi-Annual Report
June 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]
THE GABELLI
CONVERTIBLE
SECURITIES
FUND, INC.
To Our Shareholders,
In the second quarter of 1998, there was a continuation of the best of
times for large cap stocks and the worst of times for small cap stocks. During
the quarter, the broad market, as measured by the Standard & Poor's (S&P) 500
Index, rose by 3.3% while small cap stocks, as measured by the Russell 2000
Index, declined by 4.7%. Bonds rallied in a classic global "flight to quality",
with the yield on the 30 year U.S. Treasury Bond falling to 5.57% in mid-June.
Investment Performance
For the quarter ended June 30, 1998, The Gabelli Convertible Securities
Fund, Inc.'s ("Convertible Securities Fund") net asset value was unchanged,
ending the quarter at $11.66 after adjusting for the $0.20 per share dividend
paid on June 26, 1998. This compares to a decline of 1.6% for the Lipper
Analytical Services, Inc. Convertible Securities Fund Index. For the twelve
months ended June 30, 1998, the Fund increased 13.6%. This is about in line with
the increase of 14.1% for the Lipper Convertible Securities Fund Index over this
period.
The three- and five-year average annual returns of the Convertible
Securities Fund were 10.5% and 9.3%, respectively. Since inception on July 3,
1989 through June 30, 1998, the Convertible Securities Fund achieved a 141.2%
total return which represents an average annual return of 10.3%.
The Fund's common shares on the New York Stock Exchange ended the quarter
at $10.9375, up 1.2% for the quarter, up 22.8% for the past twelve months and up
31.7% from its initial price of $11.25 on March 31, 1995 after adjusting for the
reinvestment of dividends totaling $3.245 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 8% 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 recently instituted a share repurchase program which we discuss later in
this report.
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INVESTMENT RESULTS (a)(c)
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Quarter
-------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
1998: Net Asset Value ......... $11.87 $11.66 __ __ __
Total Return ............ 5.3% 0.0% __ __ __
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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%
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1989: Net Asset Value ......... __ __ $10.54 $10.51 $10.51
Total Return ............ __ __ 5.4%(b) 0.8% 6.3%(b)
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Average Annual Returns - June 30, 1998 (a)
1 Year ................................................... 13.6%
5 Year ................................................... 9.3%
Life of Fund (b) ......................................... 10.3%
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(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
------------ -------------- ------------------
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
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[GRAPHIC - DEPICTING INVESTMENT STRATEGIES]
What We Do
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.
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.
3
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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.
COMMENTARY
As hybrids, convertible securities are impacted by the performance of
underlying equities and the prevailing trend in bond prices. So, to articulate
our outlook for convertibles, we must provide our perspective on both the stock
and bond markets.
In compiling our thoughts for this shareholder letter we looked forward by
looking through the rear view mirror. In the process, we witnessed the testimony
of Federal Reserve Board Chairman Alan Greenspan and we could not say it any
better. To quote Alan . . .
"Mr. Chairman and members of the Committee, I appreciate this
opportunity to present the Federal Reserve's midyear report on monetary
policy.
Overall, the performance of the U.S. economy continues to be
impressive. Over the first part of the year, we experienced further gains
in output and employment, subdued prices, and moderate long-term interest
rates. Important crosscurrents, however, have been impacting the economy.
With labor markets very tight and domestic final demand retaining
considerable momentum, the risks of a pickup in inflation remain
significant. But inventory investment, which was quite rapid late last
year and early this year, appears to have slowed, perhaps appreciably.
Moreover, the economic and financial troubles in Asian economies are now
demonstrably restraining demands for U.S. goods and services -- and those
troubles could intensify and spread further. Weighting these forces, the
Federal Open Market Committee chose to keep the stance of policy unchanged
over the first half of 1998. However, should pressures on labor resources
begin to show through more impressively in cost increases, policy action
may need to counter any associated tendency for prices to accelerate
before it under undermines this extraordinary expansion."
-- Excerpt from the Monetary Policy Testimony and Report to Congress
Before the Subcommittee on Domestic and International Monetary Policy of
the Committee on Banking and Financial Services, U.S. House of
Representatives, July 21, 1998.
4
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The "Goldilocks" Economy
In previous quarters, the "Goldilocks" economy - not too hot, not too cold
provided ballast to the U.S. equity market. Consequently, investors tended to be
complacent about the underlying fundamentals for stocks. The perception of the
strength of the bull market may have been somewhat overblown. Over the last
three months, a number of stocks have swooned in response to early earnings
warnings, threats from the Justice Department and the latent impact of
south-east Asia's financial malaise. Even so, the Federal Reserve Chairman was
rationally exuberant over the U.S. economy and maintained interest rates at
current levels. Given a negligible inflation rate, a robust economy and level
interest rates, the overhang on the market was the weakening yen and the
mounting financial woes in the Far East. That was the case until the U.S.
Treasury opened its purse to support the Japanese currency. This added life to
an otherwise unstable market.
With the market fibrillating, it is essential to focus on fundamentals. We
are now into the fifth year of "The Third Wave of Takeovers". Each year, the
pace of deals has accelerated. Within our universe of companies, we benefited
from cross-border transactions, as with Ahold's pending acquisition of Giant
Food. We also benefited from companies that are rationalizing and monetizing
operations, such as Viacom's sale of Simon & Schuster to Pearson.
For the balance of the year, the overall market will continue to be
volatile. Our focus on fundamentals should guide us to discover new gems. For
example, the notion of speed - electronic commerce - led us to Cablevision and
Readers Digest. AT&T's proposed purchase of Tele-Communications, Inc.
underscores the virtues of these investments. Indeed, "dial tone to Webtone"
will be the mantra recited by global telephony in the months ahead.
This is Not Your Grandfather's Bond Market
The days of simple coupon clipping in the bond market are long gone. Bonds
now react instantly and often dramatically to any change in the outlook for
inflation. While stock market investors worry over the impact of Asian economic
weakness on corporate earnings, bond investors focus on the very positive
implications Asia's problems have on domestic and global inflation.
Like stocks, bonds have also benefited from favorable supply and demand
factors. Due to a declining federal budget deficit and the prospect for the
first budget surplus in a generation, bellwether U.S. Treasury Bond issuance
declined substantially at a time when concern over equity valuations in general
and the intensifying Asian flu made bonds look more appealing for many
investors.
Interestingly, even with the 30 Year Treasury Bond yield near historic
lows, bonds still offer attractive "real rates of return"--the spread between
bond yields and inflation. This would infer that if inflation stays at current
levels, bond yields could trend down even further.
Convertible Securities: Having Your Cake and Eating it Too!
Despite losing momentum this quarter, equity valuations remain heady.
Bonds have performed very well and consequently, yields are way down. What's an
investor to do? We suggest looking at convertible securities. They offer
downside protection should the stock market really correct and yields that have
become more competitive relative to straight bonds. Should the stock market once
again confound the consensus by regaining momentum, convertibles will share in
the upside. Convertible securities have never been a wildly popular asset class.
However, in view of the current situation--high equity valuations and low bond
yields--convertibles have become particularly attractive.
5
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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 June
30, 1998, 170,800 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.
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.
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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 June 26, 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 was 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 $27.5625 on June 30,
1998. We thought we would answer 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 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 June 30, 1998, the Convertible Securities Fund has earned a 10.3%
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
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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 and
incrementally boosted the Fund's twelve month returns to 13.6% with the
preferred offering versus 10.7% had the Preferred Shares not been issued. Stated
differently, shareholders have received approximately 3% in incremental returns
since the Preferred Shares were issued.
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.
AirTouch Communications Inc. (6.00%, Cv. Pfd., Cl. B; 4.25%, Cv. Pfd., Cl.
C) is the world's largest multinational company focused on wireless
communications. The company offers a full range of wireless services: cellular,
paging and personal communications services (PCS). In the future, AirTouch will
offer global satellite communications. AirTouch has over 11 million worldwide
wireless subscribers. 1997 earnings, before acquisitions, almost doubled those
in 1996. Cash flow should grow by about 25% in 1998. The company has completed
the acquisition of the U.S. cellular and PCS interests of US West Media Group in
a deal valued at almost $6 billion.
Chock Full o'Nuts Corp. (Sub. Deb. Cv., 8.00%, 9/15/06; 7.00%, 4/01/12)
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
o'Nuts 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 in 2012, offer investors an attractive way to participate in Chock
Full o'Nuts' future.
Citizens Utilities Co. (5.00% Cv. Pfd.) is a telecommunications services
and utilities company. On the telecommunications side, Citizens is the eighth
largest non-Bell telephone service provider in the United States. On the utility
side, the company provides natural gas transmission and distribution services to
446,000 residential, commercial and industrial customers in Arizona, Colorado,
Hawaii and Louisiana. Management has announced a corporate restructuring plan
which would split the company into two stand-alone, publicly-traded companies:
the telecommunications businesses and the public services/utility unit. This
restructuring will be facilitated by the $215 million in cash the company will
receive from its 16% stake in Centennial Cellular Corp. (CYCL - $37.3125 -
Nasdaq) when Centennial's planned sale to Welsh, Carson, Anderson & Stowe is
concluded.
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Fieldcrest Cannon Inc. (Sub. Deb. Cv., 6.00%, 03/15/12) is a well-known
manufacturer of household textile products, including 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 sustain
Fieldcrest's earnings recovery. Pillowtex (PTX - $40.125 - NYSE) acquired
Fieldcrest Cannon for cash and stock valued at roughly $400 million. Pillowtex
makes bedding products under a number of private label and brand names including
Ralph Lauren and Disney, so the amalgamation expands Pillowtex's product line
from the bedroom to the bathroom.
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 recently
signed a letter of intent to buy Reynold's Metals' can-machinery business. Sequa
also has acquired an 8.6% stake in Material Sciences Corp. (MSC - $11.625 -
NYSE), 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. FON 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.
Thomas Nelson Inc. (Sub. Deb. Cv., 5.75%, 11/30/99) publishes Bibles and
inspirational books and produces specialty gift items, all designed to appeal to
the growing Christian and family-oriented lifestyle segments of our nation's
population.
Shareholder Meeting - May 11, 1998 - Final Results
The Annual Meeting of Shareholders was held on May 11, 1998 at the
Greenwich Library in Greenwich, Connecticut. At that meeting, Common and
Preferred Shareholders elected Mario J. Gabelli and Karl Otto Pohl as Directors
of the Convertible Securities Fund. A total of 6,766,085 votes and 6,737,191
votes were cast in favor of each Director and 67,546 votes and 96,440 votes were
withheld for each Director, respectively. Preferred Shareholders, voting as a
separate class, elected Felix J. Christiana and Anthony J. Colavita as Directors
of the Preferred Shares of the Convertible Securities Fund. A total of 1,132,095
votes and 1,133,495 votes were cast in favor of each Director and 8,129 votes
and 6,729 votes were withheld for each Director, respectively.
E. Val Cerutti, Dugald A. Fletcher, Anthony R. Pustorino, Anthonie C. van
Ekris and Salvatore J. Zizza continue to serve in their capacities as Directors
of the Convertible Securities Fund.
In addition, Common and Preferred Shareholders elected
PricewaterhouseCoopers LLP as the independent accountants for the Convertible
Securities Fund for the year ending December 31, 1998. 6,746,540 votes were cast
in favor of the approval of this proposal, 35,485 votes were cast against the
proposal and 51,605 votes abstained.
We thank you for your participation and appreciate your continued support.
Dividends
The Fund recently distributed a dividend of $0.20 per share to Common
Shareholders on June 26, 1998. For the twelve months ended June 30, 1998, the
Fund distributed a total of $1.12 per share to Common Shareholders. Our
Preferred Shareholders were paid a dividend of $0.50 per share on June 26, 1998.
For the year ended June 30, 1998, the Preferred Shareholders received a total
distribution of $2.2278 per share. This includes an initial
9
<PAGE>
distribution on September 26, 1997, of $0.7278 per share which represented the
accrual period from May 16, 1997 through September 26, 1997. The next quarterly
dividend of $0.50 per share for the Preferred Shareholders will be paid on
September 28, 1998.
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 for
another year 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].
In Conclusion
In the second quarter of 1998, convertible securities demonstrated their
resilience in the face of a brief, but sharp, equity down draft and enjoyed the
tailwind from a rising bond market. Looking ahead, with stocks likely to be
restrained as investors ponder the impact of Asia on corporate earnings and long
bond yields near historical lows, we believe convertible securities are
particularly attractive.
Sincerely,
/s/ Mario J. Gabelli
-------------------------------------
Mario J. Gabelli
President and
Chief Investment Officer
August 1, 1998
- --------------------------------------------------------------------------------
Top Ten Convertible Holdings
June 30, 1998
Sprint ($1.50 Cv. Pfd., Ser. 1; $1.50 Cv. Pfd., Ser. 2; 8.25%, Cv. Pfd.)
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.)
Sequa Corporation ($5.00 Cv. Pfd.)
Thomas Nelson Inc. (Sub. Deb. Cv., 5.75%, 11/30/99)
WHX Corp. (Cv. Pfd. Ser. A, Cv. Pfd. Ser. B)
Atlantic Richfield ($2.80 Cv. Pfd.)
Chock Full o'Nuts Corp. (Sub. Deb. Cv., 8.00%, 9/15/06; 7.00%, 04/01/12)
Sealed Air Corp. ($2.00 Cv. Pfd. Ser. A)
- --------------------------------------------------------------------------------
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.
10
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Portfolio of Investments -- June 30, 1998 (Unaudited)
================================================================================
Principal Market
Amount Cost Value
- --------- ---- ------
CONVERTIBLE CORPORATE BONDS -- 17.24%
Automotive: Parts and Accessories -- 0.25%
$ 500,000 Exide Corp. Sub. Deb. Cv
2.90%, 12/15/05 (a). ............... $ 331,605 $ 311,250
----------- -----------
Aviation: Parts and Services -- 0.80%
966,000 Kaman Corp. Sub. Deb. Cv.
6.00%, 03/15/12..................... 888,901 975,660
----------- -----------
Building and Construction -- 0.02%
10,000 Holderbank Financiere Glarus AG
Sub. Deb. Cv.
4.50%, 08/11/08..................... 11,978 23,175
----------- -----------
Business Services -- 0.85%
900,000 BBN Corp. Sub. Deb. Cv.
6.00%, 04/01/12 .................... 879,268 832,500
850,000 Builders Transport Inc.
Sub. Deb. Cv.
6.50%, 05/01/11 ................... 359,891 212,500
----------- -----------
1,239,159 1,045,000
----------- -----------
Cable -- 0.66%
Rogers Communications Inc.
Sub. Deb. Cv.
200,000 2.00%, 11/26/05..................... 121,400 125,000
1,000,000 7.50%, 09/01/99..................... 688,088 678,321
----------- -----------
809,488 803,321
----------- -----------
Consumer Products -- 2.97%
3,500,000 Fieldcrest Cannon Inc.
Sub. Deb. Cv.
6.00%, 03/15/12..................... 2,506,185 3,005,625
750,000 Standard Commercial Corp.
Sub. Deb. Cv.
7.25%, 03/31/07 .................... 604,923 629,063
----------- -----------
3,111,108 3,634,688
----------- -----------
Consumer Services -- 0.01%
10,000 Odgen Corp. Sub. Deb. Cv.
6.00%, 06/01/02 ................... 10,282 10,050
----------- -----------
Electronic Equipment -- 0.33%
390,000 Trans-Lux Corp.
Sub. Deb. Cv.
7.50%, 12/01/06 .................... 390,000 406,088
----------- -----------
Energy -- 1.80%
1,100,000 Moran Energy Inc.
Sub. Deb. Cv.
8.75%, 01/15/08..................... 757,843 1,043,243
580,000 Pennzoil Co. Sub. Deb. Cv.
6.50%, 01/15/03..................... 580,000 1,162,175
----------- -----------
1,337,843 2,205,418
----------- -----------
Entertainment -- 0.74%
200,000 Kushner-Locke Co.
Sub. Deb. Cv.
8.00%, 12/15/00 (b) ................ 156,155 120,000
800,000 Savoy Pictures
Entertainment Inc.
Sub. Deb. Cv.
7.00%, 07/01/03 .................... 736,372 781,000
----------- -----------
892,527 901,000
----------- -----------
Equipment and Supplies -- 1.92%
1,285,000 Intermagnetics General Corp.
Sub. Deb. Cv.
5.75%, 09/15/03 (a) ................ 1,255,557 1,150,075
1,136,000 Kollmorgen Corp.
Sub. Deb. Cv.
8.75%, 05/01/09..................... 881,663 1,170,080
20,000 Robbins & Myers Inc.
Sub. Deb. Cv.
6.50%, 09/01/03..................... 26,291 25,400
----------- -----------
2,163,511 2,345,555
----------- -----------
Food and Beverage -- 1.66%
Boston Chicken Inc.
Sub. Deb. Cv.
310,000 4.50%, 02/01/04 ................... 208,209 50,763
50,000 7.75%, 05/01/04.................... 32,949 8,313
100,000 Chiquita Brands
International Inc. Cv.
7.00%, 3/28/01 ..................... 95,752 95,000
Chock Full o' Nuts Corp.
Sub. Deb. Cv.
1,000,000 7.00%, 04/01/12..................... 764,646 985,000
883,000 8.00%, 09/15/06..................... 873,866 894,038
----------- -----------
1,975,422 2,033,114
----------- -----------
Health Care -- 0.54%
750,000 Ivax Corp. Deb. Cv.
6.50%, 11/15/01..................... 655,297 660,938
----------- -----------
Hotels and Gaming -- 0.60%
700,000 Hilton Hotels Corp.
Sub. Deb. Cv.
5.00%, 05/15/06..................... 700,000 738,500
----------- -----------
See accompanying notes to financial statements.
11
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Portfolio of Investments (Continued) -- June 30, 1998 (Unaudited)
================================================================================
Principal Market
Amount Cost Value
--------- ---- ------
Metals and Mining -- 0.27%
$ 450,000 Coeur d'Alene Mines Corp.
Sub. Deb. Cv.
6.00%, 06/10/02 .................... $ 421,631 $ 335,250
----------- -----------
Paper and Forest Products -- 0.19%
200,000 Riverwood International Corp.
Sub. Deb. Cv.
6.75%, 09/15/03..................... 199,725 230,890
----------- -----------
Publishing -- 2.79%
700,000 News America Holdings Inc.
Sub. Deb. Cv.
Zero Cpn., 03/31/02 ................ 526,394 971,688
2,350,000 Thomas Nelson Inc.
Sub. Deb. Cv.
5.75%, 11/30/99 (a) ................ 2,347,900 2,341,188
50,000(c)United News & Media plc
Sub. Deb. Cv.
6.125%, 12/03/03 ................... 86,975 100,527
----------- -----------
2,961,269 3,413,403
----------- -----------
Real Estate and Development -- 0.08%
125,000 Rockefeller Center Properties Inc.
Sub. Deb. Cv.
Zero Cpn., 12/31/00 ................ 92,420 98,125
----------- -----------
Retail -- 0.24%
50,000 Costco Companies Inc.
Sub. Deb. Cv.
Zero Cpn., 08/19/17 ................ 34,563 38,313
146,000 Farah U.S.A. Inc.
Sub. Deb. Cv.
8.50%, 02/01/04..................... 133,953 116,800
160,000 JumboSports Inc.
Sub. Deb. Cv.
4.25%, 11/01/00 .................... 132,275 49,400
100,000 Nine West Group Inc.
Sub. Deb. Cv.
5.50%, 07/15/03 (a) ................ 82,223 83,250
----------- -----------
383,014 287,763
----------- -----------
Telecommunications -- 0.10%
Amnex Inc. Sub. Deb. Cv.
10,000 8.50%, 09/25/02 .................... 7,218 7,900
50,000 8.50%, 09/25/02 (a) ................ 50,000 39,500
50,000 Telefonica Europe BV
Sub. Deb. Cv.
2.00%, 07/15/02 (a) ................ 50,000 75,875
----------- -----------
107,218 123,275
----------- -----------
Transportation -- 0.42%
460,000 Greyhound Lines Inc.
Sub. Deb. Cv.
8.50%, 03/31/07..................... 287,606 490,475
150,000 WorldCorp Inc.
Sub. Deb. Cv.
7.00%, 05/15/04..................... 150,000 26,625
----------- -----------
437,606 517,100
----------- -----------
TOTAL CONVERTIBLE
CORPORATE BONDS ..................... 19,120,004 21,099,563
----------- -----------
CONVERTIBLE PREFERRED STOCKS -- 21.36%
Shares
------ Aviation: Parts and Services -- 0.38%
10,000 Coltec Capital Trust
5.25% Cv. Pfd. (a) ................. 500,000 465,000
----------- -----------
Broadcasting -- 0.44%
9,000 Granite Broadcasting Corp.
$1.938 Cv. Pfd...................... 508,995 542,250
----------- -----------
Cable -- 1.50%
4,000 Cablevision Systems Corp.
8.50% Cv. Pfd. Ser. 1 .............. 97,463 255,750
17,500 MediaOne Group
4.50% Cv. Pfd. Ser. D .............. 866,560 1,573,906
----------- -----------
964,023 1,829,656
----------- -----------
Consumer Services -- 0.16%
4,000 Cendant Corp.
1.30% Cv. Pfd....................... 130,888 115,750
4,000 Loewen Group Inc.
6.00% Cv. Pfd. Ser C. .............. 81,407 79,563
----------- -----------
212,295 195,313
----------- -----------
Diversified Industrial -- 0.24%
1,300 GATX Corp.
$2.50 Cv. Pfd....................... 116,515 291,200
----------- -----------
Energy -- 1.87%
6,000 Atlantic Richfield Co.
$2.80 Cv. Pfd....................... 1,600,963 2,232,000
1,500 McDermott International Inc.
$2.20 Cv. Pfd. A.. ................. 43,738 53,250
----------- -----------
1,644,701 2,285,250
----------- -----------
Entertainment -- 0.11%
2,500 Metromedia International
Group Inc.
7.25% Cv. Pfd....................... 122,650 128,750
----------- -----------
See accompanying notes to financial statements.
12
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Portfolio of Investments (Continued) -- June 30, 1998 (Unaudited)
================================================================================
Market
Shares Cost Value
--------- ---- ------
Equipment and Supplies -- 1.96%
24,000 Sequa Corp.
$5.00 Cv. Pfd..... ................. $ 1,832,242 $ 2,400,000
----------- -----------
Financial Services -- 1.04%
10,500 American Bankers Insurance
$3.125 Cv. Pfd. Ser. B ............. 1,356,081 1,274,438
----------- -----------
Iron/Steel -- 1.87% WHX Corp.
29,000 Cv. Pfd. Ser. A... ................. 1,459,538 1,406,500
20,000 Cv. Pfd. Ser. B... ................. 909,725 880,000
----------- -----------
2,369,263 2,286,500
----------- -----------
Paper and Forest Products -- 1.30%
38,000 Sealed Air Corp.
$2.00 Cv. Pfd. Ser. A .............. 1,731,767 1,596,000
----------- -----------
Publishing -- 0.17%
Golden Books Family
Entertainment Inc.
1,000 8.75% Cv. Pfd....................... 24,000 22,000
6,000 8.75% Cv. Pfd. (a) ................. 300,000 132,000
2,000 Reader's Digest
$1.034 Cv. Pfd...................... 53,475 51,500
----------- -----------
377,475 205,500
----------- -----------
Telecommunications -- 7.85%
63,500 Citizens Utilities Co.
5.00% Cv. Pfd....................... 3,073,949 3,000,375
1,000 Philippine Long Distance
$3.50 Cv. Pfd. Ser. III ............ 51,269 46,000
Sprint Corp.
3,000 $1.50 Cv. Pfd. Ser. 1 .............. 301,100 660,000
2,200 $1.50 Cv. Pfd. Ser. 2 .............. 187,510 502,700
82,500 8.25% Cv. Pfd....................... 3,101,119 4,769,531
4,000 TCI Communications Inc.
$2.125 Cv. Pfd. Ser. A ............. 177,465 323,000
1,500 TCI Pacific
Communications Inc.
5.00% Cv. Pfd....................... 134,838 316,430
----------- -----------
7,027,250 9,618,036
----------- -----------
Wireless Communications -- 2.47%
AirTouch Communications Inc.
12,000 4.25% Cv. Pfd. Cl. C ............... 560,930 990,000
42,000 6.00% Cv. Pfd. Cl. B ............... 1,202,662 2,026,500
----------- -----------
1,763,592 3,016,500
----------- -----------
TOTAL CONVERTIBLE
PREFERRED STOCKS ..................... 20,526,849 26,134,393
----------- -----------
COMMON STOCKS -- 18.56%
Agriculture -- 3.09%
40,000 Dekalb Genetics Corp. ................ 3,771,460 3,785,000
----------- -----------
Aviation: Parts and Services -- 0.28%
18,000 Kaman Corp............................ 181,321 342,563
----------- -----------
Business Services -- 2.56%
100,000 Transaction Systems
Architects Inc. .................... 3,086,250 3,137,500
----------- -----------
Diversified Industrial -- 1.08%
30,000 GATX Corp............................. 630,218 1,316,250
----------- -----------
Energy -- 1.19%
2,000 Central Hudson Gas
and Electric Corp. ................. 86,913 91,750
25,000 Orange & Rockland
Utilities........................... 1,338,815 1,342,188
2,000 Santa Fe Energy
Resources Inc.+..................... 14,959 21,500
----------- -----------
1,440,687 1,455,438
----------- -----------
Entertainment -- 1.71%
25,000 BET Holdings Inc.+.................... 1,488,023 1,573,438
3,000 Time Warner Inc....................... 181,458 256,313
10,000 USA Networks Inc...................... 220,317 251,250
----------- -----------
1,889,798 2,081,001
----------- -----------
Equipment and Supplies -- 0.26%
50,000 Fedders Corp. Cl. A. ................. 310,916 318,750
----------- -----------
Financial Services -- 2.79%
30,000 Allied Group Inc...................... 1,398,109 1,404,375
27,000 American Bankers
Insurance Group..................... 1,761,713 1,623,375
12,000 Argonaut Group Inc. .................. 418,245 379,500
269 First Union Corp. .................... 14,619 15,678
----------- -----------
3,592,686 3,422,928
----------- -----------
Health Care -- 0.83%
15,000 Genentech Inc.+..... ................. 719,239 1,018,125
----------- -----------
Retail -- 4.77%
45,000 Food Lion Inc. Cl. A ................. 361,381 478,125
69,400 Giant Food Inc. Cl. A ................ 2,976,079 2,988,531
30,000 Mercantile Stores Co. ................ 2,365,023 2,368,125
----------- -----------
5,702,483 5,834,781
----------- -----------
TOTAL COMMON
STOCKS ............................... 21,325,058 22,712,336
----------- -----------
See accompanying notes to financial statements.
13
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Portfolio of Investments (Continued) -- June 30, 1998 (Unaudited)
================================================================================
Principal Market
Amount Cost Value
--------- ---- ------
CORPORATE BONDS -- 0.08%
Entertainment -- 0.08%
$ 100,000 Viacom Inc.
8.00%, 07/07/06.....................$ 99,531 $ 103,500
------------ -----------
U.S. GOVERNMENT OBLIGATIONS -- 44.77%
55,060,000 U.S. Treasury Bills,
4.81% to 5.12%, ++
Due 08/06/98
to 09/17/98 ....................... 54,776,043 54,776,043
------------ -----------
TOTAL INVESTMENTS -- 102.01% .....................$115,847,485 $124,825,835
============
OTHER ASSETS, LIABILITIES AND
LIQUIDATION VALUE OF CUMULATIVE
PREFERRED STOCK-- (26.52%) ...................... (32,454,571)
------------
NET ASSETS -- COMMON STOCK -- 75.48%
(7,922,145 common
shares outstanding).............................. 92,371,264
------------
NET ASSETS -- CUMULATIVE
PREFERRED STOCK -- 24.52%
(1,200,000 preferred
shares outstanding).............................. 30,000,000
------------
TOTAL NET ASSETS -- 100%............................ $122,371,264
============
NET ASSET VALUE PER COMMON SHARE
($92,371,264 / 7,922,145
shares outstanding).............................. $11.66
======
- -----------
For Federal tax purposes:
Aggregate Cost .................. $115,847,485
============
Gross unrealized appreciation.... $ 10,624,795
Gross unrealized depreciation... (1,646,445)
------------
Net unrealized appreciation...... $ 8,978,350
============
- ----------------
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At June 30,
1998, the market value of rule 144A securities amounted to $4,598,138 or
3.76% of net assets.
(b) Security fair valued as determined by the Board of Directors. (c)
Principal amount denoted in British Pounds.
+ Non-income producing security.
++ Yields represent the effective yield to maturity on the date of purchase.
See accompanying notes to financial statements.
14
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
================================================================================
Assets:
Investments, at value
(Cost $115,847,485) .................................. $ 124,825,835
Foreign currency, at value
(Cost $112,054) ...................................... 113,214
Receivable for investments sold ........................ 302,879
Dividends and interest receivable ...................... 478,627
-------------
Total Assets ......................................... 125,720,555
-------------
Liabilities:
Payable for investments purchased ...................... 2,337,021
Payable for dividends .................................. 26,087
Payable for investment advisory fees ................... 76,716
Payable to custodian ................................... 868,766
Other accrued expenses ................................. 40,701
-------------
Total Liabilities .................................... 3,349,291
-------------
Net Assets ........................................... $ 122,371,264
=============
Net Asset Value per Common Share
($92,371,264/7,922,145 shares issued
and outstanding; 100,000,000 shares
authorized of $0.001 par value) ........................ $ 11.66
=============
Net Assets Consist of:
Cumulative Preferred Stock (8.00%,
$25 liquidation value, $0.001 par
value, 2,000,000 shares authorized,
1,200,000 shares issued and
outstanding) redemption value ........................ $ 30,000,000
Capital stock, at par value ............................ 7,922
Additional paid-in capital ............................. 82,132,838
Accumulated distributions in excess of
net investment income ................................ (152,426)
Accumulated undistributed net realized
gain on investments .................................. 1,404,555
Net unrealized appreciation on
investments and foreign currency
transactions ......................................... 8,978,375
-------------
Total Net Assets ..................................... $ 122,371,264
=============
Statement of Operations
For the Six Months Ended June 30, 1998 (Unaudited)
================================================================================
Income:
Dividends ................................................ $ 471,519
Interest ................................................. 2,631,918
-----------
Total Investment Income ................................ 3,103,437
-----------
Expenses:
Investment advisory fees ................................. 469,298
Shareholder services fees ................................ 50,966
Shareholder report expenses .............................. 49,988
Directors' fees .......................................... 34,769
Miscellaneous expenses ................................... 55,840
-----------
Total Expenses ......................................... 660,861
-----------
Net Investment Income .................................. 2,442,576
-----------
Net Realized and Unrealized
Gain on Investments:
Net realized gain on investments and
foreign currency transactions .......................... 3,438,096
Net change in unrealized depreciation on
investments, futures contracts and
foreign currency transactions .......................... (270,909)
-----------
Net realized and unrealized gain
on investments ......................................... 3,167,187
-----------
Net increase in net assets resulting
from operations ........................................ $ 5,609,763
===========
Statement of Changes in Net Assets
================================================================================
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
--------------- -----------
Operations:
Net investment income .......................... $ 2,442,576 $ 3,922,377
Net realized gain on investments and foreign
currency transactions ........................ 3,438,096 5,481,192
Net realized loss on futures ................... -- (91,050)
Net change in unrealized appreciation/
(depreciation) of investments and foreign
currency transactions ........................ (270,909) 4,526,049
------------ ------------
Net increase in net assets resulting
from operations ............................ 5,609,763 13,838,568
------------ ------------
Distributions to preferred shareholders from:
Net investment income .......................... (668,249) (623,599)
Net realized gains ............................. (531,751) (883,043)
------------ ------------
Total distributions .......................... (1,200,000) (1,506,642)
------------ ------------
Distributions to common shareholders from:
Net investment income .......................... (1,774,327) (3,206,103)
Net realized gains ............................. (1,411,901) (4,507,099)
Distributions in excess of net realized gains .. -- (29,138)
------------ ------------
Total distributions .......................... (3,186,228) (7,742,340)
------------ ------------
Capital share transactions - net: ................ (1,234,281) (459,867)
------------ ------------
Net proceeds from the issuance of preferred stock: -- 28,593,000
------------ ------------
Net increase / (decrease) in net assets ........ (10,746) 32,722,719
Net Assets
Beginning of Period ............................ 122,382,010 89,659,291
------------ ------------
End of Period .................................. $122,371,264 $122,382,010
============ ============
See accompanying notes to financial statements.
15
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Notes to Financial Statements (Unaudited)
1. Description. The Gabelli Convertible Securities Fund, Inc. (the "Fund") is a
closed-end diversified management investment company whose investment objective
is to seek a high level of total return through a combination of current income
and capital appreciation by investing in convertible securities. The Corporation
was incorporated in Maryland on December 19, 1988 as an open-end diversified
management investment company and commenced operations on July 3, 1989. The
Board of Directors, upon approval at a special meeting of shareholders held on
February 17, 1995, voted to approve the conversion of the Fund to closed-end
status, effective March 31, 1995.
2. Significant Accounting Policies. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are
valued at the last sale price on that exchange as of the close of business on
the day the securities are being valued (if there were no sales that day, the
security is valued at the average of the closing bid and asked prices or, if
there were no asked prices quoted on that day, then the security is valued as
the closing bid price on that day). All other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest average of the bid and asked prices. Portfolio securities traded on more
than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by the Adviser. When
market quotations are not readily available, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Board of Directors. Short term debt
securities with remaining maturities of 60 days or less are valued at amortized
cost, unless the Directors determine such does not reflect the securities' fair
value, in which case these securities will be valued at their fair value as
determined by the Directors. Debt instruments having a greater maturity are
valued at the highest bid priced obtained from a dealer maintaining an active
market in those securities. Options are valued at the last sale price on the
exchange on which they are listed. If no sales of such options have taken place
that day, they will be valued at the mean between their closing bid and asked
prices.
Repurchase Agreements. The Fund may enter into repurchase agreements with
government securities dealers recognized by the Federal Reserve Board, with
member banks of the Federal Reserve System or with other brokers or dealers that
meet credit guidelines established by the Directors. Under the terms of a
typical repurchase agreement, the Fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. The Fund will always receive and
maintain securities as collateral whose market value, including accrued
interest, will be at least equal to 100% of the dollar amount invested by the
Fund in each agreement. The Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer of the collateral to
the account of the custodian. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to maintain the adequacy of the collateral. If the seller defaults
and the value of the collateral declines or if bankruptcy proceedings are
commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
Forward Foreign Currency Contracts. The Fund may engage in forward foreign
exchange contracts for hedging a specific transaction with respect to either the
currency in which the transaction is denominated or another currency as deemed
appropriate by the Adviser. Forward foreign currency contracts are valued at the
forward rate and are marked-to-market daily. The change in market value is
recorded by the Fund as an unrealized gain or loss. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time it was
closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's portfolio securities, but it
does establish a rate of exchange that can be achieved in the future. Although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain that might
16
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Notes to Financial Statements (Continued) (Unaudited)
result should the value of the currency increase. In addition, the Fund could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts. At June 30, 1998, the Fund held no forward foreign
currency contracts.
Futures Contracts. The Fund may engage in futures contracts for the purpose
of hedging against changes in the value of its portfolio securities and in the
value of securities it intends to purchase. Upon entering into a futures
contract, the Fund is required to deposit with the broker an amount of cash or
cash equivalents equal to a certain percentage of the contract amount. This is
known as the "initial margin". Subsequent payments ("variation margin") are made
or received by the Fund each day, depending on the daily fluctuation of the
value of the contract. The daily changes in the contract are recorded as
unrealized gains or losses. The Fund recognizes a realized gain or loss when the
contract is closed. At June 30, 1998, there were no open futures contracts.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
Short Sales. The Fund is authorized to engage in short-selling, which
obligates the Fund to replace the security borrowed by purchasing the security
at the current market value sometime in the future. The Fund would incur a loss
if the price of the security increases between the date of the short sale and
the date on which the Fund replaces the borrowed security. The Fund would
realize a gain if the price of the security declines between those dates. Until
the Fund replaces the borrowed security, the Fund will maintain a segregated
account with cash and/or U.S. Government securities sufficient to cover its
short position on a daily basis. At June 30, 1998, there were no short
positions.
Foreign Currency Translation. The books and records of the Fund are
maintained in United States (U.S.) dollars. Foreign currencies, investments and
other assets and liabilities are translated into U.S. dollars at the exchange
rates prevailing at the end of the period, and purchases and sales of investment
securities, income and expenses are translated at the exchange rate prevailing
on the respective dates of such transactions. Unrealized gains and losses, which
result from changes in foreign exchange rates and/or changes in market prices of
securities, have been included in unrealized appreciation/depreciation on
investments. Net realized foreign currency gains and losses resulting from
changes in exchange rates include foreign currency gains and losses between
trade date and settlement date on investment securities transactions, foreign
currency transactions and the difference between the amounts of interest and
dividends recorded on the books of the Fund and the amounts actually received.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial trade date and subsequent sale trade date is
included in realized gain/(loss) on investments.
Securities Transactions and Investment Income. Securities transactions are
accounted for on the trade date with realized gain or loss on investments
determined by using the identified cost method. Interest income (including
amortization of premium and accretion of discount) is recorded as earned.
Dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders. Dividends and distributions to
shareholders are recorded on the ex-dividend date. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatment of income and gains
on various investments securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund. Distributions to
shareholders of Cumulative Preferred Stock are accrued on a daily basis and are
determined as described in Note 3.
For the year ended December 31, 1997, the following reclassifications were
made to increase distributions in excess of net investment income for $3,280 and
decrease accumulated undistributed net realized gain on investments for $3,280.
Provision for Income Taxes. The Fund has qualified and intends to continue
to qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision is
not required.
17
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Notes to Financial Statements (Continued) (Unaudited)
3. Capital. The Articles of Incorporation, dated December 19, 1988, permit the
Fund to issue 998,000,000 shares (par value $0.001) of common stock. In
addition, the Fund has been authorized to issue up to 2,000,000 shares of
Preferred Stock of which 1,200,000 shares has been designated as $0.001 par
value 8% Cumulative Preferred Stock. On May 15, 1997, the Fund received proceeds
of $28,593,000 (net of offering costs and underwriting discounts of $1,407,000)
from the public offering of 1,200,000 shares of Cumulative Preferred Stock.
Dividends on shares of the Cumulative Preferred Stock are cumulative. The Fund
is required to meet certain asset coverage tests with respect to the Cumulative
Preferred Stock. If the Fund fails to meet these requirements and does not
correct such failure, the Fund may be required to redeem, in part or in full,
the Cumulative Preferred Stock at a redemption price of $25.00 per share plus an
amount equal to the accumulated and unpaid dividends whether or not declared on
such shares in order to meet these requirements. Additionally, failure to meet
the foregoing asset requirement could restrict the Fund's ability to pay
dividends to Common Shareholders and could lead to sales of portfolio securities
at inopportune times. The Preferred Stock is callable at the redemption price at
the option of the Fund after May 15, 2002. This Cumulative Preferred Stock
introduced leverage into the capital structure of the Fund. This leverage tends
to magnify both the risks and opportunities to Common Shareholders. At June 30,
1998, the 1,200,000 shares of 8% Cumulative Preferred Stock outstanding accrued
dividends in the amount of $26,087. The income received on the Fund's assets may
vary in a manner unrelated to the fixed rate, which could have either a
beneficial or detrimental impact on net investment income and gains available to
Common Shareholders.
The Fund shall not declare dividends or make other distributions on shares
of Common Stock or purchase any such shares if at the time of the declaration,
distribution or purchase, asset coverage with respect to the outstanding
Preferred Stock would be less than 200%.
The holders of Preferred Stock have voting rights equivalent to those of the
holders of Common Stock (one vote per share) and will vote together with holders
of shares of Common Stock as a single class. In addition, the Investment Company
Act of 1940 requires that, along with approval of the holders of a majority of
any outstanding common shares, approval of the holders of a majority of any
outstanding preferred shares, voting separately as a class, would be required to
(a) adopt any plan of reorganization that would adversely affect the Preferred
Stock, and (b) take any action requiring a vote of security holders, including,
among other things, changes in the Fund's subclassification as a closed-end
investment company or changes in its fundamental investment restrictions.
The Adviser has been authorized to repurchase on behalf of the Fund up to
250,000 shares of the Fund in the open market, whenever the shares are trading
at a discount to net asset value of ten per cent or more. For the six months
ended June 30, 1998, the Fund repurchased 123,100 shares at a cost of $1,287,318
and at an average discount of 11.25%.
4. Investment Advisory Agreement. The Fund has entered into an investment
advisory agreement (the "Advisory Agreement") with the Adviser which provides
that the Fund will pay the Adviser a fee, computed daily and paid monthly, at
the annual rate of 1.00% of the value of the Fund's average daily net assets. In
accordance with the Advisory Agreement, the Adviser provides a continuous
investment program for the Fund's portfolio, oversees the administration of all
aspects of the Fund's business and affairs and pays the compensation of all
Officers and Directors of the Fund who are its affiliates.
The Adviser has agreed to reduce the management fee on the incremental net
assets attributable to the liquidation value of the Cumulative Preferred Stock
if the total net asset value return of the common shares of the Fund, including
distributions and the advisory fee subject to reduction, does not exceed the
stated dividend rate of the Cumulative Preferred Stock. During the 6 months
ended June 30, 1998, the Fund has not yet achieved a total return in excess of
the stated dividend rate and the management fee reduction was $147,161.
5. Portfolio Securities. Purchases and sales of securities for the six months
ended June 30, 1998, other than short-term securities, aggregated $49,355,838
and $45,977,055, respectively.
6. Transactions with Affiliates. During the six months ended June 30, 1998, the
Fund paid brokerage commissions of $22,851 to Gabelli & Company, Inc. and its
affiliates.
18
<PAGE>
The Gabelli Convertible Securities Fund, Inc.
Financial Highlights
Selected data for a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Six Months Ended For the Year Ended December 31,
June 30, 1998 --------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of year ...... $ 11.48 $ 11.08 $ 11.01 $ 10.60 $ 11.52 $ 11.45
-------- -------- ------- ------- -------- --------
Net investment income ................... 0.30 0.49 0.49 0.53 0.69 0.76
Net realized and unrealized gain
(loss) on securities .................. 0.40 1.23 0.31 1.03 (0.71) 0.74
-------- -------- ------- ------- -------- --------
Total from investment operations ........ 0.70 1.72 0.80 1.56 (0.02) 1.50
-------- -------- ------- ------- -------- --------
Increase in net assets from
capital share transactions .............. 0.03 0.01
-------- --------
Offering expenses charged to
additional paid-in-capital .............. (0.18)
--------
Distributions:
Preferred Shares
Distributions from net investment income (0.08) (0.08) -- -- -- --
Distributions from net realized gain on
investments ........................... (0.07) (0.11) -- -- -- --
Common Shares
Distributions from net investment income (0.22) (0.40) (0.49) (0.53) (0.69) 0.76)
Distributions from net realized gain on
investments ........................... (0.18) (0.56) (0.24) (0.56) (0.21) (0.67)
Distributions in excess of net investment
income ................................ -- -- -- (0.02) -- --
Distributions in excess of net realized
gains ................................. -- -- -- (0.01) -- --
Distributions from paid-in-capital ...... -- -- -- (0.03) -- --
-------- -------- ------- ------- -------- --------
Total distributions ..................... (0.55) (1.15) (0.73) (1.15) (0.90) (1.43)
-------- -------- ------- ------- -------- --------
Net asset value end of year ............. $ 11.66 $ 11.48 $ 11.08 $ 11.01 $ 10.60 $ 11.52
======== ======== ======= ======= ======== ========
Market value, end of period ............. $ 10.94 $ 10.31 $ 9.25 $ 0.75 -- --
======== ======== ======= ======= ======== ========
Total Net Asset Value Return +(a) ....... 5.3% 13.5% 8.4% 15.0% (0.2)% 13.1%
Total Investment Return +(b) ............ 9.9% 22.2% (7.3)% 12.3% -- --
Ratios to average net assets and
supplemental data:
Net Assets, end of period (in 000's) .... $122,371 $122,382 $89,659 $89,137 $112,090 $108,674
Net Assets attributable to common shares,
end of period (in 000's) .............. $ 92,371 $ 92,382
Ratio of net investment income to
average net assets .................... 5.22%* 4.23% 4.33% 4.60% 4.77% 4.58%
Ratio of operating expenses to average
net assets attributable to common
stock (c) (d) ......................... 1.41%* 1.68% 1.45% 1.56% 1.31% 1.38%
Portfolio Turnover Rate ................. 78% 243% 114% 140% 67% 45%
Preferred Stock:
Total shares outstanding (in 000's) ..... 1,200 1,200 -- -- -- --
Asset coverage per share ................ 407% 408% -- -- -- --
Liquidation preference per share ........ $ 25.00 $ 25.00 -- -- -- --
Average market value per share (e) ...... $ 26.75 $ 25.69 -- -- -- --
</TABLE>
- -------------
+ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the
period including reinvestment of dividends.
* Annualized.
(a) Based on net asset value per share.
(b) Based on net asset value per share through March 31, 1995, the date of
conversion of the Fund to closed-end status, and market value thereafter.
(c) The ratio of operating expenses to average net assets attributable to
common stock during the fiscal year ended December 31, 1995 includes a
current period expense associated with the conversion of the Fund to
closed-end status. Without the conversion expense, this ratio would have
been 1.28%.
(d) For the six months ended June 30, 1998, the ratio of operating expenses to
average net assets including assets attributable to preferred stock was
1.07% (annualized).
(e) Based on weekly prices.
See accompanying notes to financial statements.
19
<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 or requesting a copy of the terms of 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.
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 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 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
-------- --------------
NYSE-Symbol: GCV GCV Pr
Shares Outstanding: 7,922,145 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.
- --------------------------------------------------------------------------------
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
-------------------
Semi-Annual Report
June 30, 1998
06/98
