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THE GABELLI
CONVERTIBLE AND
INCOME SECURITIES
FUND INC.
THIRD QUARTER REPORT
SEPTEMBER 30, 2002
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THE GABELLI
CONVERTIBLE AND
INCOME 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 and Income 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.
THIS REPORT IS PRINTED ON RECYCLED PAPER.
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GLOBAL CONVERTIBLE INVESTING BOOK
NEW FROM THE GABELLI PRESS:
GLOBAL CONVERTIBLE INVESTING:
THE GABELLI WAY
BY HART WOODSON
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PICTURE OF MARIO GABELLI
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THE GABELLI
CONVERTIBLE AND
INCOME SECURITIES
FUND INC.
TO OUR SHAREHOLDERS,
Convertible stocks and bonds are hybrid securities. Because they can be
converted into common stock, performance will be impacted by the dominant trend
in the equity markets. However, due to their significantly higher yield,
performance is also influenced by the direction of the bond market. In the third
quarter of 2002, with the stock market tumbling, the equity characteristics of
converts continued to restrain performance. However, the strong bond market
helped support convertible securities prices. We invest in converts we believe
to have two-thirds the upside potential of the underlying stock and one-third
the downside risk. Once again, comparing the Gabelli Convertible and Income
Securities Fund's (the "Fund's") performance this quarter to the Standard &
Poor's ("S&P") 500 Index, our risk appraisals have proven accurate.
RIGHTS OFFERING 2002
Your Board of Directors has announced a transferable rights offering. The
Fund is offering shareholders one transferable right for each share of common
stock held as of the record date. Three rights will be required to purchase one
additional share at a discounted price to the market value and free of
commission. Shareholders who fully exercise their primary subscription rights
may oversubscribe for any additional amount of shares they wish. These
oversubscription shares will be distributed based on a pro-rata allocation
formula. The rights offering will be made only by means of a prospectus. A
prospectus describing the rights offering in greater detail will be mailed to
shareholders separately.
WHAT'S RIGHT ABOUT RIGHTS
To raise additional capital, rights offerings have historically been a
fair and efficient method. This method is widely used in England. A traditional
rights offering allows an issuer's shareholders to participate directly in the
growth of that issuer by purchasing additional common shares at a set
subscription price. We discuss some of the basic issues of rights offerings and
how they relate to the Gabelli Convertible and Income Securities Fund in the
following question and answer format.
RIGHTS OFFERING - Q&A
Q: WHAT ARE RIGHTS?
Rights are privileges granted to existing shareholders of a corporation
(in our case the Gabelli Convertible and Income Securities Fund) to subscribe to
shares of a new issue of common stock. These rights represent short-term options
granted by the corporation which the shareholder has the option of exercising.
Q: WHAT IS THE HISTORY OF RIGHTS OFFERINGS?
Rights offerings have been used in Europe since the late 17th century
following the commencement of the London Stock Exchange. In England, rights
offerings are commonplace and well-regarded by shareholders, and represent an
integral part of its capital markets. While underwritten public offerings have
been the preferred method of raising capital in the U.S., rights offerings have
become more understood and more widely used. Today, rights offerings are even
more common in the U.S. and we expect that their frequency and effectiveness
will increase.
Q: WHAT IS A RIGHTS OFFERING AS IT RELATES TO CLOSED-END FUNDS?
A rights offering is an opportunity for shareholders to purchase
additional shares of a publicly traded company or mutual fund at a specified
price--the "subscription price"--with a nominal commission. To attract
shareholder interest, the subscription price is set at a discount to the current
market price. Although shareholders are not required to purchase additional
shares, they are given the opportunity, or "right", to purchase shares based on
the number of underlying shares they own on the record date. Rights may either
be transferable or non-transferable and the offering may or may not be
underwritten with a commitment by the underwriter to buy what is not subscribed
for.
Q: WHAT ARE TRANSFERABLE RIGHTS VERSUS NON-TRANSFERABLE RIGHTS?
Non-transferable rights have no value other than that they may be
exercised and do not trade on any exchange.
Transferable rights may trade on an exchange and afford the
non-subscribing shareholder the option of selling their rights on the exchange
or through the transfer agent. Selling the rights allows a non-subscribing
shareholder to recoup much of the potential dilution that may otherwise occur. A
non-transferable rights offering does not permit such an offset so that
non-subscribing shareholders could experience full dilution.
Q: HOW IS A RIGHTS OFFERING BENEFICIAL TO SHAREHOLDERS?
The Gabelli Convertible and Income Securities Fund shareholder benefits
from the opportunity to purchase additional shares with no commission if shares
are held directly with the Fund or, in some instances, with a nominal charge
from their broker. Thus, an investor is able to put more financial assets to
work in an investment discipline in which she or he believes and which has
performed well over an extended period of time. The additional capital that is
raised by the Fund is used to position the portfolio to more fully take
advantage of new investment opportunities. Increasing the asset size of the Fund
may also result in lowering the Fund's fixed expenses as a percentage of average
net assets.
Q: HOW IS THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND'S RIGHTS OFFERING
BETTER THAN OTHER RIGHTS OFFERINGS BY CLOSED-END FUNDS?
There are two types of rights offerings a closed-end fund may use to raise
additional capital: the direct offering method and the firm-underwritten method.
The Gabelli Convertible and Income Securities Fund is utilizing a direct
offering method to realize the relative cost advantages associated with this
approach as compared to a firm-underwritten method. A direct offering avoids
costly underwriting and distribution service fees that lessen shareholder value.
2
Q: ARE THE SHAREHOLDERS IN FAVOR OF RIGHTS OFFERINGS?
We have received numerous requests from the shareholders of our Funds for
rights offerings. Our shareholders have been overwhelmingly in favor of rights
offerings and look forward to future ones. This interest was evidenced by the
oversubscribed rights offerings that the Gabelli Equity Trust had in 1991, 1992,
1993, 1995 and 2001. Additional confirmation is evident from the Gabelli Global
Multimedia Trust's (which was spun-off from the Equity Trust in 1994)
oversubscribed rights offerings in 1995 and 2000 and the Gabelli Utility Trust's
(which was spun-off from the Equity Trust in 1999) oversubscribed rights
offering in 2002. This interest was further confirmed with the response to the
Gabelli Equity Trust shareholder vote in 1993 in which shareholders voted 90% in
favor to provide rights offerings.
Q: WERE SHAREHOLDERS ABLE TO SELL THEIR RIGHTS IN PAST RIGHTS OFFERINGS FROM
GABELLI FUNDS?
Yes, registered shareholders of the Gabelli Equity Trust, the Gabelli
Global Multimedia Trust and the Gabelli Utility Trust had the option of selling
all or a portion of their rights by designating this desire on the Subscription
Certificate that accompanied the Prospectus. The certificate must have been
returned to Equiserve Trust Company by the end of the offering period at the
designated address.
Those who held shares through a broker could simply have made the broker
aware of their desire to sell or exercise the rights.
Q: WHAT ARE THE TRANSACTION COSTS ON THE SALE OF THE RIGHTS?
Rights may be sold through Equiserve Trust Company with no fees and only a
nominal commission; however, certain brokerage firms may charge a transaction
fee to sell or exercise rights.
Q: WHAT IF MY TOTAL NUMBER OF RIGHTS IS NOT EVENLY DIVISIBLE BY THREE?
The Gabelli Convertible and Income Securities Fund will automatically
round up shareholders' rights allocation so that the total number of rights a
shareholder is granted is evenly divisible by three (the number of rights
required to purchase an additional share).
A PROMISE KEPT
When we asked the shareholders of the Fund to vote to convert from an
open-end investment company to a closed-end fund in 1995, we expressed our
intent to have the Fund's common shares track the Fund's net asset value. Based
on the Fund's consistent and above average annualized performance since
inception, we expected that such a Fund would trade at or above net asset value.
In addition, over the past few years the Board of Directors has taken several
initiatives to maintain the Fund's public market price at a level equal to or
exceeding the Fund's net asset value. These initiatives included a stock
repurchase plan, a managed 8% Distribution Policy and the issuance of preferred
stock.
We are pleased to report that management kept its promise to shareholders
and the Fund is trading at a premium to net asset value. In fact, the Fund began
trading at a premium in February 2001 and has continued to trade above net asset
value, ending the quarter at a 28.96% premium. We have been able to preserve
shareholder wealth during a tough market environment. We have been conservative
during the past year and it has paid off; now is the time to be aggressive.
3
PREMIUM / DISCOUNT DISCUSSION
As a refresher to our shareholders, the price of a closed-end mutual fund
is determined in the open market by willing buyers and sellers. Shares of the
Fund trade on the New York Stock Exchange and may trade at a premium to (higher
than) net asset value ("NAV") (the market value of the Fund's underlying
portfolio) or a discount to (lower than) net asset value. Of the 519 closed-end
funds in the U.S., approximately 27% currently trade at premiums to NAV versus
26% five years ago and 58% ten years ago.
Ideally, the Fund's market price will generally track the NAV. The Fund's
premium or discount to NAV fluctuates over time. Over our Fund's 7 1/2-year
history as a closed-end fund, the range fluctuated from a 34% premium in August
2002 to a 17% discount in April 2000. Beginning in early 2001, the market price
of the Fund exceeded the NAV and this premium has gradually increased since.
"Mr. Market" often provides opportunities to invest at a discount. The
Fund has undertaken various initiatives to narrow the discount when appropriate
through distribution policies, share repurchase programs and use of leverage.
The Fund's long-term investment goal is to seek a high level of total
return through a combination of current income and capital appreciation. We
believe that our securities selection process adds to the investment equation.
We have a successful history of investment providing shareholders average annual
returns of 7.1% since inception. However, it is important to remember that "Mr.
Market" is a pendulum that swings both ways. As the market moves away from
momentum investing and back to basics, we believe that an excessive premium for
the Fund is not likely to be sustainable.
PREMIUM/DISCOUNT SINCE CONVERSION TO A CLOSED-END FUND
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PLOTPOINTSFOLLOW:
3/31/95 0
0.0099
-0.0761
-0.0978
-0.0334
-0.0903
-0.1056
-0.0657
-0.0701
-0.0957
-0.0263
Year 1996 -0.065
-0.1064
-0.0802
-0.1071
-0.1507
-0.0953
-0.1465
-0.146
-0.1318
-0.1497
-0.1492
-0.1652
Year 1997 -0.1399
-0.131
-0.1577
-0.1622
-0.1593
-0.1322
-0.147
-0.1538
-0.1321
-0.1557
-0.1432
-0.1017
Year 1998 -0.0956
-0.0882
-0.0733
-0.0815
-0.095
-0.062
-0.0848
-0.1485
-0.0705
-0.0372
-0.0325
-0.0175
Year 1999 -0.0315
-0.0745
-0.0275
-0.1027
-0.0909
-0.0689
-0.0991
-0.1019
-0.0842
-0.0948
-0.1525
-0.0735
Y2k -0.1207
-0.148
-0.1497
-0.1734
-0.1454
-0.1263
-0.1128
-0.123
-0.1022
-0.1553
-0.1088
-0.0893
Year 2001 -0.03
0.0096
0.0039
0.0202
0.0207
0.0337
0.0316
0.059
0.1202
0.1169
0.1167
0.1156
Year 2002 0.1061
0.0959
0.1067
0.0584
0.1702
0.1458
0.1127
0.2126
9/30/02 0.2896
4
COMPARATIVE RESULTS
AVERAGE ANNUAL RETURNS THROUGH SEPTEMBER 30, 2002 (A)
-----------------------------------------------------
YEAR SINCE
QUARTER TO DATE INCEPTION (B) 10 YEAR 5 YEAR 3 YEAR 1 YEAR
------- ------- ------------- ------- ------ ------ ------
Gabelli Convertible and Income
Securities Fund NAV Return (c) .... (8.45)% (12.25)% 7.05% 5.95% 2.35% (1.81)% (9.47)%
Gabelli Convertible and Income
Securities Fund Investment
Return (d) ........................ 2.71% 2.40% 4.97%(e) N/A(e) 11.06% 10.20% 3.52%
S&P 500 Index .......................(17.27)% (28.15)% 9.82% 8.99% (1.62)% (12.88)% (20.47)%
Lipper Convertible Securities
Fund Average ...................... (8.35)% (13.56)% 8.98% 8.27% 1.59% (1.35)% (6.42)%
(a) Returns 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. The S&P 500 Index is an unmanaged indicator of stock market
performance, while the Lipper Average reflects the average performance of
open-end mutual funds classified in this particular category. Performance
for periods less than one year are not annualized.
(b) From commencement of investment operations on July 3, 1989.
(c) Total returns and average annual returns reflect changes in net asset value
("NAV") and reinvestment of distributions and are net of expenses. Since
Inception return based on initial net asset value of $10.00.
(d) Total returns and average annual returns reflect changes in closing market
values on the New York Stock Exchange and reinvestment of distributions.
Since Inception return based on an initial offering price of $10.00.
(e) The Fund converted to closed-end status on March 31, 1995 and had no
operating history on the New York Stock Exchange prior to that date.
8.00% CUMULATIVE PREFERRED STOCK - MANDATORY 50% REDEMPTION
As authorized by the Board of Directors, the Fund is redeeming 50%
(600,000 Shares) of its outstanding 8.00% Cumulative Preferred Stock. The
redemption date is November 12, 2002 and the redemption price is $25.2555 per
Preferred Share, which consists of $25.00 per Preferred Share plus accumulated
and unpaid dividends through the redemption date of $0.2555 per Preferred Share.
The redemption will be made pro rata from each Preferred Stock Shareholder
based on the respective number of Preferred Shares held by each such holder on
the redemption date. From and after the redemption date, the Preferred Shares to
be redeemed will no longer be deemed outstanding, dividends will cease to accrue
and all the rights of the Preferred Shareholders with respect to the Preferred
Shares to be redeemed will cease, except the right to receive the redemption
price. Shareholders of record will be mailed a redemption notice and letter of
transmittal. The redemption price will be paid only to shareholders of record
who complete and sign the letter of transmittal and submit certificates for the
number of Preferred Shares being redeemed. New certificates will be issued to
replace any excess Preferred Shares submitted.
The Board has also authorized the Fund to issue additional preferred stock
in the future. The actual amount of capital to be raised, the dividend rate and
the timing of any new offering will be determined at a later date. Any offering
will be made only by means of a prospectus. Depending on prevailing interest
rates, shareholder interest and other factors, the Board may determine to seek
to structure any such offering so as to enable shareholders to exchange all or a
portion of their Preferred Shares for such newly issued preferred stock in that
offering.
The Fund's 8.00% Cumulative Preferred Stock paid a cash distribution on
September 26, 2002 of $0.50 per share. For the twelve-month period ended
September 30, 2002, Preferred Stock shareholders received distributions totaling
$2.00, the annual dividend rate per share of Preferred Stock. The next
distribution is scheduled for December 2002.
5
NEW NAME: SAME APPROACH
Effective August 1, 2002, the Gabelli Convertible Securities Fund changed
its name to the Gabelli Convertible and Income Securities Fund. Although our
name has changed, our approach has not.
The Fund will maintain its investment objective of seeking a high level of
total return through a combination of current income and capital appreciation.
With this change, the Fund will have more investment flexibility to meet
the new Securities and Exchange Commission ("SEC") requirement (Rule 35d-1) that
funds invest at least 80% of their assets in the type of securities specified in
their name, under normal market conditions. The Fund has determined that being
required to invest 80% of its assets strictly in convertible securities is not
always optimal and, accordingly, has determined to change its name as it strives
to achieve its goal of preserving and enhancing capital. The Fund expects to
continue its practice of investing in convertible securities to the extent
attractive opportunities are available.
OUR OBJECTIVE
Our mandate is to preserve and enhance our shareholders' wealth through a
conservative and disciplined approach to investing in convertible and income
securities. 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.
Our Fund is managed with a 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 recognized for
and we anticipate will continue in the future. Of course, there are no
guarantees.
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 that 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.
CONVERTIBLE MARKET OVERVIEW
The convertible market, as measured by the Merrill Lynch All Convertible
Index, fell 8.2% during the third quarter. This compared to a decline of 19.8%,
17.3%, and 17.4% by the Nasdaq Composite, the S&P 500 and the Dow Jones
Industrial Indices, respectively. Poor corporate earnings, corporate governance
issues and tensions in the Middle East hurt equity markets. This provoked a
flight to quality as registered by the AA1 rated Merrill Lynch
Government/Corporate Bond Index, which rose 5.9%. Conversely, the B1 rated
Merrill Lynch U.S. High Yield Master II Index fell 3.0% as credit spreads
widened. This trend was reflected in the convertible market, as speculative
grade convertibles dropped 10.0%, while investment grade issues fell by only
7.4%. The average convertible now has the highest conversion premium on record
of 106% (up from 75% last quarter), a current yield of 4.67% (versus 4.22%), and
a credit rating of BBB-, unchanged from last quarter.
6
The size of the convertible market fell 11% during the quarter to $197
billion due primarily to poor price performance. Weak equity markets have
stunted the new issue market. Year to date, new deals have totalled $44.6
billion versus $74.5 billion during the comparable period last year, a decline
of 40%. By product type, new issuance continues to be dominated by the more
equity-like structures as companies strive to repair balance sheets and
investors search for low premium convertibles with attractive current yields.
Year to date, convertible preferred stock and mandatory convertible securities
constituted 44% of total new issue activity versus only 19% during all of 2001.
Finally, in an effort to capitalize on currently depressed levels, companies are
buying back their issues in the open market. Year to date, of the $21 billion in
redemptions, 29% (or $6 billion) represent company repurchases.
Only two sectors rose during the quarter: Consumer Staples (+1.0%) and
Telecommunications (+0.7%). Although down 27.8% year to date, the
Telecommunications sector rose during the quarter due to the strong performance
of Nextel Communications and Level 3 Communications. This sector makes up 6% of
the convertible market. Utilities were the worst performing sector both for the
quarter (-24.1%) and the year to date (-34.7%). The sector was hit by the poor
performance of issues like Calpine, Duke Energy, and Mirant. Meanwhile, the
Materials (-17.4%) and Technology sectors (-14.8%) remained weak. These sectors
represent 4% and 20% of the convertible market respectively. The Materials
sector was adversely affected by declines at Freeport Copper, Georgia Pacific,
and Sealed Air, which suffered from renewed concerns about asbestos liabilities.
Finally, busted convertibles (-4.1%), being less equity sensitive, outperformed
balanced (-14.9%) and equity sensitive convertibles (-16.0%), while small
capitalization issuers (-16.3%) succumbed to mid (-10.6%) and large
capitalization issuers (-4.4%) and value (-10.2%) gave in to growth (-5.9%).
COMMENTARY
THE ECONOMY: LIMPING ALONG
Federal Reserve Board ("Fed") Chairman Greenspan remains confident the
economy is still on a modest growth path. Equity investors aren't so sure. On
balance, the economic data has been mixed. Consumer spending has remained
buoyant. Housing starts, existing home sales and auto sales are still quite
healthy. Retail sales have held up well, despite the drag from rising
unemployment and the toxic impact of the wealth effect.
Why is the economy treading water? The business sector is acting like a
deer caught in headlights. A dearth of capital spending continues to drag on the
economy and uncertainty regarding Iraq is also probably having an impact. Oil
hovering over $30 per barrel is taking its toll on all. We saw impressive Gross
Domestic Product ("GDP") growth in the first half of the year as companies began
rebuilding inventories depleted during the recession and in the aftermath of
9/11. Then the re-stocking of shelves was put on hold as corporate managers
devoted much of their time, energy and resources to making sure their companies'
books were in good order and/or shoring up balance sheets. As these tasks are
completed, we should see the inventory rebuilding cycle resume and the economy
make more meaningful progress, though the West Coast dock lock-out will mute
results. As corporate managers gain confidence that the recovery is for real, we
should also see a modest up-tick in capital spending take some of the economic
burden off the American consumer's broad shoulders. However, in order for the
world economies to gain traction, oil would need to be plentiful and priced
below $25 per barrel.
Higher energy prices are essentially a tax on virtually every business and
consumer. At around $30 per barrel, oil appears to be discounting a serious
disruption in supply resulting from a potential war in Iraq, and closer to home,
a threatened strike by Mexican oil workers. It is impossible to predict what
will happen in the coming months. However, should the supply lines remain open,
we believe oil prices will come down from current levels and no longer pose a
serious threat to a global economic recovery. Longer term, the U.S. must consume
less and find alternative ways to power our ubiquitous automobile.
7
THE STOCK MARKET: WHERE IS THE BOTTOM?
When and where will the stock market bottom out? We wish we knew. At this
juncture, stock prices appear to be discounting most if not all of the bad news.
In July and again in September, we witnessed the kind of near panic selling that
usually foreshadows market bottoms. We believe the old adage that "bull markets
climb a wall of worry," and it is apparent that investors have plenty to worry
about. We also echo our observation that the two ingredients for a stock market
recovery -- low interest rates and a better earnings environment -- are in
place.
PUTTING HUMPTY DUMPTY BACK TOGETHER
When past market bubbles burst, lots of debris washed ashore. This time,
the bubble was bigger and the debris was more hideous and more widespread.
Accountants, analysts, and investment bankers (among others) lost their checks
and balances and did not act as safety nets and buffers.
We are in a camp that believes that securities analysts do a terrific job.
Beginning in May of 1975, a payment mechanism for research was removed with the
collapse of fixed price commissions. The conflicts in the late 1990s are
directly traceable to "May Day." Where next? When we joined Wall Street in 1967,
research that was performed on a brokerage firm's investment banking client was
identified as such. To get back there is an easy fix. Regulation Fair Disclosure
("FD") already put analysts back on the fundamental research track.
Accountants should not perform services beyond audit functions, except
where the fee is small relative to the audit engagement.
Perhaps we need to revisit the Glass-Steagall Act. The safeguards put in
place by that Act were there for a reason.
All in all, we believe that most corporate managers we see come to work
every day to grow the intrinsic value of their enterprise and work hard to have
the public stock track the underlying value of the business.
Our job remains the same -- to ferret out those companies that Mr. Market
puts on the bargain counter.
ALL HAIL BONDS!
Although corporate bonds have not performed nearly as well as Treasuries
(traditionally investors' favorite port during stock market storms), they have
delivered positive returns. Preferred stocks, which trade more like bonds than
stocks, have also held up well. Consequently, it is no surprise that our
portfolio of convertible bonds and convertible preferreds outperformed equity
indices by such a wide margin.
INVESTMENT SCORECARD
This quarter's best performing holdings came from a variety of industry
groups including: telecommunications (Nextel Communications, AT&T, and United
States Cellular); auto parts (WHX Corp. and Allen Group); and manufacturing
(Thermo Fibertek).
Among our biggest disappointments were telecom equipment manufacturer
Lucent Technologies, utilities company Progress Energy, and amusement park
operator Six Flags.
8
LET'S TALK CONVERTS
The following are specifics on selected convertible holdings of our Fund.
Favorable earnings prospects do not necessarily translate into higher stock
prices, but they do express a positive trend that we believe will develop over
time.
CITIZENS COMMUNICATIONS CO. (CZN) (5.00% CV. PFD.) is one of the nation's top
three largest independent local exchange carriers with about 2.5 million access
lines after completion of a $3.4 billion acquisition of almost 1.1 million lines
from Frontier. This and several other recent acquisitions, accompanied by
divestitures of its utilities operations, have repositioned the company as a
pure telecommunications carrier. After recent completion of the tender offer for
19% of shares that it already did not own, CZN now owns 100% of Electric
Lightwave Inc., a competitive carrier with fiber optic networks covering the
Western part of the U.S. The company is now focused on strengthening its balance
sheet by using the strong free cash flow of its local phone operations as well
as any potential proceeds from the sale of the remaining utility operations to
pay down debt.
FRANKLIN RESOURCES INC. (BEN) (ZERO COUPON, 05/11/31) is a financial holding
company that provides investment advisory and management services through its
Franklin, Templeton, Mutual Series, Bissett, and Fiduciary investment management
groups as well as banking services though its banking/finance segment. The
company has about $248 billion in assets under management across a wide-range of
investment products and styles. Finally, the company operates in 37 offices in
29 countries, and is focused on further expanding its international investment
management business, particularly as pension systems are reformed in numerous
countries around the world.
GENERAL MOTORS CORP. (GM) (5.25% CV. PFD., SER. B; 4.50% CV. PFD., SER. A) is
the largest producer of motor vehicles in the world, with unit sales of over 8
million cars, trucks, and commercial vehicles in 2001 alone. The company has
operating subsidiaries in North America, Europe, Latin America, and Asia, and
equity interests in manufacturers in Europe (Fiat Auto Holdings) and Japan
(Isuzu, Suzuki, Subaru). General Motors Acceptance Corporation provides retail
and wholesale financing to consumers and dealers worldwide, as well as vehicle
leasing, mortgage, and insurance products. The company's Hughes Electronics (GMH
- $9.15 - NYSE) subsidiary provides direct-to-home satellite television services
to over 10 million consumers in the U.S. under the DirecTV brand name.
HILTON HOTELS CORP. (HLT) (SUB. DEB. CV., 5.00%, 05/16/06) is recognized as one
of the world's preeminent hospitality companies. Hilton develops, owns, manages
and franchises hotels, resorts and vacation ownership properties. Based on the
number of hotel rooms, Hilton is the nation's third largest lodging company.
Hilton's hotel system includes approximately 2,000 properties totaling over
333,000 rooms worldwide. The Company's hotel brands include Hilton, Hilton
Garden Inn, Doubletree, Embassy Suites Hotels, Hampton Inn, Hampton Inn &
Suites, Homewood Suites by Hilton, Conrad, and Harrison Conference Centers.
Flagship properties include the Waldorf Astoria, the Hilton Chicago, the Hilton
Hawaiian Village Beach Resort & Spa and the Palmer House Hilton. HLT formalized
a marketing alliance with the British company Hilton Group plc (HG.L - $2.52 -
London Stock Exchange), owner of Hilton International, in January 1997 to
reunite the Hilton name worldwide for the first time in over 30 years.
NEXTEL COMMUNICATIONS INC. (NXTL) (5.25%, 01/15/10; 6.00%, 06/01/11; 4.75%,
07/01/07) is one of two remaining independent national wireless carriers in the
U.S., servicing over 10 million mostly high-value business subscribers and
controlling wireless licenses covering over 235 million people. Nextel is
differentiating itself by offering its unique direct-connect feature that allows
instant two-way voice communication. Since the beginning of 2002, the company
has used a combination of cash and stock to reduce its debt by over $1.8 billion
while still maintaining a healthy cash balance. Nextel has submitted a proposal
to the Federal Communications Commission ("FCC") to re-allocate its spectrum
portfolio at the radio frequencies also used by the public safety organizations.
The FCC decision is expected by the end of 2002 and, if approved, would
significantly strengthen Nextel's competitive position.
9
NORTHROP GRUMMAN CORP. (NOC) (7.00% CV. PFD., SER. B) is a defense technologies
company, specializing in electronics and systems integration. Their products are
at the heart of the network-centric integrated battle management systems of
modern warfare. The Global Hawk unmanned aerial reconnaissance system is one of
their most recent products. They also produce nearly 60% of the Pentagon's
airborne radar systems and are well positioned in missile defense. After
acquiring Litton Industries and Newport News, the company is now the world's
largest naval shipbuilder, with expertise in every class of nuclear and
non-nuclear vessel. In July 2002, TRW, the aerospace and information technology
company, agreed to be acquired for $7.8 billion in stock. The pending deal will
make Northrop a leader in military satellites, missile systems, and systems
integration.
ROBBINS & MYERS INC. (RBN) (SUB. DEB. CV., 6.50%, 09/01/03) is an international
manufacturer of industrial mixing equipment, glass-lined vessels, industrial
pumps and corrosion resistant products serving the process industries such as
specialty chemicals, pharmaceuticals, water treatment, oil and gas, food and
beverage. Recently the company completed the acquisition of Romaco, a company
with annual sales of approximately $150 million that manufactures the packaging,
printing and processing of pharmaceutical products. Romaco provides horizontal
integration to Robbins' mixer and vessel businesses and the acquisition is
expected to be accretive to earnings. With Romaco, 40% of Robbins & Myers
revenues are in the pharmaceutical market that is generally stable, with an
average 6% to 8% rate of growth. The company's remaining businesses are in
specialty chemical (26%), energy (20%), water and wastewater (4%) and other
industries. Management's use of its strong cash flow to make complementary
acquisitions makes Robbins & Myers an attractive company in a consolidating
industry.
SEQUA CORP. (SQA) ($5.00 CV. PFD.) is a diversified company with businesses in
aerospace, pre-paint metal, specialty chemical, printing and cannery equipment.
Chromalloy Gas Turbine, Sequa's aerospace business, is the largest independent
supplier of aftermarket parts for the overhaul and repair of jet and industrial
gas turbine engines. We believe this business is attractive to original
equipment engine manufacturers like General Electric and Pratt & Whitney who are
looking to grow their replacement parts business. With roughly $800 million in
revenues, we estimate Chromalloy's private market value to be near the entire
public value of Sequa.
STANDARD MOTOR PRODUCTS INC. (SMP) (SUB. DEB. CV., 6.75%, 07/15/09),
headquartered in Long Island City, New York, supplies functional replacement
parts for the engine management, electrical and climate control systems of cars,
trucks and buses. The company services all makes and models, both new and old
cars, imported and domestic. SMP has two primary divisions -- engine management
and temperature control -- and believes it is the number one supplier to the
North American aftermarket in each of these lines.
STOCK REPURCHASE PLAN
The Fund is authorized to repurchase up to 500,000 shares of the Fund's
outstanding common shares. Pursuant to this stock repurchase plan, the 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, 2002, 305,200 shares have been
repurchased in the open market under this stock repurchase plan. No shares were
repurchased during the third quarter because the Fund traded at a premium to net
asset value throughout the quarter.
COMMON STOCK 8% DISTRIBUTION POLICY
The Fund continues to maintain its 8% Distribution Policy whereby the Fund
pays out to common stock shareholders 8% of its average net assets each year.
Pursuant to this policy, the Fund distributed $0.20 per share on September 24,
2002. The next distribution is scheduled for December 2002.
10
Under the policy, distributions are made at the annual rate of 8% of the
average of the calendar quarter-end net assets of the Fund's common stock at
December 2001 and March, June, and September 2002. The Fund normally distributes
$0.20 per share to common stock shareholders in March, June, and September. The
fourth quarter distribution is a variable adjusting distribution in December.
The adjusting distribution is the greater of the remaining portion of 8% of the
average net assets to be distributed (8% of the average net assets less the
cumulative amount paid in March, June, and September) or the minimum
distribution required by IRS regulations. Each quarter, the Board of Directors
reviews the amount of any potential distribution based on the income, capital
gains or capital available.
WWW.GABELLI.COM
Please visit us on the Internet. Our homepage at http://www.gabelli.com
contains information about Gabelli Asset Management Inc., the Gabelli Mutual
Funds, IRAs, 401(k)s, quarterly reports, closing prices and other current news.
You can send us e-mail at closedend@gabelli.com.
In our efforts to bring our shareholders more timely portfolio
information, Gabelli Fund's portfolio managers regularly participate in chat
sessions at www.gabelli.com as reflected below.
WHO WHEN
--- ----
Special Chats: Mario J. Gabelli First Monday of each month
Howard Ward First Tuesday of each month
In addition, every Wednesday will feature a different portfolio manager.
The upcoming Wednesday chat schedule is as follows:
NOVEMBER DECEMBER JANUARY
-------- -------- -------
1st Wednesday Charles Minter & Martin Weiner Charles Minter & Martin Weiner Ivan Arteaga
2nd Wednesday Caesar Bryan Walter Walsh & Laura Linehan Charles Minter & Martin Weiner
3rd Wednesday Walter Walsh & Laura Linehan Hart Woodson Walter Walsh & Laura Linehan
4th Wednesday Barbara Marcin Barbara Marcin
All chat sessions start at 4:15 PM (Eastern Time). Please arrive early, as
participation is limited. You may sign up for our e-mail alerts at
www.gabelli.com and receive early notice of chat sessions, closing mutual fund
prices, news events and media sightings.
IN CONCLUSION
True to form, convertible securities held up relatively well as the stock
market continued to slump in the third quarter. Hopefully, in the not too
distant future, we will have the opportunity to see convertibles participate in
a more forgiving stock market.
Sincerely,
/S/ MARIO J. GABELLI
MARIO J. GABELLI
President and Chief Investment Officer
October 15, 2002
NOTE: The views expressed in this report reflect those of the portfolio manager
only through the end of the period stated in this report. The manager's views
are subject to change at any time based on market and other conditions.
11
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
CONVERTIBLE CORPORATE BONDS -- 40.6%
AUTOMOTIVE: PARTS AND ACCESSORIES -- 8.4%
GenCorp Inc., Sub. Deb. Cv.,
$ 1,150,000 5.750%, 04/15/07 (b) ..........$ 1,030,687
350,000 5.750%, 04/15/07 .............. 313,688
8,900,000 Standard Motor Products Inc.,
Sub. Deb. Cv.,
6.750%, 07/15/09 .............. 6,853,000
-------------
8,197,375
-------------
AVIATION: PARTS AND SERVICES -- 4.4%
4,676,000 Kaman Corp., Sub. Deb. Cv.,
6.000%, 03/15/12 .............. 4,290,230
-------------
BUSINESS SERVICES -- 3.8%
900,000 BBN Corp., Sub. Deb. Cv.,
6.000%, 04/01/12+ (a)(c) ...... 0
10,000 First Data Corp., Sub. Deb. Cv.,
2.000%, 03/01/08 .............. 10,562
3,000,000 Franklin Resources Inc., Cv.,
Zero Coupon, 05/11/31 (b) ..... 1,758,750
Navistar Financial Corp.,
Sub. Deb. Cv.,
400,000 4.750%, 04/01/09 (b) .......... 304,500
100,000 4.750%, 04/01/09 .............. 76,125
1,900,000 Trans-Lux Corp., Sub. Deb. Cv.,
7.500%, 12/01/06 .............. 1,605,500
-------------
3,755,437
-------------
CABLE -- 1.3%
200,000 Adelphia Communications Corp.,
Sub. Deb. Cv.,
3.250%, 05/01/21+ (c) ......... 15,000
3,000,000 Charter Communications Inc., Cv.,
4.750%, 06/01/06 .............. 1,301,250
-------------
1,316,250
-------------
COMPUTER SOFTWARE AND SERVICES -- 0.2%
350,000 QuadraMed Corp., Sub. Deb. Cv.,
5.250%, 05/01/05 .............. 227,500
-------------
CONSUMER PRODUCTS -- 0.7%
690,000 Standard Commercial Corp.,
Sub. Deb. Cv.,
7.250%, 03/31/07 .............. 671,025
-------------
CONSUMER SERVICES -- 0.1%
1,100,000 Ogden Corp., Sub. Deb. Cv.,
Zero Coupon, 06/01/03+ (c) .... 143,000
-------------
DIVERSIFIED INDUSTRIAL -- 0.5%
500,000 GATX Corp., Cv.,
7.500%, 02/01/07 (b) .......... 493,125
-------------
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
ELECTRONICS -- 4.5%
$ 2,600,000 Agere Systems Inc., Sub. Deb. Cv.,
6.500%, 12/15/09 ..............$ 1,430,000
900,000 Oak Industries Inc., Sub. Deb. Cv.,
4.875%, 03/01/08 .............. 452,250
100,000 Solectron Corp., Cv.,
Zero Coupon, 05/08/20 ......... 58,375
2,500,000 Thermo Electron Corp.,
Sub. Deb. Cv.,
4.000%, 01/15/05 .............. 2,412,500
-------------
4,353,125
-------------
ENERGY AND UTILITIES -- 1.7%
388,000 Devon Energy Corp., Sub. Deb. Cv.,
4.950%, 08/15/08 .............. 388,000
1,700,000 Mirant Corp., Sub. Deb. Cv.,
2.500%, 06/15/21 .............. 750,125
511,000 Moran Energy Inc., Sub. Deb. Cv.,
8.750%, 01/15/08 .............. 489,282
-------------
1,627,407
-------------
EQUIPMENT AND SUPPLIES -- 1.7%
1,650,000 Robbins & Myers Inc.,
Sub. Deb. Cv.,
6.500%, 09/01/03 .............. 1,621,125
-------------
HEALTH CARE -- 1.6%
50,000 Apogent Technologies Inc., Cv.,
2.250%, 10/15/21 (b) .......... 49,312
30,000 Invitrogen Corp., Sub. Deb. Cv.,
5.500%, 03/01/07 .............. 27,263
IVAX Corp., Sub. Deb. Cv.,
1,400,000 5.500%, 05/15/07 .............. 1,186,500
400,000 4.500%, 05/15/08 (b) .......... 309,500
150,000 Sabratek Corp., Sub. Deb. Cv.,
6.000%, 04/15/05+ (c) ......... 0
-------------
1,572,575
-------------
HOTELS AND GAMING -- 5.2%
5,500,000 Hilton Hotels Corp.,
Sub. Deb. Cv.,
5.000%, 05/15/06 .............. 5,060,000
-------------
PAPER AND FOREST PRODUCTS -- 1.6%
200,000 Riverwood International Corp.,
Sub. Deb. Cv.,
6.750%, 09/15/03 .............. 220,000
1,400,000 Thermo Fibertek Inc.,
Sub. Deb. Cv.,
4.500%, 07/15/04 (b) .......... 1,372,000
-------------
1,592,000
-------------
PUBLISHING -- 0.1%
200,000 Times Mirror Ltd., Sub. Deb. Cv.,
Zero Coupon, 04/15/17 ......... 123,750
-------------
12
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
PORTFOLIO OF INVESTMENTS (Continued)
SEPTEMBER 30, 2002 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
CONVERTIBLE CORPORATE BONDS (CONTINUED)
RETAIL -- 1.3%
$ 60,000 Costco Companies Inc.,
Sub. Deb. Cv.,
Zero Coupon, 08/19/17 .........$ 45,900
10,000 School Specialty Inc.,
Sub. Deb. Cv.,
6.000%, 08/01/08 .............. 10,513
1,200,000 Thermo Instrument Systems Inc.,
Sub. Deb. Cv.,
4.500%, 10/15/03 (b) .......... 1,200,000
-------------
1,256,413
-------------
TELECOMMUNICATIONS -- 1.3%
80,000 Amnex Inc., Sub. Deb. Cv.,
8.500%, 09/30/03+ (b)(c) ...... 0
Bell Atlantic Corp., Cv.,
600,000 4.250%, 09/15/05 (b) .......... 609,000
90,000 4.250%, 09/15/05 .............. 90,900
1,000,000 NTL Inc., Sub. Deb. Cv.,
5.750%, 12/15/09+ (c) ......... 185,000
500,000 Rogers Communications Inc.,
Sub. Deb. Cv.,
2.000%, 11/26/05 .............. 349,375
-------------
1,234,275
-------------
WIRELESS COMMUNICATIONS -- 2.2%
Nextel Communications Inc., Cv.,
700,000 6.000%, 06/01/11 (b) .......... 510,929
1,700,000 5.250%, 01/15/10 .............. 1,156,000
100,000 4.750%, 07/01/07 .............. 74,500
1,100,000 United States Cellular Corp.,
Sub. Deb. Cv.,
Zero Coupon, 06/15/15 ......... 385,000
-------------
2,126,429
-------------
TOTAL CONVERTIBLE
CORPORATE BONDS ............... 39,661,041
-------------
SHARES
------
CONVERTIBLE PREFERRED STOCKS -- 17.4%
AEROSPACE -- 1.3%
8,500 Northrop Grumman Corp.,
7.000% Cv. Pfd., Ser. B ....... 1,215,500
-------------
AUTOMOTIVE -- 0.8%
5,000 Ford Motor Co. Capital Trust II,
6.500% Cv. Pfd. ............... 201,450
General Motors Corp.,
14,000 5.250% Cv. Pfd., Ser. B ....... 313,320
12,000 4.500% Cv. Pfd., Ser. A ....... 282,840
-------------
797,610
-------------
MARKET
SHARES VALUE
--------- ------
AVIATION: PARTS AND SERVICES -- 4.3%
Coltec Capital Trust,
37,000 5.250% Cv. Pfd. ...............$ 1,098,704
17,000 5.250% Cv. Pfd. (b) ........... 504,810
30,000 Sequa Corp.,
$5.00 Cv. Pfd. ................ 2,568,000
-------------
4,171,514
-------------
BROADCASTING -- 1.0%
100 Gray Television Inc.,
8.000% Cv. Pfd., Ser. C (b) ... 1,000,000
-------------
BUSINESS SERVICES -- 1.4%
14,000 Interep National Radio Sales Inc.,
4.000% Cv. Pfd., Ser. A (b) ... 1,400,000
20,000 Key3Media Group,
5.500% Cv. Pfd. ............... 1,351
-------------
1,401,351
-------------
CABLE -- 0.7%
50,000 CVC Equity Securities Trust I,
6.500% Cv. Pfd. ............... 672,500
-------------
DIVERSIFIED INDUSTRIAL -- 0.5%
2,400 GATX Corp.,
$2.50 Cv. Pfd. ................ 294,000
WHX Corp.,
28,000 6.500% Cv. Pfd., Ser. A+ ...... 123,200
10,000 $3.75 Cv. Pfd., Ser. B+ ....... 51,500
-------------
468,700
-------------
ENERGY AND UTILITIES -- 0.3%
500 Cinergy Corp.,
9.500% Cv. Pfd. ............... 26,500
2,500 FPL Group Inc.,
8.500% Cv. Pfd. ............... 128,750
22,000 Semco Capital Trust II,
11.000% Cv. Pfd. .............. 157,080
-------------
312,330
-------------
ENTERTAINMENT -- 1.1%
1,000 Metromedia International Group Inc.,
7.250% Cv. Pfd.+ .............. 580
60,000 Rainbow Equity Securities Trust II,
6.250% Cv. Pfd. ............... 774,000
20,000 Six Flags Inc.,
7.250% Cv. Pfd. ............... 276,000
-------------
1,050,580
-------------
13
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
PORTFOLIO OF INVESTMENTS (Continued)
SEPTEMBER 30, 2002 (UNAUDITED)
MARKET
SHARES VALUE
--------- ------
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
PAPER AND FOREST PRODUCTS -- 1.5%
68,000 Sealed Air Corp.,
$2.00 Cv. Pfd., Ser. A ........$ 1,496,000
-------------
REAL ESTATE -- 0.1%
5,000 Innkeepers USA Trust,
8.625% Cv. Pfd., Ser. A ....... 116,250
-------------
TELECOMMUNICATIONS -- 3.5%
1,500 ALLTEL Corp.,
7.750% Cv. Pfd. ............... 65,250
15,000 Broadwing Inc.,
6.750% Cv. Pfd., Ser. B ....... 169,500
78,000 Citizens Communications Co.,
5.000% Cv. Pfd. ............... 2,551,380
700 Lucent Technologies Capital
Trust I,
7.750% Cv. Pfd. (b) ........... 157,500
1,000 Lucent Technologies Inc.,
8.000% Cv. Pfd. ............... 268,320
12,000 Philippine Long Distance
Telephone Co.,
$3.50 Cv. Pfd., Ser. III ...... 194,640
-------------
3,406,590
-------------
WIRELESS COMMUNICATIONS -- 0.9%
21,000 Allen Telecom Inc.,
7.750% Cv. Pfd., Ser. D ....... 861,000
3,000 Loral Space & Communications Ltd.,
6.000% Cv. Pfd., Ser. D ....... 10,875
-------------
871,875
-------------
TOTAL CONVERTIBLE
PREFERRED STOCKS .............. 16,980,800
-------------
COMMON STOCKS -- 2.5%
AVIATION: PARTS AND SERVICES -- 0.1%
9,000 Kaman Corp., Cl. A .............. 110,250
-------------
BROADCASTING -- 0.1%
35,000 Granite Broadcasting Corp.+ ..... 74,200
-------------
CABLE -- 0.0%
10,000 UnitedGlobalCom Inc., Cl. A+ .... 16,400
-------------
ENERGY AND UTILITIES -- 1.4%
8,900 AGL Resources Inc. .............. 196,601
10,000 BP plc, ADR ..................... 399,000
3,000 CH Energy Group Inc. ............ 140,790
34,198 KCS Energy Inc.+ ................ 51,297
10,000 NiSource Inc.+ .................. 18,100
25,000 Northeast Utilities ............. 422,500
10,000 Progress Energy Inc., CVO+ ...... 2,100
2,200 SJW Corp. ....................... 171,600
-------------
1,401,988
-------------
MARKET
SHARES VALUE
--------- ------
EQUIPMENT AND SUPPLIES -- 0.1%
50,000 Fedders Corp. ...................$ 126,000
-------------
FINANCIAL SERVICES -- 0.4%
20,000 Argonaut Group Inc. ............. 345,000
-------------
FOOD AND BEVERAGE -- 0.1%
3,609 Chiquita Brands
International Inc.+ ........... 55,759
-------------
PUBLISHING -- 0.2%
10,000 News Corp. Ltd., ADR ............ 192,500
-------------
TELECOMMUNICATIONS -- 0.1%
10,000 AT&T Corp. ...................... 120,100
-------------
WIRELESS COMMUNICATIONS -- 0.0%
49 Winstar Communications Inc.+ .... 0
-------------
TOTAL COMMON STOCKS ............. 2,442,197
-------------
PREFERRED STOCKS -- 1.5%
BROADCASTING -- 1.3%
2,127 Granite Broadcasting Corp.,
12.750% Pfd. .................. 1,276,200
-------------
PUBLISHING -- 0.2%
9,777 News Corp. Ltd., Pfd., ADR ...... 162,298
-------------
TOTAL PREFERRED STOCKS .......... 1,438,498
-------------
PRINCIPAL
AMOUNT
---------
CORPORATE BONDS -- 0.4%
BROADCASTING -- 0.0%
$ 15,000 Granite Broadcasting Corp.,
Sub. Deb.,
8.875%, 05/15/08 .............. 12,075
-------------
CONSUMER PRODUCTS -- 0.0%
1,500,000 Pillowtex Corp., Sub. Deb.,
6.000%, 03/15/12+ (c) ......... 0
-------------
WIRELESS COMMUNICATIONS -- 0.4%
500,000 Nextel Communications Inc.,
9.500%, 02/01/11 .............. 376,250
-------------
TOTAL CORPORATE BONDS ........... 388,325
-------------
14
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
PORTFOLIO OF INVESTMENTS (Continued)
SEPTEMBER 30, 2002 (UNAUDITED)
MARKET
SHARES VALUE
--------- ------
RIGHTS -- 0.0%
TELECOMMUNICATIONS -- 0.0%
6,902 NTL Inc.+ .......................$ 0
------------
WARRANTS -- 0.0%
BUSINESS SERVICES -- 0.0%
87,500 Interep National Radio
Sales Inc.+ ................... 0
CONSUMER PRODUCTS -- 0.0%
4,331 Pillowtex Corp.+ ................ 1,906
------------
TOTAL WARRANTS .................. 1,906
------------
PRINCIPAL
AMOUNT
---------
U.S. GOVERNMENT OBLIGATIONS -- 36.5%
$35,629,000 U.S. Treasury Bills,
1.624% to 1.700%++,
10/03/02 to 12/19/02 .......... 35,612,852
------------
TOTAL INVESTMENTS -- 98.9%
(Cost $108,904,636) ....................... 96,525,619
OTHER ASSETS, LIABILITIES AND
LIQUIDATION VALUE OF
CUMULATIVE PREFERRED STOCK -- (29.6)% ..... (28,936,785)
------------
NET ASSETS -- COMMON STOCK -- 69.3%
(8,289,791 common shares outstanding) ..... 67,588,834
------------
NET ASSETS -- PREFERRED STOCK -- 30.7%
(1,200,000 preferred shares outstanding) .. 30,000,000
------------
TOTAL NET ASSETS -- 100.0% ..................$ 97,588,834
============
NET ASSET VALUE PER COMMON SHARE
(67,588,834 (DIVIDE) 8,289,791
shares outstanding) ....................... $8.15
=====
SECURITIES SOLD SHORT
29,000 KCS Energy Inc.+ (d) ..$276,921 $ 43,500
============
------------------
For Federal tax purposes:
Aggregate cost .................... $109,882,972
============
Gross unrealized appreciation ..... $ 1,194,237
Gross unrealized depreciation ..... (14,551,590)
------------
Net unrealized depreciation ....... $(13,357,353)
============
-------------------
(a) Security fair valued under procedures established 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, 2002, the market value of Rule 144A securities
amounted to $10,700,113 or 11.0% of total net assets.
(c) Bond in default.
(d) Collateralized by U.S. Treasury Bills, 1.697% due 10/17/02, market value
$499,635.
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
ADR - American Depository Receipt.
CVO - Contingent Value Obligation.
--------------------------------------------------------------------------------
SELECTED CONVERTIBLE HOLDINGS
SEPTEMBER 30, 2002
------------------
Citizens Communications Co. (5.00% Cv. Pfd.)
Franklin Resources Inc. (Zero Coupon, 05/11/31)
General Motors Corp. (5.25% Cv. Pfd.)
Hilton Hotels Corp. (Sub. Deb. Cv., 5.00%, 05/15/06)
Kaman Corp. (Sub. Deb. Cv., 6.00%, 03/15/12)
Nextel Communications Inc. (5.25%, 01/15/10)
Northrop Grumman Corp. (7.00% Cv. Pfd., Ser. B)
Robbins & Myers Inc. (Sub. Deb. Cv., 6.50%, 09/01/03)
Sequa Corp. ($5.00 Cv. Pfd.)
Standard Motor Products Inc. (Sub. Deb. Cv., 6.75%, 07/15/09)
--------------------------------------------------------------------------------
15
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
ENROLLMENT IN THE PLAN
It is the policy of The Gabelli Convertible and Income Securities Fund
Inc. ("Convertible and Income Securities Fund") to automatically reinvest
dividends. As a "registered" shareholder you automatically become a participant
in the Convertible and Income Securities Fund's Automatic Dividend Reinvestment
Plan (the "Plan"). The Plan authorizes the Convertible and Income 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 and Income Securities Fund. Plan
participants may send their stock certificates to EquiServe Trust Company
("EquiServe") 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 and Income Securities Fund Inc.
c/o EquiServe
P.O. Box 43011
Providence, RI 02940-3011
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 EquiServe at 1 (800)
336-6983.
SHAREHOLDERS WISHING TO LIQUIDATE REINVESTED SHARES held at EquiServe 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 and Income 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 and
Income Securities Fund's Common Stock. The valuation date is the dividend or
distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next trading day. If the net asset value of the Common Stock at
the time of valuation exceeds the market price of the Common Stock, participants
will receive shares from the Convertible and Income Securities Fund valued at
market price. If the Convertible and Income Securities Fund should declare a
dividend or capital gains distribution payable only in cash, EquiServe will buy
Common Stock in the open market, or on the New York Stock Exchange or elsewhere,
for the participants' accounts, except that EquiServe will endeavor to terminate
purchases in the open market and cause the Convertible and Income 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 and Income 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
EquiServe 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 and Income
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 EquiServe for investments in the Convertible and
Income Securities Fund's shares at the then current market price. Shareholders
may send an amount from $250 to $10,000. EquiServe will use these funds to
purchase shares in the open market on or about the 1st and 15th of each month.
EquiServe 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. It is
suggested that any voluntary cash payments be sent to EquiServe, P.O. Box 43011,
Providence, RI 02940-3011 such that EquiServe receives such payments
approximately 10 days before the investment date. Funds not received at least
five days before the investment date shall be held for investment until the next
purchase date. A payment may be withdrawn without charge if notice is received
by EquiServe 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 and Income Securities Fund.
16
DIRECTORS AND OFFICERS
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
ONE CORPORATE CENTER, RYE, NY 10580-1422
DIRECTORS
Mario J. Gabelli, CFA
CHAIRMAN & CHIEF INVESTMENT OFFICER,
GABELLI ASSET MANAGEMENT INC.
E. Val Cerutti
CHIEF EXECUTIVE OFFICER,
CERUTTI CONSULTANTS, INC.
Anthony J. Colavita
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 EMERITUS, PACE UNIVERSITY
Werner J. Roeder, MD
VICE PRESIDENT/MEDICAL AFFAIRS,
LAWRENCE HOSPITAL CENTER
Anthonie C. van Ekris
MANAGING DIRECTOR,
BALMAC INTERNATIONAL, INC.
Salvatore J. Zizza
CHAIRMAN, HALLMARK ELECTRICAL SUPPLIES 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, LLC
One Corporate Center
Rye, New York 10580-1422
CUSTODIAN
State Street Bank and Trust Company
COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company
STOCK EXCHANGE LISTING
Common 8.00% Preferred
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NYSE-Symbol: GCV GCV Pr
Shares Outstanding: 8,289,791 1,200,000
The Net Asset Value appears in the Publicly Traded Funds column, under the
heading "Convertible Securities Funds," in Sunday'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 Gabelli Funds' Internet
homepage at: HTTP://WWW.GABELLI.COM,
or e-mail us at: closedend@gabelli.com
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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 and Income Securities Fund
may from time to time purchase shares of its common stock in the open market
when the Convertible and Income Securities Fund shares are trading at a discount
of 10% or more from the net asset value of the shares. The Convertible and
Income Securities Fund may also, from time to time, purchase shares of its
Cumulative Preferred Stock in the open market when the shares are trading at a
discount to the Liquidation Value of $25.00.
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THE GABELLI CONVERTIBLE AND
INCOME SECURITIES FUND INC.
ONE CORPORATE CENTER
RYE, NY 10580-1422
(914) 921-5070
HTTP://WWW.GABELLI.COM
THIRD QUARTER REPORT
SEPTEMBER 30, 2002
GBFCS 09/02