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GABELLI LOGO:
THE GABELLI
CONVERTIBLE AND
INCOME SECURITIES
FUND INC.
ANNUAL REPORT
DECEMBER 31, 2002
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GABELLI LOGO
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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HART BOOK:
GLOBAL
CONVERTIBLE
INVESTING
FROM THE GABELLI PRESS:
GLOBAL CONVERTIBLE INVESTING:
THE GABELLI WAY
BY HART WOODSON
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GABELLI LOGO
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. With the stock market tumbling through the first three quarters of
2002, the equity characteristic of converts continued to restrain
performance. With the market rallying in the fourth quarter, the equity
characteristic of converts enhanced returns. Through full-year 2002, 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. The Gabelli Convertible
and Income Securities Fund (the "Fund") declined 6.50% for the year but
outpaced the Standard & Poor's ("S&P") 500 Index, which declined 22.09%
during 2002.
COMPARATIVE RESULTS
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AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 2002 (A)
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SINCE
QUARTER INCEPTION (B) 10 YEAR 5 YEAR 3 YEAR 1 YEAR
------- ------------ ------- ------ ------ ------
Gabelli Convertible and Income
Securities Fund NAV Return (c) ......... 6.64% 7.39% 6.21% 3.14% (0.22)% (6.50)%
Gabelli Convertible and Income Securities
Fund Investment Return (d) ............. (16.25)% 3.51%(e) N/A(e) 5.87% 2.88% (14.24)%
S&P 500 Index ............................ 8.43% 10.29% 9.34% (0.58)% (14.54)% (22.09)%
Lipper Convertible Securities
Fund Average ........................... 6.34% 9.31% 8.03% 3.15% (4.97)% (7.99)%
(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"), reinvestment of distributions at NAV on the ex-dividend
date and adjustments for rights offerings, 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, reinvestment of
distributions and adjustments for rights offerings. Since Inception
return based on an initial offering price of $11.25.
(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.
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RIGHTS OFFERING 2002 - AN OUTSTANDING SUCCESS - THANK YOU
The Convertible and Income Securities Fund's Rights Offering proved to be
an overwhelming success. Rights offerings have historically been a fair and
efficient method to raise additional capital. This method is widely used in
England. The 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.
Shareholders of record on November 14, 2002 were issued one Right for each
share of the Fund. Three Rights were required to purchase one additional share
of the Fund at $8.00 per share without incurring commission costs. Shareholders
remitted $53 million in subscription requests, of which the Fund retained $22
million for the 2,763,961 shares offered.
Furthermore, since these Rights were transferable, shareholders who chose
not to exercise their Rights could sell their Rights. The market value of the
Rights during the subscription period was such that sellers of the Rights would
have gained a portion of the value of their holdings that resulted from the
Offering. Our subscription agent, EquiServe, sold Rights in the open market
through Gabelli & Company, Inc. at a nominal commission through December 16,
2002.
We appreciate the efforts of the brokerage community in explaining the
offering to their clients, resulting in a high level of participation.
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 545 closed-end
funds in the U.S., approximately 23% currently trade at premiums to NAV versus
32% five years ago and 49% 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 8-year history
as a closed-end fund, the range fluctuated from a 31% premium in August 2002 to
a 17% discount in April 2000. Beginning in early 2001, the market price of the
Fund has exceeded the NAV.
"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 7.4% 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
December 31, 2002
-----------------
Net Asset Value $8.44
Market Price $8.55
Premium 1.30%
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PLOT POINTS FOLLOW
Premium/Discount
0
0.0099
-0.0761
-0.0978
-0.0334
-0.0903
-0.1056
-0.0657
-0.0701
-0.0957
-0.0263
-0.0650
-0.1064
-0.0802
-0.1071
-0.1507
-0.0953
-0.1465
-0.1460
-0.1318
-0.1497
-0.1492
-0.1652
-0.1399
-0.1310
-0.1577
-0.1622
-0.1593
-0.1322
-0.1470
-0.1538
-0.1321
-0.1557
-0.1432
-0.1017
-0.0956
-0.0882
-0.0733
-0.0815
-0.0950
-0.0620
-0.0848
-0.1485
-0.0705
-0.0372
-0.0325
-0.0175
-0.0315
-0.0745
-0.0275
-0.1027
-0.0909
-0.0689
-0.0991
-0.1019
-0.0842
-0.0948
-0.1525
-0.0735
-0.1207
-0.1480
-0.1497
-0.1734
-0.1454
-0.1263
-0.1128
-0.1230
-0.1022
-0.1553
-0.1088
-0.0893
-0.0300
0.0096
0.0039
0.0202
0.0207
0.0337
0.0316
0.0590
0.1202
0.1169
0.1167
0.1156
0.1061
0.0959
0.1067
0.0584
0.1702
0.1458
0.1127
0.2126
0.2896
0.1607
0.0418
0.0130
2
8.00% CUMULATIVE PREFERRED STOCK - REDEMPTION
As authorized by the Board of Directors, the Fund is redeeming the
remaining 50% (600,000 Shares) of its outstanding 8.00% Cumulative Preferred
Stock. The redemption date is February 11, 2003 and the redemption price is
$25.25 per Preferred Share, which consists of $25.00 per Preferred Share plus
accumulated and unpaid dividends through the redemption date of $0.25 per
Preferred Share.
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.
In addition, the Fund filed an initial registration statement 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.
The Fund's 8.00% Cumulative Preferred Stock paid its last cash
distribution on December 26, 2002 of $0.50 per share. For the twelve-months
ended December 31, 2002, Preferred Stock shareholders received distributions
totaling $2.00, the annual dividend rate per share of Preferred Stock.
OUR OBJECTIVE
Our mandate is to preserve and enhance our shareholders' wealth through a
conservative and 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.
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, gained 8.8% during the fourth quarter but lost 8.6% for the year. As an
asset class, convertibles performed as expected. In 2002, they outperformed all
of the major equity indices due to their defensive fixed income characteristics
and higher income yields. For the year, the Nasdaq Composite Index dropped
31.5%, the S&P 500 Index fell 22.1% and the Dow Jones Industrial Average
declined 15.0%. For the quarter, these indices were up 13.9%, 8.4% and 10.5%
respectively. The year as a whole was characterized by a flight to quality as
the AA1 rated Merrill Lynch Government/Corporate Bond Index gained 10.9%.
However, during the fourth quarter, this index gained only 1.6% as investors
once again became willing to embrace riskier assets. Conversely, the B1 rated
Merrill Lynch U.S. High Yield Master II Index, which was down
3
1.9% for the year, rose by 6.9% during the quarter as credit spreads tightened
from 1,026 basis points to 871 basis points and equity market volatility fell.
Equity market volatility, as measured by the Chicago Board Option Exchange OEX
Volatility Index, declined from 44% to 32% during the quarter. It had been as
high as 50% in July. These trends were reflected in the convertible market as
speculative grade convertibles significantly outperformed their investment-grade
counterparts during the quarter gaining 13.7% versus 4.7%, respectively. The
domestic convertible market is composed of 40% speculative grade credits, 48%
investment grade credits and 12% non-rated credits.
As expected, weak equity performance in 2002 caused the average conversion
premium to expand as convertibles outperformed their underlying equities. During
the year, this premium rose from 56% to 98%. At the same time, the average
current yield rose from 3.8% to 4.3% while the credit quality deteriorated to
BB+ from BBB-.
In 2002, the size of the convertible market fell by 3% to $212 billion
despite positive net new issuance of $24 billion. This was due to poor price
performance. Weak equity markets stunted the new issue market, which fell by 49%
to $55 billion from last year's record high of $105 billion. New issue activity
is expected to grow modestly in 2003 as companies seek capital for growth, lock
in low interest rates and continue to mend balance sheets. Accounting issues
(i.e. "bifurcation") and the proposed legislation regarding dividends are not
expected to have a major impact on the market. Redemptions, which totalled $31
billion this year, are expected to moderate slightly next year to about $25
billion. Redemptions will come from about $11 billion in matured or called
securities, $10 billion via puts, and $4 billion from buying back out of the
money convertibles.
All of the major industrial sectors rose during the quarter lead by
Materials (+20.6%), Technology (+19.6%) and Telecommunications (+19.2%). The
Materials sector benefited from gains by Sealed Air, which reached an agreement
concerning asbestos-related lawsuits, and Freeport McMoRan, which rallied on
higher precious metals prices. This sector was the second strongest of the year
ending up 7.4%. The Technology sector was propelled in the quarter by strong
gains from Corning, Nortel Networks and Lucent, but ended the year down 11.6%.
The Telecom sector was driven by gains from Alltel and Verizon Communications,
which helped to soften the 14% loss for the year. The worse performing sector
for the year was Utilities (-32.9%), which was hit by the poor performance of
issues like Calpine, Duke Energy and Mirant, but even this sector showed
improvement in the fourth quarter gaining 2.6%. In the year ahead, convertibles
should benefit from a combination of attractive current income, continued credit
spread tightening and capital appreciation.
COMMENTARY
AND NOW, YOUR LOCAL WEATHER
Weathermen tend to hedge their bets. When they are really not quite sure
what kind of weather to expect, their next day forecast is either "partly
cloudy" or "partly sunny." I've never understood the distinction between these
two forecasts, but appreciate the fact that often the best weathermen don't
really know which way the wind blows. The same can be said for economists and
market prognosticators.
As we prepare this letter, the economic picture is either partly cloudy or
partly sunny. The clouds come in several forms: poor Christmas retail sales
indicating the consumer may be running out of gas; an ongoing capital spending
drought; and rapidly rising oil prices resulting from fear of a supply
disruption if we go to war with Iraq and the general strike in Venezuela that
has crippled oil production.
However, there are also some rays of sunshine, most notably historically
low interest rates still working through the system, the continued health of the
critical housing and auto sectors, the possibility of the passage of the Bush
Administration's aggressive economic stimulus package, and the potential for
lower oil prices resulting from a successful resolution of the Iraq problem and
Venezuelan supply coming back to market.
Although consumers pulled back this Christmas, we think they will continue
to spend enough to sustain the economic recovery until corporate managers regain
confidence and start investing in their businesses again. We believe the
changing of the guard in the Bush Administrations economic team foreshadowed a
commitment to further
4
economic stimulus. Everything seems to be on the table in the latest proposed
economic package, including accelerated tax cuts to businesses and individuals
and the elimination of the double taxation on dividends. We are also confident
that America and its allies will succeed in their goal of ending Saddam
Hussein's reign in Iraq, helping bring oil prices lower and removing a very real
threat to a global economic recovery.
Will this be enough economic sunshine to support a stock market picnic? In
our opinion, yes, but it will be a modest affair with stocks making grudging
progress in the year ahead.
A STABLE BOND MARKET
In our opinion, modest economic growth in the year ahead bodes well for
corporate bonds as well as stocks. While interest rate risk may increase
somewhat as the economic recovery unfolds, a firmer economy will likely reduce
the credit risk for corporate bonds. Our conclusion is that the corporate bond
market will be relatively stable in the year ahead.
INVESTMENT SCORECARD
Standard Motor Products, Hilton Hotels and Thermo Electron were top
performers in the Fund for 2002. Telecommunications and media converts were
among our best and worst performing holdings this year. Nextel Communications,
Granite Broadcasting and Times Mirror convertibles finished near the top of our
performance list while Broadwing, Cablevision, and Rogers Communications were
among our biggest disappointments.
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 expanding profit margins
and strengthening its balance sheet by using the strong free cash flow of its
local phone operations as well as 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 $261 billion in assets under management across a wide-range of
investment products and styles. Finally, the company operates in 51 offices in
28 countries, and is focused on further expanding its international investment
management business, particularly as pension systems are reformed in numerous
countries around the world.
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. Hilton's hotel
system includes approximately 2,000 properties totaling over 334,000 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 - $2.69 - London Stock
Exchange), owner of Hilton International, in January 1997 to reunite the Hilton
name worldwide for the first time in over 30 years.
5
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 $2.4 billion cash balance. Nextel has
submitted a proposal to the FCC to re-allocate its spectrum portfolio at the
radio frequencies also used by the public safety organizations. The FCC decision
is expected over the next few months and, if approved, would significantly
strengthen Nextel's competitive position.
NORTHROP GRUMMAN CORP. (NOC) (7.00% CV. PFD.) 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 deal, which closed in December 2002,
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 $150
million manufacturer of 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.
SEALED AIR CORP. (SEE) ($2.00 CV. PFD.) manufactures and sells protective and
specialty packaging products to a diverse group of customers throughout the
world - reaching about 80% of the word's population. It has an equity market
capitalization of $3.2 billion. Sealed Air's largest product segment, food
packaging, produces Cryovac shrink films, absorbent pads and foam trays used by
food processors and supermarkets. Its protective and specialty packaging
segments produce Bubble Wrap, Instapak foam, Jiffy envelopes and Rapid Fill
inflatable packaging systems. At the end of November, Sealed Air announced a
pending settlement of asbestos-related claims related to its 1998 purchase of
W.R. Grace & Co's Cryovac packaging business. The company said it would
contribute $732.8 million in stock and cash to creditors of W.R. Grace, starting
December 21 and ending on the effective date of the W.R. Grace reorganization.
The stock surged more than 50% on the news. With the stock at $37.30, the
convertible preferred trades at $42.60 on a 29% conversion premium and 4.69%
current yield.
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.
6
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 December 31, 2002, 305,200 shares have been
repurchased in the open market under this stock repurchase plan.
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 $0.15 per share on December 24,
2002. The next distribution is scheduled for March 2003.
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 at quarter-end 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
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 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 as reflected below.
FEBRUARY MARCH APRIL
-------- ----- -----
1st Tuesday Howard Ward Howard Ward Howard Ward
1st Wednesday Walter Walsh & Laura Linehan Caesar Bryan Charles Minter & Martin Weiner
2nd Wednesday Caesar Bryan Susan Byrne Susan Byrne
3rd Wednesday Elizabeth Lilly Henry Van der Eb Ivan Arteaga
4th Wednesday Barbara Marcin Barbara Marcin Walter Walsh & Laura Linehan
5th Wednesday 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.
7
IN CONCLUSION
True to form, convertible securities held up relatively well as the stock
market slumped through the first three quarters of 2002. As the market rallied
in the fourth quarter, convertible securities' equity characteristics enhanced
portfolio returns. If, as we anticipate, stocks make modest progress and the
corporate bond market remains stable in the year ahead, convertible securities
should produce positive returns.
Sincerely,
/S/MARIO J. GABELLI
MARIO J. GABELLI
President and Chief Investment Officer
February 10, 2003
--------------------------------------------------------------------------------
SELECTED CONVERTIBLE HOLDINGS
DECEMBER 31, 2002
-----------------------------
Citizens Communications Co. (5.00% Cv. Pfd.) Northrop Grumman Corp. (7.00% Cv. Pfd.)
Franklin Resources Inc. (Cv., Zero Coupon, 05/11/31) Robbins & Myers Inc. (Sub. Deb. Cv., 6.50%, 09/01/03)
Hilton Hotels Corp. (Sub. Deb. Cv., 5.00%, 05/15/06) Sealed Air Corp. ($2.00 Cv. Pfd., Ser. A)
Kaman Corp. (Sub. Deb. Cv., 6.00%, 03/15/12) Sequa Corp. ($5.00 Cv. Pfd.)
Nextel Communications Inc. (Sub. Deb. Cv., 5.25%, 01/15/10) Standard Motor Products Inc. (Sub. Deb. Cv., 6.75%, 07/15/09)
--------------------------------------------------------------------------------
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.
8
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2002
PRINCIPAL MARKET
AMOUNT COST VALUE
---------- -------- ---------
CONVERTIBLE CORPORATE BONDS -- 34.3%
AUTOMOTIVE: PARTS AND ACCESSORIES -- 7.6%
GenCorp Inc., Sub. Deb. Cv.,
$ 1,150,000 5.750%, 04/15/07 (b) ....... $ 1,150,000 $ 977,500
450,000 5.750%, 04/15/07 ........... 412,290 382,500
8,900,000 Standard Motor Products Inc.,
Sub. Deb. Cv.,
6.750%, 07/15/09 ........... 7,163,755 6,886,375
------------ ------------
8,726,045 8,246,375
------------ ------------
AVIATION: PARTS AND SERVICES -- 4.1%
4,676,000 Kaman Corp., Sub. Deb. Cv.,
6.000%, 03/15/12 ........... 4,446,500 4,453,890
------------ ------------
BUSINESS SERVICES -- 3.5%
900,000 BBN Corp., Sub. Deb. Cv.,
6.000%, 04/01/12+ (a)(c) ... 882,893 0
10,000 First Data Corp., Cv.,
2.000%, 03/01/08 ........... 9,953 11,300
3,000,000 Franklin Resources Inc., Cv.,
Zero Coupon, 05/11/31 ...... 1,768,357 1,785,000
600,000 Navistar Financial Corp.,
Sub. Deb. Cv.,
4.750%, 04/01/09 ........... 533,275 459,750
1,900,000 Trans-Lux Corp., Sub. Deb. Cv.,
7.500%, 12/01/06 ........... 1,835,713 1,520,000
------------ ------------
5,030,191 3,776,050
------------ ------------
CABLE -- 0.6%
400,000 Adelphia Communications Corp.,
Sub. Deb. Cv.,
3.250%, 05/01/21+ (c) ...... 127,000 35,000
3,200,000 Charter Communications Inc., Cv.,
4.750%, 06/01/06 ........... 2,001,331 588,000
------------ ------------
2,128,331 623,000
------------ ------------
COMPUTER SOFTWARE AND SERVICES -- 0.2%
350,000 QuadraMed Corp.,
Sub. Deb. Cv.,
5.250%, 05/01/05 ........... 275,389 213,937
------------ ------------
CONSUMER PRODUCTS -- 0.5%
550,000 Standard Commercial Corp.,
Sub. Deb. Cv.,
7.250%, 03/31/07 ........... 482,082 540,375
------------ ------------
CONSUMER SERVICES -- 0.1%
1,100,000 Ogden Corp., Sub. Deb. Cv.,
6.000%, 06/01/03+ (c) ...... 1,090,087 93,500
------------ ------------
DIVERSIFIED INDUSTRIAL -- 0.5%
500,000 GATX Corp., Cv.,
7.500%, 02/01/07 (b) ....... 500,000 540,000
------------ ------------
ELECTRONICS -- 4.8%
2,500,000 Agere Systems Inc.,
Sub. Deb. Cv.,
6.500%, 12/15/09 ........... 2,469,505 1,959,375
1,100,000 Oak Industries Inc.,
Sub. Deb. Cv.,
4.875%, 03/01/08 ........... 889,714 668,250
100,000 Solectron Corp., Cv.,
Zero Coupon, 05/08/20 ...... 54,036 61,875
2,500,000 Thermo Electron Corp.,
Sub. Deb. Cv.,
4.000%, 01/15/05 ........... 2,412,526 2,481,250
------------ ------------
5,825,781 5,170,750
------------ ------------
PRINCIPAL MARKET
AMOUNT COST VALUE
---------- -------- ---------
ENERGY AND UTILITIES -- 1.3%
$ 388,000 Devon Energy Corp.,
Sub. Deb. Cv.,
4.950%, 08/15/08 ........... $ 382,208 $ 392,365
1,600,000 Mirant Corp., Sub. Deb. Cv.,
2.500%, 06/15/21 ........... 1,164,248 602,000
511,000 Moran Energy Inc.,
Sub. Deb. Cv.,
8.750%, 01/15/08 ........... 357,912 452,874
------------ ------------
1,904,368 1,447,239
------------ ------------
EQUIPMENT AND SUPPLIES -- 1.4%
1,550,000 Robbins & Myers Inc.,
Sub. Deb. Cv.,
6.500%, 09/01/03 ........... 1,544,221 1,551,937
------------ ------------
HEALTH CARE -- 1.2%
50,000 Apogent Technologies Inc., Cv.,
2.250%, 10/15/21 (b) ....... 51,512 51,688
30,000 Invitrogen Corp., Sub. Deb. Cv.,
5.500%, 03/01/07 ........... 27,928 27,825
IVAX Corp., Sub. Deb. Cv.,
1,000,000 5.500%, 05/15/07 ........... 887,428 893,750
400,000 4.500%, 05/15/08 (b) ....... 328,594 331,000
150,000 Sabratek Corp., Sub. Deb. Cv.,
6.000%, 04/15/05+ (c) ...... 84,763 0
------------ ------------
1,380,225 1,304,263
------------ ------------
HOTELS AND GAMING -- 5.1%
5,801,000 Hilton Hotels Corp.,
Sub. Deb. Cv.,
5.000%, 05/15/06 ........... 5,332,664 5,583,463
------------ ------------
PAPER AND FOREST PRODUCTS -- 0.2%
200,000 Riverwood International Corp.,
Sub. Deb. Cv.,
6.750%, 09/15/03 ........... 199,945 220,000
------------ ------------
PUBLISHING -- 0.1%
200,000 Times Mirror Co.,
Sub. Deb. Cv.,
Zero Coupon, 04/15/17 ...... 110,886 137,750
------------ ------------
RETAIL -- 0.0%
60,000 Costco Companies Inc.,
Sub. Deb. Cv.,
Zero Coupon, 08/19/17 ...... 44,423 41,850
10,000 School Specialty Inc.,
Sub. Deb. Cv.,
6.000%, 08/01/08 ........... 10,175 9,700
------------ ------------
54,598 51,550
------------ ------------
TELECOMMUNICATIONS -- 1.2%
80,000 Amnex Inc., Sub. Deb. Cv.,
8.500%, 09/25/49+ (b)(c) ... 71,773 0
Bell Atlantic Corp., Cv.,
90,000 4.250%, 09/15/05 ........... 94,821 94,331
600,000 4.250%, 09/15/05 (b) ....... 598,341 631,500
1,000,000 NTL Inc., Sub. Deb. Cv.,
5.750%, 12/15/09+ (c) ...... 429,921 175,000
500,000 Rogers Communications Inc.,
Sub. Deb. Cv.,
2.000%, 11/26/05 ........... 415,529 380,000
------------ ------------
1,610,385 1,280,831
------------ ------------
See accompanying notes to financial statements.
9
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2002
PRINCIPAL MARKET
AMOUNT COST VALUE
---------- -------- --------
CONVERTIBLE CORPORATE BONDS -- (CONTINUED)
WIRELESS COMMUNICATIONS -- 1.9%
Nextel Communications Inc., Cv.,
$ 100,000 6.000%, 06/01/11 (b) ....... $ 66,945 $ 86,250
450,000 6.000%, 06/01/11 ........... 343,025 388,125
1,500,000 5.250%, 01/15/10 ........... 994,034 1,083,750
100,000 4.750%, 07/01/07 ........... 70,050 83,875
1,100,000 United States Cellular Corp.,
Sub. Deb. Cv.,
Zero Coupon, 06/15/15 ...... 748,202 365,750
------------ ------------
2,222,256 2,007,750
------------ ------------
TOTAL CONVERTIBLE
CORPORATE BONDS ............. 42,863,954 37,242,660
------------ ------------
SHARES
------
CONVERTIBLE PREFERRED STOCKS -- 19.2%
AEROSPACE -- 1.0%
8,500 Northrop Grumman Corp.,
7.000% Cv. Pfd., Ser. B .... 990,420 1,048,560
------------ ------------
AUTOMOTIVE -- 0.7%
4,000 Ford Motor Co. Capital Trust II,
6.500% Cv. Pfd. ............ 192,705 163,400
General Motors Corp.,
14,000 5.250% Cv. Pfd., Ser. B .... 350,000 323,400
12,000 4.500% Cv. Pfd., Ser. A .... 300,000 293,160
------------ ------------
842,705 779,960
------------ ------------
AVIATION: PARTS AND SERVICES -- 3.5%
54,000 Coltec Capital Trust,
5.250% Cv. Pfd. ............ 2,282,375 1,597,720
30,000 Sequa Corp.,
$5.00 Cv. Pfd. ............. 2,297,667 2,220,000
------------ ------------
4,580,042 3,817,720
------------ ------------
BROADCASTING -- 0.9%
100 Gray Television Inc.,
8.000% Cv. Pfd.,
Ser. C (a) (b) ............. 1,000,000 1,020,000
------------ ------------
BUSINESS SERVICES -- 1.3%
14,000 Interep National Radio Sales Inc.,
4.000% Cv. Pfd.,
Ser. A+ (a) (b) ............ 1,400,000 1,428,000
20,000 Key3Media Group,
5.500% Cv. Pfd. (a) ........ 500,000 811
------------ ------------
1,900,000 1,428,811
------------ ------------
CABLE -- 1.0%
55,000 CVC Equity Securities Trust I,
6.500% Cv. Pfd. ............ 1,247,443 1,102,750
------------ ------------
DIVERSIFIED INDUSTRIAL -- 0.4%
2,400 GATX Corp.,
$2.50 Cv. Pfd. ............. 335,070 300,000
WHX Corp.,
28,000 6.500% Cv. Pfd., Ser. A+ ... 216,762 103,600
10,000 $3.75 Cv. Pfd., Ser. B+ .... 45,523 38,200
------------ ------------
597,355 441,800
------------ ------------
PRINCIPAL MARKET
AMOUNT COST VALUE
---------- -------- ---------
ENERGY AND UTILITIES -- 0.3%
3,000 AES Trust III,
6.750% Cv. Pfd. ............ $ 42,830 $ 45,600
500 Cinergy Corp.,
9.500% Cv. Pfd. ............ 25,025 27,700
2,500 FPL Group Inc.,
8.500% Cv. Pfd. ............ 125,000 138,400
22,000 Semco Capital Trust II,
11.000% Cv. Pfd. ........... 202,290 117,920
------------ ------------
395,145 329,620
------------ ------------
ENTERTAINMENT -- 1.5%
2,000 Metromedia International Group Inc.,
7.250% Cv. Pfd.+ (a) ....... 26,611 3,800
60,000 Rainbow Equity Securities Trust II,
6.250% Cv. Pfd. ............ 1,179,555 1,205,400
24,000 Six Flags Inc.,
7.250% Cv. Pfd. ............ 441,970 390,000
------------ ------------
1,648,136 1,599,200
------------ ------------
PAPER AND FOREST PRODUCTS -- 2.8%
70,000 Sealed Air Corp.,
$2.00 Cv. Pfd., Ser. A ..... 2,261,134 2,982,000
------------ ------------
REAL ESTATE -- 0.1%
5,000 Innkeepers USA Trust,
8.625% Cv. Pfd., Ser. A .... 123,288 121,000
------------ ------------
TELECOMMUNICATIONS -- 4.9%
1,500 ALLTEL Corp.,
7.750% Cv. Pfd. ............ 66,547 76,995
15,000 Broadwing Inc.,
6.750% Cv. Pfd., Ser. B .... 408,702 315,000
78,000 Citizens Communications Co.,
5.000% Cv. Pfd. ............ 3,855,676 3,705,000
1,000 Lucent Technologies
Capital Trust I,
7.750% Cv. Pfd. ............ 756,750 410,000
1,100 Lucent Technologies Inc.,
8.000% Cv. Pfd. ............ 961,000 541,750
12,000 Philippine Long Distance
Telephone Co.,
$3.50 Cv. Pfd., Ser. III ... 471,755 244,800
------------ ------------
6,520,430 5,293,545
------------ ------------
WIRELESS COMMUNICATIONS -- 0.8%
12,000 Allen Telecom Inc.,
7.750% Cv. Pfd., Ser. D .... 596,350 888,000
------------ ------------
TOTAL CONVERTIBLE
PREFERRED STOCKS ............ 22,702,448 20,852,966
------------ ------------
COMMON STOCKS -- 2.3%
AVIATION: PARTS AND SERVICES -- 0.1%
9,000 Kaman Corp., Cl. A ............ 106,563 99,000
------------ ------------
BROADCASTING -- 0.1%
35,000 Granite Broadcasting Corp.+ ... 37,187 71,750
------------ ------------
CABLE -- 0.0%
10,000 UnitedGlobalCom Inc., Cl. A+ .. 91,270 24,000
------------ ------------
See accompanying notes to financial statements.
10
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2002
MARKET
SHARES COST VALUE
---------- -------- ---------
COMMON STOCKS -- (CONTINUED)
ENERGY AND UTILITIES -- 1.1%
3,500 AGL Resources Inc. ............ $ 62,300 $ 85,050
10,000 BP plc, ADR ................... 384,270 406,500
3,000 CH Energy Group Inc. .......... 83,900 139,890
105 KCS Energy Inc.+ .............. 139 180
10,000 NiSource Inc.+ ................ 20,000 22,200
25,000 Northeast Utilities ........... 474,141 379,250
10,000 Progress Energy Inc., CVO+ .... 5,200 1,600
2,200 SJW Corp. ..................... 213,919 171,710
------------ ------------
1,243,869 1,206,380
------------ ------------
EQUIPMENT AND SUPPLIES -- 0.3%
100,000 Fedders Corp. ................. 444,766 283,000
------------ ------------
FINANCIAL SERVICES -- 0.3%
20,000 Argonaut Group Inc. ........... 435,711 295,000
------------ ------------
FOOD AND BEVERAGE -- 0.0%
3,609 Chiquita Brands
International Inc.+ ........ 99,993 47,855
------------ ------------
RETAIL -- 0.4%
5,000 Gucci Group NV, ADR ........... 455,270 458,000
------------ ------------
SATELLITE -- 0.0%
10,000 Loral Space &
Communications Ltd.+ ....... 24,969 4,300
------------ ------------
TELECOMMUNICATIONS -- 0.0%
2,000 AT&T Corp. .................... 40,934 52,220
------------ ------------
WIRELESS COMMUNICATIONS -- 0.0%
49 Winstar Communications Inc.+ .. 438 0
------------ ------------
TOTAL
COMMON STOCKS ............... 2,980,970 2,541,505
------------ ------------
PREFERRED STOCKS -- 1.3%
BROADCASTING -- 1.1%
2,127 Granite Broadcasting Corp.,
12.750% Pfd. ............... 879,780 1,169,850
------------ ------------
PUBLISHING -- 0.2%
9,777 News Corp. Ltd., Pfd., ADR .... 189,209 221,449
------------ ------------
TOTAL
PREFERRED STOCKS ............ 1,068,989 1,391,299
------------ ------------
PRINCIPAL
AMOUNT
--------
CORPORATE BONDS -- 0.4%
BROADCASTING -- 0.0%
$ 15,000 Granite Broadcasting Corp.,
Sub. Deb.,
8.875%, 05/15/08 ........... 7,961 12,375
------------ ------------
WIRELESS COMMUNICATIONS -- 0.4%
400,000 Nextel Communications Inc.,
9.500%, 02/01/11 ........... 281,520 362,000
------------ ------------
TOTAL
CORPORATE BONDS ............. 289,481 374,375
------------ ------------
MARKET
SHARES COST VALUE
---------- -------- ---------
WARRANTS -- 0.0%
BUSINESS SERVICES -- 0.0%
87,500 Interep National Radio
Sales Inc.,
expires 05/06/07+ (a) ...... $ 0 $ 0
CONSUMER PRODUCTS -- 0.0%
4,331 Pillowtex Corp.,
expires 11/24/09+ .......... 120,955 43
------------ ------------
TOTAL WARRANTS ............... 120,955 43
------------ ------------
PRINCIPAL
AMOUNT
--------
U.S. GOVERNMENT OBLIGATIONS -- 42.5%
$46,109,000 U.S. Treasury Bills,
1.087% to 1.659%++,
01/02/03 to 03/27/03 ....... 46,040,113 46,040,442
------------ ------------
TOTAL INVESTMENTS -- 100.00% .............. $116,066,910 $108,443,290
OTHER ASSETS IN EXCESS OF LIABILITIES ................... 330,950
PREFERRED STOCK
(600,000 preferred shares outstanding) ................ (15,000,000)
------------
NET ASSETS -- COMMON STOCK
(11,113,431 common shares outstanding) ................ $ 93,774,240
============
NET ASSET VALUE PER COMMON SHARE
($93,774,240 / 11,113,431 shares outstanding) ........ $8.44
=====
-------------
For Federal tax purposes:
Aggregate cost ............................. $117,414,901
============
Gross unrealized appreciation .............. $ 2,326,107
Gross unrealized depreciation .............. (11,297,718)
------------
Net unrealized depreciation ................ $ (8,971,611)
============
-------------
(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 December
31, 2002, the market value of Rule 144A securities amounted to $5,065,938
or 4.67% of total investments.
(c) Bond in default.
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
ADR - American Depository Receipt.
CVO - Contingent Value Obligation.
See accompanying notes to financial statements.
11
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2002
ASSETS:
Investments, at value (cost $116,066,910) .................... $108,443,290
Cash ......................................................... 3,278
Dividends and interest receivable ............................ 998,705
Receivable for investments sold .............................. 187,963
------------
TOTAL ASSETS ................................................. 109,633,236
------------
LIABILITIES:
Dividends payable ............................................ 20,000
Payable for investments purchased ............................ 164,010
Payable for investment advisory fees ......................... 62,646
Payable to custodian ......................................... 5,197
Payable for legal and audit .................................. 40,800
Payable for shareholder communications expense ............... 33,605
Payable for offering expenses ................................ 443,949
Payable for payroll expenses ................................. 60,146
Other accrued expenses and liabilities ....................... 28,643
------------
TOTAL LIABILITIES ............................................ 858,996
------------
PREFERRED STOCK:
Cumulative Preferred Stock (8.00%,
$25 liquidation value, $0.001 par value,
2,000,000 shares authorized with 600,000
shares issued and outstanding) ............................. 15,000,000
------------
NET ASSETS ATTRIBUTABLE TO
COMMON STOCK SHAREHOLDERS .................................. $ 93,774,240
============
NET ASSETS ATTRIBUTABLE TO COMMON STOCK
SHAREHOLDERS CONSIST OF:
Capital stock, at par value .................................. $ 11,113
Additional paid-in capital ................................... 104,240,469
Accumulated distributions in excess of net
investment income .......................................... (162,155)
Accumulated net realized loss on investments,
securities sold short and foreign
currency transactions ...................................... (2,691,567)
Net unrealized depreciation on investments ................... (7,623,620)
------------
TOTAL NET ASSETS ............................................. $ 93,774,240
============
NET ASSET VALUE PER COMMON SHARE
($93,774,240 / 11,113,431 shares outstanding;
100,000,000 shares authorized of
$0.001 par value) .......................................... $8.44
=====
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
INVESTMENT INCOME:
Dividends (net of foreign taxes of $9,308) ................... $ 1,416,544
Interest ..................................................... 3,800,428
-----------
TOTAL INVESTMENT INCOME ...................................... 5,216,972
-----------
EXPENSES:
Investment advisory fees ..................................... 687,016
Payroll ...................................................... 108,134
Shareholder services fees .................................... 82,262
Shareholder communications expenses .......................... 71,721
Directors' fees .............................................. 67,452
Legal and audit fees ......................................... 62,201
Accounting fees .............................................. 34,800
Custodian fees ............................................... 33,792
Miscellaneous expenses ....................................... 44,566
-----------
TOTAL EXPENSES ............................................... 1,191,944
-----------
NET INVESTMENT INCOME ........................................ 4,025,028
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS,
SECURITIES SOLD SHORT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized loss on investments, securities sold
short and foreign currency transactions .................... (485,993)
Net change in unrealized depreciation on
investments ................................................ (5,783,094)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS,
SECURITIES SOLD SHORT AND FOREIGN
CURRENCY TRANSACTIONS ...................................... (6,269,087)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................................ (2,244,059)
-----------
Total Distributions to Preferred
Stock Shareholders ......................................... (2,253,300)
-----------
NET DECREASE IN NET ASSETS ATTRIBUTABLE TO
COMMON STOCK SHAREHOLDERS
RESULTING FROM OPERATIONS .................................. $(4,497,359)
===========
STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO COMMON SHAREHOLDERS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
----------- -----------
OPERATIONS:
Net investment income ............................................................... $ 4,025,028 $ 5,317,865
Net realized gain (loss) on investments, securities sold short and
foreign currency transactions ..................................................... (485,993) 1,598,603
Net change in unrealized appreciation/depreciation on investments,
securities sold short and foreign currency transactions ........................... (5,783,094) 932,372
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..................... (2,244,059) 7,848,840
----------- -----------
DISTRIBUTIONS TO PREFERRED STOCK SHAREHOLDERS:
Net investment income ............................................................... (2,253,300) (1,417,106)
Net realized short-term gain on investments and foreign currency transactions ....... -- (176,060)
Net realized long-term gain on investments and foreign currency transactions ........ -- (806,834)
----------- -----------
TOTAL DISTRIBUTIONS TO PREFERRED STOCK SHAREHOLDERS ................................. (2,253,300) (2,400,000)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO
COMMON STOCK SHAREHOLDERS RESULTING FROM OPERATIONS ............................... (4,497,359) 5,448,840
----------- -----------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
Net investment income ............................................................... (2,225,314) (3,753,230)
Net realized short-term gain on investments and foreign currency transactions ....... -- (546,918)
Net realized long-term gain on investments and foreign currency transactions ........ -- (2,093,023)
Return of capital ................................................................... (3,885,345) --
----------- -----------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .................................... (6,110,659) (6,393,171)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from common shares issued upon reinvestment
of dividends and distributions and rights offering in 2002 ........................ 24,307,879 2,952,833
----------- -----------
NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS ............................. 24,307,879 2,952,833
----------- -----------
NET INCREASE IN NET ASSETS ATTRIBUTABLE TO
COMMON STOCK SHAREHOLDERS ......................................................... 13,699,861 2,008,502
NET ASSETS ATTRIBUTABLE TO COMMON STOCK SHAREHOLDERS:
Beginning of period ................................................................. 80,074,379 78,065,877
----------- -----------
End of period (including undistributed net investment income of
$0 and $314,002, respectively) .................................................... $93,774,240 $80,074,379
=========== ===========
See accompanying notes to financial statements.
12
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION. The Gabelli Convertible and Income Securities Fund Inc. (the
"Fund") is a closed-end diversified management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), 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 Fund was incorporated in Maryland on December 19,
1988 as an open-end diversified management investment company and commenced
investment operations on July 3, 1989 as The Gabelli Convertible Securities
Fund, Inc. 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.
Effective August 1, 2002, the Fund changed its name to The Gabelli
Convertible and Income Securities Fund Inc. The Fund continues to maintain its
investment objective of seeking a high level of total return through a
combination of current income and capital appreciation. Consistent with its new
name, under normal market conditions, the Fund will invest at least 80% of its
net assets in a combination of convertible securities and income producing
securities (the "80% Policy"). The Fund expects to continue its practice of
focusing on convertible securities to the extent attractive opportunities are
available.
The 80% Policy may be changed without shareholder approval. However, the
Fund has adopted a policy to provide shareholders with at least 60 days' prior
notice of the implementation of any change in the 80% Policy.
2. SIGNIFICANT ACCOUNTING POLICIES. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITY VALUATION. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are
valued at the last sale price on that exchange as of the close of business on
the day the securities are being valued (if there were no sales that day, the
security is valued at the average of the closing bid and asked prices or, if
there were no asked prices quoted on that day, then the security is valued at
the closing bid price on that day except for open short positions, which are
valued at the last asked price). 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. If there were no asked prices quoted
on that day, then the security is valued at the closing bid price. Portfolio
securities traded on more than one national securities exchange or market are
valued according to the broadest and most representative market, as determined
by Gabelli Funds, LLC (the "Adviser"). Portfolio securities primarily traded on
foreign markets are generally valued at the preceding closing values of such
securities on their respective exchanges. Securities and assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Board of Directors. Short term debt securities with remaining
maturities of 60 days or less are valued at amortized cost, unless the Board of
Directors determines such does not reflect the securities' fair value, in which
case these securities will be valued at their fair value as determined by the
Board of Directors. Debt instruments having a maturity greater than 60 days are
valued at the highest bid price obtained from a dealer maintaining an active
market in those securities. Options are valued at the last sale price on the
exchange on which they are listed. If no sales of such options have taken place
that day, they will be valued at the mean between their closing bid and asked
prices.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
primary government securities dealers recognized by the Federal Reserve Bank of
New York, with member banks of the Federal Reserve System or with other brokers
or dealers that meet credit guidelines established by the Adviser and reviewed
by the Board of 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 102% 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.
13
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. Such investments will only be
made if they are economically appropriate to the reduction of risks involved in
the management of the Fund's investments. Upon entering into a futures contract,
the Fund is required to deposit with the broker an amount of cash or cash
equivalents equal to a certain percentage of the contract amount. This is known
as the "initial margin." Subsequent payments ("variation margin") are made or
received by the Fund each day, depending on the daily fluctuation of the value
of the contract. The daily changes in the contract are included in unrealized
appreciation/depreciation on investments and futures contracts. The Fund
recognizes a realized gain or loss when the contract is closed. At December 31,
2002, 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.
FORWARD FOREIGN EXCHANGE 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 exchange contracts are valued at the
forward rate and are marked-to-market daily. The change in market value is
included in unrealized appreciation/depreciation on investments and foreign
currency transactions. 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 exchange 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 exchange contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain/(loss) that
might 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 December 31, 2002, the Fund held no
forward foreign exchange contracts.
SECURITIES SOLD SHORT. A short sale involves selling a security which the
Fund does not own. The proceeds received for short sales are recorded as
liabilities and the Fund records an unrealized gain or loss to the extent of the
difference between the proceeds received and the value of the open short
position on the day of determination. The Fund records a realized gain or loss
when the short position is closed out. By entering into a short sale, the Fund
bears the market risk of an unfavorable change in the price of the security sold
short. Dividends on short sales are recorded as an expense by the Fund on the
ex-dividend date and interest expense is recorded on the accrual basis.
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 and foreign currency transactions. 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 as of 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. Distributions to shareholders
are recorded on the ex-dividend date. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments of income and gains on various investment
securities held by the Fund, timing differences and differing characterization
of distributions made by the Fund. Distributions to shareholders of the Fund's
8.00% Cumulative Preferred Stock ("Cumulative Preferred Stock") are accrued on a
daily basis and are determined as described in Note 5.
14
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended December 31, 2002, reclassifications were made to
decrease accumulated undistributed net investment loss for $3,862,774 and to
increase accumulated net realized loss on investments, securities sold short and
foreign currency transactions for $17,429 with an offsetting adjustment to
additional paid-in capital.
The tax character of distributions paid during the fiscal year ended
December 31, 2002 and December 31, 2001 were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------- ------------------------------
COMMON PREFERRED COMMON PREFERRED
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID FROM:
Ordinary income
(inclusive of short term capital gains) .. $2,225,314 $2,253,300 $4,295,980 $1,593,166
Net long term capital gains ................ -- -- 2,097,191 806,834
Non-taxable return of capital .............. 3,885,345 -- -- --
---------- ---------- ---------- ----------
Total distributions paid ................... $6,110,659 $2,253,300 $6,393,171 $2,400,000
========== ========== ========== ==========
PROVISION FOR INCOME TAXES. The Fund 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.
As of December 31, 2002, the components of accumulated earnings/(losses)
on a tax basis were as follows:
Accumulated capital loss carryforward ...... $ (1,343,575)
Net unrealized depreciation ................ (8,971,611)
Other ...................................... (162,156)
------------
Total accumulated loss ..................... $(10,477,342)
============
Other is primarily due to dividends payable and defaulted interest.
The Fund has a net capital loss carryforward for Federal income tax
purposes at December 31, 2002 of $1,343,575. The capital loss carryforward is
available to reduce future distributions of net capital gains to shareholders
through 2010.
Differences between amounts reported on a tax basis and those reported on
a GAAP basis are primarily due to timing of recognition of capital gains on
investments held by the Fund.
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES. 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, equal on an annual basis to 1.00% of the value of the Fund's average
daily net assets plus liquidation value of preferred stock. In accordance with
the Advisory Agreement, the Adviser provides a continuous investment program for
the Fund's portfolio and oversees the administration of all aspects of the
Fund's business and affairs. The Adviser has agreed to reduce the management fee
on the incremental assets attributable to the Cumulative Preferred Stock if the
total return of the net asset value of the common shares of the Fund, including
distributions and advisory fee subject to reduction, does not exceed the stated
dividend rate of the Cumulative Preferred Stock. For the year ended December 31,
2002, the Fund's total return on the net asset value of the common shares did
not exceed the stated dividend rate of the Cumulative Preferred Stock. Thus,
such management fees were not earned on the incremental assets.
During the year ended December 31, 2002, Gabelli & Company, Inc. and its
affiliates received $16,332 in brokerage commissions as a result of executing
agency transactions in portfolio securities on behalf of the Fund.
The cost of calculating the Fund's net asset value per share is a Fund
expense pursuant to the Investment Advisory Agreement between the Fund and the
Adviser. During fiscal 2002, the Fund reimbursed the Adviser $34,800 in
connection with the cost of computing the Fund's net asset value.
4. PORTFOLIO SECURITIES. Costs of purchases and proceeds from sales of
securities, other than short-term securities, for the year ended December 31,
2002 aggregated $36,501,654 and $38,459,377, respectively.
5. CAPITAL. The Articles of Incorporation, dated December 19, 1988, permit the
Fund to issue 100,000,000 shares of common stock (par value $0.001).
On November 14, 2002, the Fund distributed one transferable right for each
of the 8,291,884 common shares outstanding to shareholders of record on that
date. Three rights were required to purchase one additional common share at the
subscription price of $8.00 per share. The subscription period expired on
December 16, 2002. The rights offering was fully subscribed resulting in the
issuance of 2,763,961 common shares and proceeds of $22,111,688 to the Fund,
prior to the deduction of estimated expenses of $450,000. The net asset value
per share of the Fund's common shareholders was reduced by approximately $0.20
per share as a result of the issuance.
15
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Transactions in common stock were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------- --------------------
Shares Amount Shares Amount
--------- ----------- ------- ----------
Shares issued in rights offering ....... 2,763,961 $21,661,688 -- --
Shares issued upon reinvestment
of dividends and distributions ....... 274,753 2,646,191 286,972 $2,952,833
--------- ----------- ------- ----------
Net increase ........................... 3,038,714 $24,307,879 286,972 $2,952,833
========= =========== ======= ==========
The Adviser has been authorized to repurchase on behalf of the Fund up to
500,000 shares of Common Stock of the Fund in the open market, whenever the
shares are trading at a discount of 10% or more from the net asset value of the
shares. For the year ended December 31, 2002, the Fund did not repurchase any
shares of Common Stock. All shares of Common Stock repurchased have been
retired.
In addition, the Fund has been authorized to issue up to 2,000,000 shares
of Preferred Stock of which 1,200,000 shares have been designated as $0.001 par
value 8% 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 as required by the
1940 Act and by the Shares' Articles Supplementary. 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. On November 12, 2002, theFund redeemed 50%
(600,000 shares) of its outstanding 8% Cumulative PreferredStock at the
redemption price of $25.00 per Preferred Share plus accumulated and unpaid
dividends through the redemption date of $0.2555 per Preferred Share. At
December 31, 2002, the 600,000 shares of 8% Cumulative Preferred Stock
outstanding accrued dividends in the amount of $20,000. 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
600,000 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 Cumulative 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 1940
Act requires that along with approval of a majority of the holders of Common
Stock, approval of a majority of the holders of any outstanding shares of
Cumulative Preferred Stock, voting separately as a class, would be required to
(a) adopt any plan of reorganization that would adversely affect the Cumulative
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.
Under Emerging Issues Task Force (EITF) promulgating Topic D-98,
Classification and Measurement of Redeemable Securities, which was issued on
July 19, 2001, preferred securities that are redeemable for cash or other assets
are to be classified outside of permanent equity to the extent that the
redemption is at a fixed or determinable price and at the option of the holder
or upon the occurrence of an event that is not solely within the control of the
issuer. Subject to the guidance of the EITF, the Fund's Cumulative Preferred
Stock, which was previously classified as a component of net assets, has been
reclassified outside of permanent equity (net assets attributable to common
stock shareholders) in the accompanying financial statements. Prior year amounts
have also been reclassified to conform with this presentation. The impact of
this reclassification creates no change to the net assets available to common
shareholders.
6. SUBSEQUENT EVENT. The Fund, as authorized by the Board of Directors, redeemed
the remaining 50% (600,000 Shares) of its outstanding 8.00% Cumulative Preferred
Stock. The redemption date was February 11, 2003 and the redemption price was
$25.25 per Preferred Share, which consisted of $25.00 per Preferred Share plus
accumulated and unpaid dividends through the redemption date of $0.25 per
Preferred Share.
16
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A FUND COMMON SHARE YEAR ENDED DECEMBER 31,
OUTSTANDING THROUGHOUT EACH PERIOD: ----------------------------------------------------
OPERATING PERFORMANCE: 2002 2001 2000 1999 1998
Net asset value, beginning of period ....................... $ 9.92 $ 10.02 $ 11.40 $ 11.45 $ 11.48
-------- -------- -------- -------- --------
Net investment income ...................................... 0.49 0.68 0.72 0.51 0.53
Net realized and unrealized gain (loss) on investments ..... (0.76) 0.32 (0.52) 0.77 0.65
-------- -------- -------- -------- --------
Total from investment operations ........................... (0.27) 1.00 0.20 1.28 1.18
-------- -------- -------- -------- --------
DISTRIBUTIONS TO PREFERRED STOCK SHAREHOLDERS:
Net investment income ...................................... (0.28) (0.18) (0.13) (0.11) (0.13)
Net realized gain on investments ........................... -- (0.12) (0.17) (0.19) (0.17)
-------- -------- -------- -------- --------
Total distributions to preferred stock shareholders ........ (0.28) (0.30) (0.30) (0.30) (0.30)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO
COMMON STOCK SHAREHOLDERS RESULTING
FROM OPERATIONS .......................................... (0.55) 0.70 (0.10) 0.98 0.88
-------- -------- -------- -------- --------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
Net investment income ...................................... (0.27) (0.48) (0.57) (0.39) (0.39)
Net realized gain on investments ........................... -- (0.33) (0.73) (0.64) (0.53)
Paid-in capital ............................................ (0.48) -- -- -- --
-------- -------- -------- -------- --------
Total distributions to common stock shareholders ........... (0.75) (0.81) (1.30) (1.03) (0.92)
-------- -------- -------- -------- --------
CAPITAL SHARE TRANSACTIONS:
Increase in net asset value from
common stock share transactions .......................... 0.02 0.01 0.02 -- 0.01
Decrease in net asset value from
shares issued in rights offering ......................... (0.20) -- -- -- --
-------- -------- -------- -------- --------
NET ASSET VALUE ATTRIBUTABLE TO COMMON STOCK
SHAREHOLDERS, END OF PERIOD .............................. $ 8.44 $ 9.92 $ 10.02 $ 11.40 $ 11.45
======== ======== ======== ======== ========
Net asset value total return + ............................. (7.0)% 7.0% 0.0% 9.4% 8.3%
======== ======== ======== ======== ========
Market value, end of period ................................ $ 8.55 $ 10.90 $ 9.13 $ 10.56 $ 11.25
======== ======== ======== ======== ========
Total investment return ++ ................................. (14.2)% 29.1% (1.7)% 3.2% 18.4%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets plus liquidation value of preferred shares,
end of period (in 000's) ................................. $108,774 $110,074 $108,066 $120,179 $120,726
Net assets attributable to common shares,
end of period (in 000's) ................................. $ 93,774 $ 80,074 $ 78,066 $ 90,179 $ 90,726
Ratio of net investment income to average
net assets attributable to common stock .................. 5.32% 6.58% 6.49% 4.35% 4.54%
Ratio of operating expenses to average
net assets attributable to common stock .................. 1.58% 1.46% 1.48% 1.80% 1.83%
Ratio of operating expenses to average total net assets
including liquidation value of preferred shares .......... 1.15% 1.07% 1.10% 1.36% 1.38%
Portfolio turnover rate .................................... 56% 59% 169% 175% 149%
PREFERRED STOCK:
Liquidation value, end of period (in 000's) ................ $ 15,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Total shares outstanding (in 000's) ........................ 600 1,200 1,200 1,200 1,200
Asset coverage ............................................. 725% 367% 360% 401% 402%
Asset coverage per share ................................... $ 181.29 $ 91.72 $ 90.05 $ 100.15 $ 100.60
Liquidation preference per share ........................... $ 25.00 $ 25.00 $ 25.00 $ 25.00 $ 25.00
Average market value (a) ................................... $ 25.83 $ 25.80 $ 24.31 $ 25.36 $ 26.84
----------------------------
+ Based on net asset value per share, adjusted for reinvestment of
distributions, including the effect of shares issued pursuant to rights
offering, assuming full subscription by shareholders.
++ Based on market value per share, adjusted for reinvestment of distributions,
including the effect of shares issued pursuant to rights offering, assuming
full subscription by shareholders.
(a) Based on weekly prices.
See accompanying notes to financial statements.
17
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Gabelli Convertible and Income Securities Fund Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Gabelli Convertible and Income
Securities Fund Inc. (formerly The Gabelli Convertible Securities Fund, Inc.)
(the "Fund") at December 31, 2002, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2002 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
/S/PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York, NY 10036
February 13, 2003
18
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
ADDITIONAL FUND INFORMATION (UNAUDITED)
The business and affairs of the Fund are managed under the direction of
the Fund's Board of Directors. Information pertaining to the Directors and
officers of the Fund is set forth below. The Fund's Statement of Additional
Information includes additional information about The Gabelli Convertible and
Income Securities Fund Inc. Directors and is available, without charge, upon
request, by calling 800-GABELLI (800-422-3554) or by writing to The Gabelli
Convertible and Income Securities Fund Inc. at One Corporate Center, Rye, NY
10580-1422.
TERM OF NUMBER OF
OFFICE AND FUNDS IN FUND
NAME, POSITION(S) LENGTH OF COMPLEX
ADDRESS 1 TIME OVERSEEN BY PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
AND AGE SERVED 2 DIRECTOR DURING PAST FIVE YEARS HELD BY DIRECTOR
---------------- ---------- ------------- ----------------------- -------------------
INTERESTED DIRECTORS 3:
----------------------
MARIO J. GABELLI Since 1989** 22 Chairman of the Board and Chief Executive Director of Morgan Group
Director, President and Officer of Gabelli Asset Management Inc. and Holdings, Inc. (holding
Chief Investment Officer Chief Investment Officer of Gabelli Funds, company); Vice Chairman
Age: 60 LLC and GAMCO Investors, Inc.; of Lynch Corporation
Chairman and Chief Executive Officer of (diversified manufacturing)
Lynch Interactive Corporation (multimedia
and services)
KARL OTTO POHL Since 1992** 31 Member of the Shareholder Committee of Director of Gabelli Asset
Director Sal Oppenheim Jr. & Cie (private invest- Management Inc. (investment
Age: 73 ment bank); Former President of the management); Chairman,
Deutsche Bundesbank and Chairman of its Incentive Capital and
Central Bank Council (1980-1991) Incentive Asset Management
(Zurich); Director at Sal
Oppenheim, Jr. & Cie,
Zurich
NON-INTERESTED DIRECTORS:
------------------------
E. VAL CERUTTI Since 1989* 7 Chief Executive Officer of Cerutti Director of Lynch
Director Consultants, Inc.; Adviser, Iona College Corporation
Age: 63 School of Business
ANTHONY J. COLAVITA 4 Since 1989*** 33 President and Attorney at Law in the law --
Director firm of Anthony J. Colavita, P.C.
Age: 67
DUGALD A. FLETCHER Since 1989* 2 President, Fletcher & Company, Inc.; Director of Harris and
Director Former Director and Chairman and Harris Group, Inc. (venture
Age: 73 Chief Executive Officer of Binnings capital)
Building Products, Inc. (1997)
ANTHONY R. PUSTORINO Since 1989* 17 Certified Public Accountant; Professor --
Director Emeritus, Pace University
Age: 77
WERNER J. ROEDER, MD 4 Since 2001** 26 Medical Director of Lawrence Hospital --
Director and practicing private physician
Age: 62
ANTHONIE C. VAN EKRIS Since 1992*** 18 Managing Director of BALMAC --
Director International, Inc.
Age: 68
SALVATORE J. ZIZZA Since 1991*** 9 Chairman, Hallmark Electrical Supplies Director of Hollis Eden
Director Corp.; Former Executive Vice President of Pharmaceuticals
Age: 57 FMG Group (OTC), a healthcare provider;
Former President and Chief Executive Officer
of the Lehigh Group Inc., (electrical supply
wholesaler); an interior construction company,
through 1997
19
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
ADDITIONAL FUND INFORMATION (UNAUDITED) (CONTINUED)
TERM OF NUMBER OF
OFFICE AND FUNDS IN FUND
NAME, POSITION(S) LENGTH OF COMPLEX
ADDRESS 1 TIME OVERSEEN BY PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
AND AGE SERVED 2 DIRECTOR DURING PAST FIVE YEARS HELD BY DIRECTOR
---------------- ---------- ------------- ----------------------- -------------------
OFFICERS:
---------
BRUCE N. ALPERT Since 1989 -- Executive Vice President and Chief Operating --
Vice President and Officer of Gabelli Funds, LLC since 1988 and
Treasurer an officer of all mutual funds advised by
Age: 51 Gabelli Funds, LLC and its affiliates
Director and President of the Gabelli Advisors,
Inc.
PETER W. LATARTARA Since 1998 -- Vice President of the Fund since 1998. Vice --
Vice President President of Gabelli & Company, Inc.
Age: 35 from 1996.
JAMES E. MCKEE Since 1995 -- Vice President, General Counsel and Secretary --
Secretary of Gabelli Asset Management Inc. since 1999
Age: 39 and GAMCO Investors, Inc. since 1993; Secretary
of all mutual funds advised by Gabelli Advisers,
Inc. and Gabelli Funds, LLC.
--------------------------
1 Address:One Corporate Center, Rye, NY 10580-1422, unless otherwise noted.
2 The Fund's Board of Directors is divided into three classes, each class having
a term of three years. Each year the term of office of one class expires and
the successor or successors elected to such class serve for a three year term.
The three year term for each class expires as follows:
* - Term expires at the Fund's 2003 Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
** - Term expires at the Fund's 2004 Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
*** - Term expires at the Fund's 2005 Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
3 "Interested person" of the Fund as defined in the Investment Company Act of
1940. Messrs. Gabelli and Pohl are each considered an "interested person"
because of their affiliation with Gabelli Funds, LLC which acts as the Fund's
investment adviser.
4 Represents holders of the Fund's 8.00% Cumulative Preferred Stock.
20
--------------------------------------------------------------------------------
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
AND YOUR PERSONAL PRIVACY
WHO ARE WE?
The Gabelli Convertible and Income Securities Fund Inc. (the "Fund") is a
closed-end investment company registered with the Securities and Exchange
Commission under the Investment Company Act of 1940. We are managed by
Gabelli Funds, LLC, which is affiliated with Gabelli Asset Management Inc.
Gabelli Asset Management is a publicly-held company that has subsidiaries
that provide investment advisory or brokerage services for a variety of
clients.
WHAT KIND OF NON-PUBLIC INFORMATION DO WE COLLECT ABOUT YOU IF YOU BECOME A
GABELLI CUSTOMER?
When you purchase shares of the Fund on the New York Stock Exchange, you
have the option of registering directly with our transfer agent in order,
for example, to participate in our dividend reinvestment plan.
o INFORMATION YOU GIVE US ON YOUR APPLICATION FORM. This could include your
name, address, telephone number, social security number, bank account
number, and other information.
o INFORMATION ABOUT YOUR TRANSACTIONS WITH US. This would include
information about the shares that you buy or sell, it may also include
information about whether you sell or exercise rights that we have issued
from time to time. If we hire someone else to provide services--like a
transfer agent--we will also have information about the transactions that
you conduct through them.
WHAT INFORMATION DO WE DISCLOSE AND TO WHOM DO WE DISCLOSE IT?
We do not disclose any non-public personal information about our customers
or former customers to anyone, other than our affiliates, our service
providers who need to know such information and as otherwise permitted by
law. If you want to find out what the law permits, you can read the privacy
rules adopted by the Securities and Exchange Commission. They are in volume
17 of the Code of Federal Regulations, Part 248. The Commission often posts
information about its regulations on its web site, WWW.SEC.GOV.
WHAT DO WE DO TO PROTECT YOUR PERSONAL INFORMATION?
We restrict access to non-public personal information about you to the
people who need to know that information in order to provide services to
you or the Fund and to ensure that we are complying with the laws governing
the securities business. We maintain physical, electronic, and procedural
safeguards to keep your personal information confidential.
--------------------------------------------------------------------------------
21
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
INCOME TAX INFORMATION (UNAUDITED)
DECEMBER 31, 2002
CASH DIVIDENDS AND DISTRIBUTIONS
TOTAL AMOUNT ORDINARY DIVIDEND
PAYABLE RECORD PAID INVESTMENT RETURN OF REINVESTMENT
DATE DATE PER SHARE INCOME CAPITAL (B) PRICE
-------- -------- ------------ ---------- ----------- ------------
COMMON SHARES
03/25/02 03/15/02 $0.2000 $0.0759 $0.1241 $10.3170
06/24/02 06/14/02 0.2000 0.0712 0.1288 9.9465
09/24/02 09/16/02 0.2000 0.0712 0.1288 9.4145
12/24/02 12/12/02 0.1500 0.0534 0.0966 8.7000
------- ------- -------
Total Common Stock $0.7500 $0.2717 $0.4783
PREFERRED SHARES
03/26/02 03/19/02 $0.5000 $0.5000
06/26/02 06/19/02 0.5000 0.5000
09/26/02 09/19/02 0.5000 0.5000
12/26/02 12/18/02 0.5000 0.5000
------- -------
Total Preferred Stock $2.0000 $2.0000
A Form 1099-DIV has been mailed to all shareholders of record for the
distributions mentioned above, setting forth specific amounts to be included in
your 2002 tax returns. Ordinary income distributions include net investment
income and realized net short-term capital gains.
RETURN OF CAPITAL
The amount received as a non-taxable (return of capital) distribution should
be applied to reduce the tax cost of shares. There was a $0.4783 per share
return of capital in 2002 on common shares.
CORPORATE DIVIDENDS RECEIVED DEDUCTION AND U.S. TREASURY SECURITIES INCOME
The Fund paid to common and preferred shareholders ordinary income
dividends of $0.4014 and $2.00 per share, respectively, in 2002. For 2002,
31.40% of the ordinary income dividend qualifies for the dividend received
deduction available to corporations. The percentage of ordinary income
dividends paid by the Fund during 2002 derived from U.S. Treasury
Securities was 11.43%. However, it should be noted that the Convertible and
Income Securities Fund did not hold more than 50% of its assets in U.S.
Treasury Securities at the end of each calendar quarter during 2002.
HISTORICAL DISTRIBUTION SUMMARY -- COMMON STOCK
SHORT-TERM LONG-TERM ADJUSTMENT
INVESTMENT CAPITAL CAPITAL RETURN OF TOTAL TO
INCOME (A) GAINS (A) GAINS CAPITAL (B) DISTRIBUTIONS COST BASIS (C)
---------- --------- --------- ----------- ------------- --------------
2002 ............... $0.2717 -- -- $0.4783 $0.7500 $0.4783
2001 ............... 0.4755 $0.0695 $0.2650 -- 0.8100 --
2000 ............... 0.5661 0.3267 0.4072 -- 1.3000 --
1999 ............... 0.3899 0.4459 0.1942 -- 1.0300 --
1998 ............... 0.3866 0.2413 0.2921 -- 0.9200 --
1997 ............... 0.3969 0.2285 0.3346 -- 0.9600 --
1996 ............... 0.4900 0.1416 0.1034 -- 0.7350 --
1995 ............... 0.5574 0.2041 0.3595 0.0290 1.1500 0.0290
1994 ............... 0.5730 0.1150 0.2120 -- 0.9000 --
1993 ............... 0.5610 0.2000 0.6640 -- 1.4250 --
1992 ............... 0.6540 0.0900 0.1320 -- 0.8760 --
1991 ............... 0.7060 0.1120 0.0470 -- 0.8650 --
1990 ............... 0.6900 -- -- -- 0.6900 --
1989 ............... 0.1150 -- -- -- 0.1150 --
HISTORICAL DISTRIBUTION SUMMARY -- PREFERRED STOCK
2002 ............... $2.0000 -- -- -- $2.0000 --
2001 ............... 1.1808 $0.1468 $0.6724 -- 2.0000 --
2000 ............... 0.8685 0.5041 0.6274 -- 2.0000 --
1999 ............... 0.7571 0.8657 0.3772 -- 2.0000 --
1998 ............... 0.8405 0.5246 0.6349 -- 2.0000 --
1997 ............... 0.5082 0.2926 0.4270 -- 1.2278 --
--------------------------
(a) Taxable as ordinary income for Federal tax purposes.
(b) Non-taxable.
(c) Decrease in cost basis.
(d) On November 14, 2002, the Company distributed Rights equivalent to $0.10
per share based upon full subscription of all issued shares.
22
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 or requesting a copy of the terms of the
Plan may contact EquiServe at (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.
23
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 State
Street on at least 90 days' written notice to participants in the Plan.
VOLUNTARY CASH PURCHASE PLAN
The Voluntary Cash Purchase Plan is yet another vehicle for our shareholders
to increase their investment in the Convertible 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 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.
--------------------------------------------------------------------------------
The Annual Meeting of The Gabelli Convertible and Income Securities Fund
Inc.'s stockholders will be held at 8:30 A.M. on Monday, May 12, 2003, at The
Bruce Museum, One Museum Drive, in Greenwich, Connecticut.
--------------------------------------------------------------------------------
24
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 ADVISOR
Gabelli Funds, LLC
One Corporate Center
Rye, New York 10580-1422
CUSTODIAN, TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company
COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
STOCK EXCHANGE LISTING
Common 8.00% Preferred
________ _______________
NYSE-Symbol: GCV GCV Pr
Shares Outstanding: 11,113,431 600,000
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.
--------------------------------------------------------------------------------
For general information about the Gabelli Funds,
call 800-GABELLI (800-422-3554), fax us at
914-921-5118, visit Gabelli Funds' Internet
homepage at: WWW.GABELLI.COM,
or e-mail us at: closedend@gabelli.com
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that The Gabelli Convertible and Income
Securities Fund Inc. may from time to time purchase shares of its common stock
in the open market when The Gabelli Convertible and Income Securities Fund
Inc. shares are trading at a discount of 10% or more from the net asset value
of the shares. The Gabelli Convertible and Income Securities Fund Inc. 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.
--------------------------------------------------------------------------------
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
ONE CORPORATE CENTER, RYE, NY 10580-1422
PHONE: 800-GABELLI (800-422-3554)
FAX: 914-921-5118 INTERNET: WWW.GABELLI.COM
E-MAIL: CLOSEDEND@GABELLI.COM
GBFCS-AR-12/02