Form N-CSR
Pursuant to Rule 30b2-1 {17 CFR 270.30b2-1}
1. Investment Company Act File Number: 811-09189
2. Exact name of investment company as specified in
registration statement: Zazove Convertible Securities Fund, Inc.
3. Address of principal executive office:
1001 Tahoe Blvd.
Incline Village, NV 89451
4. Name and Address of Agent for Service:
Mark R. Ludviksen
1001 Tahoe Blvd.
Incline Village, NV 89451
5. Registrant's telephone number: 775.298-7500
6. Date of fiscal year end: December 31
7. Date of reporting period: January 1, 2017 through
June 30, 2017
Item 1. Report to Stockholders
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2017 (UNAUDITED)
ASSETS
Investments, at fair value (cost $60,473,531) $56,388,517
Cash and cash equivalents, at fair value
(cost $2,031,118) 2,031,118
Receivables:
Interest 194,798
Dividends 16,045
Securities sold 832,673
Other assets 4,777
Total assets 59,467,928
LIABILITIES
Payables:
Capital shares redeemed $1,564,960
Securities sold short, at fair value
(proceeds $2,197,455) 2,403,577
Subscriptions received in advance 47,720
Transfer agency fees 7,125
Custody fees 650
Professional fees 28,326
Securities purchased 533,228
Total liabilities 4,585,586
NET ASSETS $54,882,342
ANALYSIS OF NET ASSETS:
Common stock
($.01 par value; 25,000,000 shares authorized;
3,096,781 shares issued and outstanding) $30,968
Paid-in surplus 61,074,459
Accumulated net realized loss on
investments and securities sold short (921,818)
Accumulated net investment loss (1,010,131)
Net unrealized depreciation on investments
and securities sold short (4,291,136)
NET ASSETS $54,882,342
NET ASSET VALUE PER SHARE
(based on 3,096,781 shares outstanding) $17.72
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
SCHEDULE OF INVESTMENTS
June 30, 2017 (UNAUDITED)
Principal/ Fair
Shares/ Value
Contracts
INVESTMENTS - 103%
Convertible Preferred Stock - 13%
United States - 13%
Affiliated Managers Group,Inc. 5.150% 24,062 $1,435,900
Due 10-15-37
Bunge Limited 4.875% 18,800 1,988,100
Chesapeake Energy 5.750% (144A) (b) 250 156,210
Chesapeake Energy 5.750% 1,000 624,841
Cowen Group, Inc. 5.625% 1,020 888,675
Iridium Communications 6.750% 1,925 738,959
Iridium Communications 7.000% 3,800 462,650
Schulman (A.) Inc. 6.000% 1,000 882,500
Total Convertible Preferred Stock
(cost $6,570,514) 7,177,835
Convertible Bonds - 78%
Ghana-0%
Tullow Oil (Reg S) 6.625%
Due 07-12-21 (e) 200,000 209,500
Germany-4%
Siemens AG (Reg S) 2,000,000 2,436,000
1.650% Due 08-16-19 (e)
Israel-4%
Teva Pharm (Series C) 0.250% 1,820,000 1,961,050
Due 02-01-26 (d)
Mexico- 0%
Cemex S.A. 3.750% Due 03-15-18 100,000 119,562
Cemex S.A. 3.720% Due 03-15-20 210,000 242,813
Total Mexico 362,375
Norway-1%
Golden Ocean Group Limited (Reg S) 800,000 720,000
3.070% Due 01-30-19 (e)
United Kingdom- 2%
Janus Capital Group, Inc. 0.750% 800,000 1,178,000
Due 07-15-18 (d)
United States - 66%
Air Lease Corporation 3.875% 400,000 553,000
Due 12-01-18
Alon USA Energy, Inc. 3.000% 730,000 830,850
Due 09-15-18
Altaba 0.000% 400,000 455,000
Due 12-01-18 (c)
Amyris 6.500% 1,000,000 675,000
Due 05-15-19
Arbor Realty Trust 6.500% 45,000 47,939
Due 10-01-19
Arconic, Inc. 1.625% 1,550,000 1,657,570
Due 10-15-19
Atlas Air Worldwide Holdings 1.875% 650,000 710,450
Due 06-01-24
Carriage Services 2.750% 690,000 898,725
Due 03-15-21
Chesapeake Energy Corporation (144A) 135,000 127,130
5.500% Due 09-15-26 (b)
Ciena Corporation 3.750% 440,000 593,736
Due 10-15-18
Cinedigm Corporation (144A) 570,000 256,500
5.500% Due 04-15-35 (b)
Citrix Systems, Inc. 940,000 1,130,487
0.500% Due 04-15-19 (d)
Corenergy Infrastructure Trust 600,000 672,375
7.000% Due 06-15-20 (d)
Dycom Industries, Inc. 0.750% 900,000 1,047,420
Due 09-15-21 (d)
Euronet Worldwide, Inc 1.500% 940,000 1,202,636
Due 10-01-44
Finisar Corporation 0.500% 500,000 558,750
Due 12-15-33
Global Eagle Entertainment, Inc. 2.750% 225,000 146,250
Due 02-15-35
Green Plains (144A) 4.125% 800,000 806,000
Due 09-01-22 (b)
Greenbrier Companies 3.500% 500,000 540,625
Due 04-01-18
Harmonic, Inc. 4.000% 100,000 1,259,500
Due 12-01-20 (d)
Horizon Global 2.750% 570,000 547,200
Due 07-01-22
Intel Corporation (144A) 3.250% 1,100,000 1,818,025
Due 08-01-39 (b)(d)
InterDigital, Inc. 1.500% 540,000 655,182
Due 03-01-20
Johnson & Johnson 580,000 1,054,150
0.000% Due 07-28-20 (c)
Liberty Media Corporation 1.375% 1,500,000 1,782,225
Due 10-15-23
Medicines Company (144A) 2.750% 800,000 838,000
Due 07-15-23 (b)
Microchip Technology, Inc. (144A) 1,250,000 1,317,989
1.625% Due 02-15-27 (b)
NantHealth (144A) 5.500% 1,130,000 791,000
Due 12-15-21 (b)
Neurocrine Biosciences (144A) 2.250% 620,000 618,094
Due 05-15-24 (b)
Oasis Petroleum 2.625% 770,000 755,690
Due 09-15-23
Palo Alto Networks, Inc. 0.000% 620,000 814,122
Due 07-01-19 (c)
PDL BioPharma, Inc. 2.750% 950,000 857,147
Due 12-01-21
Pernix Therapeutics Holdings (144A) 530,000 145,704
4.250% Due 04-01-21 (b)
PRA Group, Inc. (144A) 3.500% 500,000 527,500
Due 06-01-23 (b)
Priceline.com 1.000% 1,100,000 1,258,180
Due 03-15-18
RPM International, Inc. 2.250% 460,000 544,548
Due 12-15-20
Salesforce.com, Inc. 0.250% 1,000,000 1,325,900
Due 04-01-18 (d)
Square (144A) 0.375% 650,000 798,265
Due 03-01-22 (b)
Synaptics (144A) 0.500% 600,000 609,750
Due 06-15-22 (b)
TCP Capital Corporation (144A) 4.625% 290,000 299,077
Due 03-01-22 (b)
Teradyne (144A) 1.250% 300,000 345,204
Due 12-15-23 (b)
TerraVia Holdings 6.000% 180,000 110,700
Due 02-01-18
TerraVia Holdings 5.000% 690,000 288,075
Due 10-01-19
Trinity Industries, Inc 3.875% 950,000 1,193,438
Due 06-01-36
Vishay Intertechnology, Inc. 2.250% 25,000 25,000
Due 05-15-41
Vitamin Shoppe, Inc. 2.250% 250,000 197,813
Due 12-01-20
WebMD Health Corporation 1.500% 500,000 635,625
Due 12-01-20
Workday, Inc. 1.500% 780,000 1,040,568
Due 07-15-20
World Wrestling Entertainment (144A) 600,000 637,500
3.375% Due 12-15-23 (b)
Total United States 36,001,612
Total Convertible Bonds (cost $41,076,587 42,868,537
Corporate Bonds - 3%
United States - 3%
MIG,LLC Senior Secured Notes 17.5000% 5,158,766 1,547,630
Due 12-31-16 (a)
Total Corporate Bonds (cost $4,303,511 1,547,630
Common Stock - 6%
Bahamas - 1%
Vedanta Resources 162,493 678,501
China-0%
Emerald Plantation Holdings (c) 180,362 24,349
United States - 5%
Cumulus Media, Inc. (c) 204,759 92,141
Emmis Communication (c) 180,000 516,600
School Specialty, Inc. (c) 6,777 801,380
Urban One Class D (c) 504,990 1,136,228
Total United States 2,546,349
Total Common Stock (cost $7,276,494 3,249,199
WARRANTS - 3%
United States - 3%
Ashland Global Holdings, Inc.,
$1,000 strike price,
expire 3-31-29 (c) 2,260 20,623
Bank of America, $12.94 strike price
expire 01-16-19 (c) 50,000 602,000
General Motors Corporation-
Class B, $18.33 strike price
expire 07-10-19 (c) 47,890 832,807
Hostess Brand, $11.50 strike price
expire 11-14-21 (c) 300 873
Total Warrants(cost $1,031,522) 1,456,303
Put Options-0%
United States-0%
iShares Russell 2000 125 43,000
$140 put price, expire 09-15-17 (c)
Pernix Therapeutics, $5 put price,
expire 08-18-17 (c) 265 43,063
Total Put Options (cost $206,036) 86,063
Escrow-0%
China-0%
Sino Forest Corporation escrow 1,180,000 2,950
Total Escrow (cost $8,867) 2,950
TOTAL INVESTMENTS (cost $60,473,531) 56,388,517
SECURITIES SOLD SHORT -(4%)
Common Stock - (4%)
United States- (4%)
Bank of America (50,000) (1,213,000)
Corenergy Infrastructure Trust (2,750) (92,373)
Harmonic, Inc. (73,000) (383,250)
Iridium Communications, Inc. (64,402) (711,642)
Total Common Stock (proceeds $2,173,516) (2,400,265)
Call Options- (0%)
United States- (0%)
Pernix Therapeutics, $7.50 call price,
expire 08-18-17 (c) (265) (3,312)
Total Call Options (proceeds $23,939) (3,312)
TOTAL SECURITIES SOLD SHORT (2,403,577)
(proceeds $2,197,455)
(a) This security is in default or deferral and interest or
dividends are not being accrued on the position.
(b) 144A securities are those which are exempt from registration
under Rule 144A of the U.S. Securities Act of 1933. These
securities are subject to contractual or legal restrictions
on their sale.
(c) Non-income producing securities.
(d) All or a portion of these securities are pledged as
collateral for the margin account held by the broker.
(e) Reg S securities are those offered and sold outside of the
United States and thus are exempt from registration under
Regulation S of the U.S. Securities Act of 1933. These
securities are subject to restrictions on their sale.
Percentages are based upon the fair value as a percent of
net assets as of June 30, 2017.
See notes to financial statements. (concluded)
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
INVESTMENT INCOME:
Interest $120,642
Dividends 175,104
Other 22,153
Total Investment Income 317,899
EXPENSES:
Custody fees 6,424
Director fees 9,750
Insurance expense 2,471
Management fees 463,843
Margin Interest 77,244
Professional fees 32,743
Transfer agency fees 55,089
Dividend expense 43,410
Other 4,650
Total expenses 695,624
NET INVESTEMENT LOSS (377,725)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
SECURITIES SOLD SHORT:
Net realized gain on investment 934,561
Net realized loss on securities sold short (82,928)
Net change in unrealized appreciation
of investments 2,859,968
Net realized and unrealized gain from investments and
securities sold short 3,711,601
NET INCREASE IN NET ASSET RESULTING
FROM OPERATIONS $3,333,876
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
NET INCREASE IN NET ASSETS RESULTING FROM:
OPERATIONS:
Net investment income $(377,725)
Net realized gain on investments and
securities sold short 851,633
Net change in unrealized appreciation
(depreciation) of investments and
securities sold short $2,859,968
Net increase in net assets
resulting from operations 3,333,876
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 333,082
Reinvestment of distributions -
Payments from shares redeemed (2,609,860)
Net increase (decrease) in net assets resulting
from capital share transactions (2,276,778)
NET INCREASE IN NET ASSETS 1,057,098
NET ASSETS-Beginning of the year 53,825,244
NET ASSETS-End of year $54,882,342
ACCUMULATED NET INVESTMENT LOSS $(1,010,131)
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting
from operations $3,333,876
Adjustments to reconcile net decrease
in net assets resulting from operations
to net cash provided by operating activities:
Net change in unrealized depreciation of
investments and securities sold short (2,859,968)
Net realized gain on investments and
securities sold short (851,633)
Amortization and accretion 358,577
Purchases of Investment securities (36,779,878)
Proceeds from sale of investment
securities 40,790,422
Purchase of securities sold short (3,362,628)
Proceeds from sale of securities
sold short 2,093,180
Changes in assets and liabilities:
Decrease in receivables 42,820
Increase in other assets (3,762)
Decrease in payables (24,674)
Net cash Provided by operating activities 2,736,331
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold 265,053
Payments for shares redeemed (2,123,337)
Payments for distributions to shareholders
Net cash used in financing activities (1,858,284)
NET INCREASE IN CASH AND CASH EQUIVALENTS 878,047
CASH AND CASH EQUIVALENTS-Beginning of year 1,153,071
CASH AND CASH EQUIVALENTS-End of year $2,031,118
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
cash paid during the period for interest $ 77,244
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHSENDED JUNE 30, 2017(UNAUDITED)
1.ORGANIZATION
Zazove Convertible Securities Fund, Inc.,
a Maryland corporation (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified investment
company that operates as a closed-end interval fund.
The Fund's investment objective is to realize long-term
growth, current income and the preservation of capital.
The Fund pursues this objective primarily through
investing in a portfolio of convertible securities.
The convertible strategy focuses primarily on
opportunities in the United States of America,
although the Fund may hold foreign securities.
Zazove Associates, L.L.C. is the Fund's investment
advisor (the "Investment Advisor"). The Fund initially
acquired its portfolio pursuant to a merger whereby
Zazove Convertible Fund, L.P., a Delaware limited
partnership registered under the Investment
Company Act of 1940, was merged into the Fund on
January 1, 1999.
2.SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation-The Fund's financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America
and are stated in United States dollars.
The Fund is an investment company and follows accounting
and reporting guidance within Financial Accounting
Standards Board ("FASB") Accounting Standard
Codification ("ASC") Topic 946, Financial Services
-Investment Companies. The following is a summary
of the significant accounting and reporting
policies used in preparing the financial statements.
Use of Estimates-The preparation of financial
statements requires the Fund's management to
make estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of increases and decreases in net assets
from operations during the reporting period.
Actual results could differ from those estimates.
Valuation of Investments-The valuation of the
Fund'sinvestments is in accordance with policies
and procedures adopted by and under the supervision of
the Board of Directors. Investments are recorded at
fair value.
Common stock, certain convertible
preferred securities and certain derivatives that
are traded on national securities exchanges are
valued at the last reported sales price or, if there
are no sales, at the mean between the bid and ask prices.
Common stock, certain convertible preferred securities
and certain derivatives traded over the counter are
valued at the average of the highest current
independent bid and lowest current independent offer
reported upon the close of trading on that day.
Convertible bond securities, corporate bond securities,
certain convertible preferred securities and certain
derivatives are valued at the mid-point of independent
bid and offer quotes received from dealers or
brokers who make markets in such securities.
Securities for which market quotations are not available
are valued at fair value as determined in good faith by
the Investment Advisor with the oversight of
the Board of Directors pursuant to Board of Directors'
approved procedures. In such cases, fair value
is derived based on all relevant facts and
circumstances including, among other things,
fixed income and option pricing models,
enterprise valuation analysis, comparable security
analysis and conversion value.
Cash and Cash Equivalents-Cash and cash equivalents
represents cash held by the Fund's custodianin the
amount of $48,915, cash held by the Fund's prime
broker in the amount of $1,120,842 and cash collateral
held by the Fund's prime brokerin the amount
of $861,361. Since the Fund does not clear its
own investment transactions, it has established
an account with a third-party custodian
(UMB Bank, N.A.) for this purpose.
In addition, the Fund has established an
account with a prime broker (Citigroup) for
the purpose of purchasing securities on margin.
At June 30, 2017, the Fund did not have a
margin account balance for securities purchased on margin.
The Fund pledges sufficient cash and securities as collateral
for the margin account, if any, held by the custodian.
As the valuation of such securities fluctuates,
the Fund may be required to pledge additional
securities as collateral.
Investment Transactions and Income-Security transactions
are recorded on the trade date.
Realized gains or losses from sales of securities
(including securities sold short) are determined
on an identified cost basis. Dividend income
and expense is recognized on the ex-dividend date.
Interest income and expense are recognized on the
accrual basis. Bond discount is accreted and
bond premium is amortized over the expected
maturity of each applicable security using the effective
interest method, as long as the collectability is not in
doubt and the security is performing in accordance with
its contractual terms.
Indemnifications-Under the Fund's organizational
documents, the Fund is obligated to indemnify
its directors, officers and Investment Advisor
against certain liabilities relating to the
business or activities undertaken by them on
behalf of the Fund. In addition, in the
normal course of business, the Fund enters into
contracts that provide for general indemnification
to other parties. The Fund's maximum exposure under
these arrangements is unknown as this would involve
future claims that may be made against the Fund that
have not yet occurred. However, the Fund has
not had prior claims or losses pursuant to
these indemnification provisions and expects the risk
of loss to be remote.
3. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurement("Topic 820"),
defines fair value, establishes a framework for
measuring fair value and expands disclosures about
fair value measurements.
Various inputs are used to determine the value of the Fund's
investments. These inputs are summarized in the three broad
levels listed below:
Level 1 - quoted prices in active markets for identical
securities
Level 2 - other significant observable inputs (including
quoted prices for similiar securities, interest
rates, prepayment speeds, credit risk, etc.)
Level 3 - significant unobservable inputs (including the
Fund's own assumptions in determining the fair
value of investments)
The inputs or methodologies used for valuing securities are not
necessarily an indication of the risk associated with investing
in those securities.
The following table summarizes the inputs used to value the
Fund's investments as of June 30, 2017:
Level1 Level2 Level3 Total
Convertible
Preferred
Stock 738,959 $6,438,876 $0 $7,177,835
Convertible Bonds 0 42,868,537 0 42,868,537
Corporate Bonds 0 0 1,547,630 1,547,630
Common Stock 1,744,969 825,729 678,501 3,249,199
Warrants 1,435,680 0 20,623 1,456,303
Put 86,063 0 0 86,063
Escrow 0 0 2,950 2,950
Total
Investments $4,005,671 $50,133,142 $2,249,704 $56,388,517
The following table summarizes the Fund's common stock industry
concentrations as of June 30, 2017:
Level1 Level2 Level3 Total
Cable & Satellite TV $608,741 $0 $0 $608,741
Media Content 1,136,228 0 0 1,136,228
Metals/Mining
Excluding Steel 0 0 678,501 678,501
Paper & Forest 0 24,349 0 24,349
Products
Retail-Specialty 0 801,380 0 801,380
Total Common Stock $1,744,969 $825,729 $678,501 $3,249,199
The following table summarizes the inputs used to value the
Fund's securities sold short as of June 30, 2017:
Level1 Level2 Level3 Total
Common Stock
Banking $1,213,000 0 0 $1,213,000
Gas Distribution 92,373 0 0 92,373
Tech Hardware & 383,250 0 0 383,250
Equipment
Telecom-Satellite 711,642 0 0 711,642
Call Options 3,312 0 0 3,312
Total Securities $2,403,577 $0 $0 $2,403,577
Sold Short
The following is a reconciliation of Level 3 assets for which
significant unobservable inputs were used to determine fair
value:
Corporate Common
Bonds Stock
Balance as of December 31, 2016 $1,547,630 $882,128
Realized gain (loss) 0 0
Net change in appreciation 0 (203,627)
(depreciation)
Purchases 0 0
Sales/return of capital 0 0
Transfers into Level 3 0 0
Transfers out of Level 3 0 0
Balance as of June 30, 2017 $1,547,630 $678,501
Warrants Escrow
Balance as of December 31, 2016 $9,975 $ 2,950
Realized gain (loss) 0 0
Net change in appreciation 10,648 0
(depreciation)
Purchases 0 0
Sales/return of capital 0 0
Transfers into Level 3 0 0
Transfers out of Level 3 0 0
Balance as of June 30, 2017 $20,623 $ 2,950
For the six months ended June 30, 2017, the net change in
appreciation(depreciation) included in net assets related to
Level 3 investmentsstill held at the reporting date are as
follows:
Corporate Common
Bonds Stock Warrants Escrow
$0 $(203,627) $10,648 $0
The Fund's policy is to recognize transfers between Levels at
the end of the reporting period. For the six months ended
June 30, 2017,there were no transfers between Levels 1, 2 or 3.
FASB Accounting Standards Update ("ASU") 2011-04 requires the
following disclosures about fair value measurements of assets
and liabilities classified as Level 3 within the fair value
hierarchy: the valuation process used by the reporting entity
and quantitative information about the unobservable inputs
used in a fair value measurement.
The following table presents the quantitative information about
the significant unobservable inputs and valuation techniques
utilized to determine the fair value of the Fund's Level 3
investments as of June 30, 2017. The table includes Level 3
investments with values derived from third parties. Such
investments are primarily based on broker/dealer quotes for
which there is a lack of transparency as to inputs used to
develop the valuations. The quantitative detail of these
unobservable inputs is neither provided nor reasonably available
to the Fund.
Fair Value at Valuation Unobservable Amount/
Description June 30, 2017 Technique Inputs Range
Assets:
Corporate Bonds $1,547,630 Discount to Impact of 70%
asset recapitalization
valuation and liquidity
analysis
Common Stock $678,501 Discount to Liquidity 50%
comparable Discount
securities
Warrants $20,623 Discount to Liquidity 50%
Black-Shole Discount
pricing model
Escrow $ 2,950 Broker quote
The significant unobservable input used in the fair value
measurement of the Fund's Level 3 convertible bonds is a
discount for lack of liquidity. A significant and reasonable
increase or decrease in the liquidity discount would result in
a significant decrease or increase in the fair value
measurement.
The valuation process of Level 3 securities follows the
valuation of investments policy as disclosed in footnote 2.
4.DERIVATIVES AND HEDGING
The Fund follows the provisions of FASB ASC topic 815,
Derivatives and Hedging ("Topic 815"), which requires
qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures
about fair value amounts of gains and losses on derivative
instruments and disclosures about credit risk related to
contingent features in derivative agreements.
As of and for the six months ended June 30, 2017, the Fund held
warrants which are considered derivative instruments under
Topic 815.Warrants are convertible at the holder's option into
a fixed number of shares of the issuer's common stock upon
payment of the exercise price and are treated as convertible
securities by the Fund. Warrants held by the Fund were either
purchased or received pursuant to a restructuring or exchange
transaction. Equity price is the primary risk exposure of
warrants. The fair value of warrants as of June 30, 2017 was
$1,456,303 and is included in investments of the statement of
assets and liabilities.
As of and for the six months ended June 30, 2017, the Fund held
call options which are considered derivative instruments under
Topic 815. Call options are an agreement that gives the Fund the
right (but not the obligation) to buy a common stock, bond,
commodity or other instrument at a specified price within a
specified time period. Equity price is the primary risk exposure
of call options. The fair value of call options as of
June 30, 2017 was $(3,312) and is included in securities sold
short on the statement of assets and liabilities.
As of and during the six months ended June 30, 2017, the Fund
held put options which are considered derivative instruments
under Topic 815. Put options are an agreement that gives the
Fund the right (but not the obligation) to sell a common stock,
bond, commodity or other instrument at a specified price within
a specified time period. Equity price is the primary risk
exposure of put options. The fair value of put options as of
June 30, 2017 was $86,063 and is included in investments on the
statement of assets and liabilities.
Realized gains and losses on derivative instruments are
included in net realized loss on investments on the statement
of operations. Change in unrealized appreciation (depreciation)
on derivative instruments is included in net change in
unrealized depreciation of investments on the statement of
operations.The following table summarizes the net realized loss
and net change in unrealized depreciation on derivative
instruments for the six months ended June 30, 2017:
Change in
Net Realized Unrealized Appreciation
Derivative Gain (Loss) (Depreciation)
Warrants $(1,976,698) $2,159,157
Call Options 0 20,627
Put options (534,933) 411,689
$(2,511,631) $2,591,473
The following table summarizes derivative transactions
for the six months ended June 30, 2017:
Call Put
Warrants Options Options
Held as of
December 31, 2016 1,042,440 0 475
Purchased 300 0 265
Sold/excercised (942,290) (265) (350)
Held as of
June 30, 2017 100,450 (265) 390
FASB ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures
about Offsetting Assets and Liabilities ("ASU 2011-11"),
requires entities to disclose both gross and net information
for recognized derivative instruments and financial instruments
that are either offset in the Statements of Assets and
Liabilities or subject to an enforceable master netting
arrangement or similar agreement. ASU No. 2013-01, Clarifying
the Scope of Disclosures about Offsetting Assets and Liabilities
("ASU 2013-01"), clarifies that the scope of ASU 2011-11 applies
to derivatives accounted for in accordance with ASC Topic 815,
Derivatives and Hedging, including bifurcated embedded
derivatives, repurchase agreements and reverse repurchase
agreements, and securities borrowing and securities lending
transactions. As of and for the six months ended June 30, 2017,
the Fund did not hold any derivative instruments that would
require disclosure under ASU 2013-01.
5. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue up to 25,000,000 shares of
common stock, $0.01 par value. Shareholders are entitled to
one vote per share on all corporate issues put to vote of the
shareholders, although the Fund does not contemplate holding
annual meetings to elect directors or for any other purpose.
Upon approval of the Board of Directors, shares may be
purchased as of the first business day of each month at the
then net asset value per share. All subscription funds
received after the first business day of the month will be
tracked as subscriptions received in advance until the
beginning of the following month, at which time shares will be
issued and the subscription will be recorded as a component of
net assets.
On a quarterly basis, the Fund will offer to repurchase
no less than 5% and no more than 25% of the Fund's outstanding
shares at the then net asset value per share. Notice of
the terms and conditions of each quarterly repurchase offer
are sent to the shareholders in advance of the offer.
On May 17, 2017, the Fund offered to repurchase shares
as of June 30, 2017, which are reflected as capital shares
redeemed on the statement of assets and liabilities.
The Fund may impose a 2% fee on the redemption of fund
shares held for less than one year. This fee is intended
to compensate the Fund for expenses related to such
redemption. Shares are redeemed by treating the shares
first acquired by a shareholder as being redeemed prior
to shares acquired by such shareholders thereafter.
There have been no redemption fees charged during 2017.
Distributions from the Fund are recorded on the
ex-distribution date. All ordinary and capital
gain distributions are automatically reinvested
in Shares at the net asset value on the ex-distribution
date unless Shareholders elect in writing to receive
such distributions in cash.
In the case of the termination of the Fund,
distributions to the shareholders will be made in
proportion to their respective share ownership after
the payment of all Fund creditors.
Changes in Shares Outstanding
Shares sold 19,545
Shares redeemed (148,610)
Net decrease (129,065)
Shares outstanding at the beginning of year 3,225,846
Shares outstanding at the end of period 3,096,781
6. MANAGEMENT AGREEMENT AND OTHER TRANSACTIONS
WITH AFFILIATES
Zazove Associates, L.L.C. has been engaged as the Fund's
Investment Advisor and fund accountant pursuant to the
terms of an Investment Advisory Agreement.
As Investment Advisor and fund accountant of the Fund,
Zazove Associates, L.L.C. will receive management fees
based on the following management fee schedule.
Management fees are computed and paid on a monthly
basis based on the net assets of the Fund as of the
beginning of the month.
Net Assets in
Excess of
First $20,000,000 Net Assets in
$20,000,000 up to Excess of
Net Assets in Net Assets $70,000,000 $70,000,000
Annual
management
fee rate 2.00% 1.50% 1.00%
As of June 30, 2017, certain employees and affiliates of
the Investment Advisor held 12.52% of the outstanding
shares of the Fund.
Transactions with related parties were conducted
on terms equivalent to those prevailing in an
arm's length transaction.
The Fund bears all normal direct costs and expenses of its
operations including: management fees; brokerage commissions;
custodian fees; transfer agency fees; legal, audit, accounting
and tax preparation expenses; applicable state taxes and other
operating expenses such as regulatory filing fees and costs for
communications with shareholders. The custodian fees and
transfer agent fees are paid to UMB Bank, N.A.
The overall responsibility for the management and
operation of the Fund is vested in the Board of Directors
(the "Board"). The Board consists of four directors:
Gene T. Pretti, Andrew J. Goodwin III, Jack L. Hansen,
and Peter A. Lechman. Each of the three directors who
are not affiliated with the Investment Advisor will
receive $6,000 for their service to the Fund during 2017.
Gene T. Pretti, President, and Steven M. Kleiman, Secretary
and Treasurer, are the principal officers of the Fund and are
responsible for the day-to-day supervision of the business and
affairs of the Fund. Steven M. Kleiman is the Fund's Chief
Compliance Officer and is responsible for administering the
Fund's compliance policies and procedures. Except for certain
actions requiring the approval of the shareholders or the Board
of Directors, the principal officers of the Fund have the power
and authority to take all actions deemed necessary and
appropriate to pursue the Fund's objective.
Shareholders in the Fund will be unable to exercise any
management functions. There will not be any shareholder vote
unless required by the Investment Company Act of 1940.
7.INCOME TAXES
FASB ASC Topic 740, Income Taxes ("Topic 740"),provides
guidance for how uncertain tax positionsshould be recognized,
measured, presented and disclosed in the financial statements.
Topic 740 prescribes the minimum recognition threshold a tax
position must meet in connection with accounting for
uncertainties in income tax positions taken or expected to be
taken by an entity before being measured and recognized in
the financial statements. Topic 740 requires the evaluation
of tax positions taken in the course of preparing the Fund's
tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable
tax authority. Tax benefits of positions not deemed to meet
the more-likely-than-not threshold would be recorded as a tax
expense in the current year. The Fund has not taken any tax
positions that do not meet the more-likely-than-not threshold.
The tax years 2013 - 2016 remain subject to examination by
the Internal Revenue Service.
It is the Fund's policy to meet the requirements for
qualificationas a registered investment company as defined in
Subchapter M of the Internal Revenue Code and to distribute
substantially all of its taxable income and capital gains to
the Fund's shareholders. Therefore, no provision for federal
income taxes has been made.
At December 31, 2016, the Fund had undistributed
ordinary income in the amount of $7,244 and no undistributed
short term capital gains or undistributed long term
capital gains for federal income tax purposes.
At June 30, 2017, the cost and related gross unrealized
appreciation and depreciation for federal income tax purposes
are as follows:
Cost of investments on
Statement of Assets and Liablities $60,473,531
Proceeds of securities sold short
on Statement of Assets and Liabilities $(2,197,455)
Amortization and accretion
cost adjustments not
included in tax cost basis 624,558
Contingent payment debt
instrument cost adjustments
for tax purposes 557,597
Market discount bond cost
adjustments for tax purposes 245,474
Cost of investments/proceeds of
securities sold short for tax purposes $59,703,705
Gross tax unrealized appreciation $4,773,197
Gross tax unrealized depreciation (10,491,962)
Net tax unrealized depreciation on investments
and securities sold short $(5,718,765)
8. INVESTMENT TRANSACTIONS
For the six months ended June 30, 2017, the cost
of purchases and proceeds from sales of investments
were $40,401,970 and $43,716,276, respectively. There were
no purchases or sales of long-term U.S. government securities.
9. OFF-BALANCE-SHEET AND CONCENTRATION OF RISKS
The Fund may engage in the short sale of securities.
Securities sold short represent obligations of the Fund
that result in off-balance-sheet risk as the ultimate
obligation may exceed the amount shown in the accompanying
financial statements due to increases in the market values
of these securities. These short positions are generally
hedged positions against portfolio holdings and, as a
result, any increase in the Fund's obligation related to
these short positions will generally be offset by gains
in the related long positions.
At June 30, 2017, the Fund's investments by industry
concentrations (as a percentage of net assets) were as follows:
Software/Services 12.6%
Electronics 8.7%
Tech Hardware & Equipment 7.3%
Diversified Capital Goods 6.6%
Investments & Misc Financial Services 5.3%
Pharmaceuticals 5.3%
Media Content 4.4%
Food - Wholesale 4.4%
Pharmaceuticals 3.6%
Energy - Exploration & Production 3.4%
Support-Services 3.2%
Metals/Mining Excluding Steel 3.0%
Media - Diversified 2.8%
Integrated Energy 2.7%
Telecom - Satellite 2.2%
Media Content 2.1%
Building & Construction 1.9%
Specialty Retail 1.8%
Building Materials 1.7%
Chemicals 1.6%
Health Services 1.6%
Brokerage 1.6%
Automakers 1.5%
Oil Refining & Marketing 1.5%
Cable & Satellite TV 1.4%
Transport Infrastructure/Services 1.3%
Air Transportation 1.3%
Metals/Mining Excluding Steel 1.2%
Gas Distribution 1.2%
Medical Products 1.1%
Banking 1.1%
Cons/Comm/Lease Financing 1.0%
Auto Parts & Equipment 1.0%
Machinery 1.0%
REITs 0.1%
Pharmaceuticals 0.1%
Mutual Funds 0.1%
Forestry/Paper 0.0%
At June 30, 2017, the Fund's securities sold short by
industry concentrations (as a percentage of net assets)
were as follows:
Banking -2.2%
Telecom - Satellite -1.3%
Tech Hardware & Equipment -0.7%
Gas Distribution -0.2%
Pharmaceuticals 0.0%
10. SUBSEQUENT EVENTS
In accordance with FASB ASC Topic 855, Subsequent Events,
management has evaluated the impact of all subsequent events
on the Fund through the date the financial statements were
issued. Management has determined that there are no material
events that would require disclosure in the Fund's financial
statements.
PROXY VOTING POLICIES
A description of the policies and procedures that
the Fund uses to determine how to vote proxies relating
to portfolio securities is available (i) without charge,
upon request, by calling toll-free at 800.217.2978 and
(ii) on the Commission's website at http://www.sec.gov.
DIVIDEND REINVESTMENT PLAN
Distributions from the Fund are recorded on the ex-distribution
date. Pursuant to the Fund's Dividend Reinvestment Plan
("DRIP"), all ordinary and capital gain distributions are
reinvested in Shares at the then prevailing net asset value.
Each Shareholder is automatically included in the DRIP unless
the Fund receives a written request from the Shareholder to
receive such distributions in cash, or cash and stock.
In order to determine the number of shares to be received
by each Shareholder that participates in the DRIP,
the aggregate ordinary and capital gain distribution
allocated to the Shareholder that is to be reinvested .
is divided by the Fund's Net Asset Value per share immediately
after giving effect to the aggregate amount of the
dividend distribution declared by the Fund. For federal income
tax purposes, dividends paid by the Fund are taxable whether
received in cash or reinvested in additional Shares pursuant
to the DRIP. There are no fees, commissions or expenses
associated with participation in the DRIP and Shareholders may
elect to terminate their participation in the DRIP by written
request to the Fund. Additional information regarding the
Dividend Reinvestment Plan may be obtained by contacting the
Investment Advisor at 847.239.7100
DIRECTORS
Andrew J. Goodwin, III
Jack L. Hansen
Peter A. Lechman
Gene T. Pretti
OFFICERS
Gene T. Pretti
Steven M. Kleiman
INVESTMENT ADVISOR
Zazove Associates, LLC
1001 Tahoe Blvd.
Incline Village, NV 89451
CUSTODIAN UMB Bank N.A.
928 Grand Avenue
Kansas City, MO 64106
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
DIVIDEND-DISBURSING
AND TRANSFER AGENT
UMB Fund Services, Inc.
235 W. Galena Street
Milwaukee, WI 53212
Item 2: Code of Ethics
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 3: Audit Committee Financial Expert
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 4: Principal Accountant Fees and Services
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 5: Audit Committee of Listed Registrants
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 6: Schedule of Investments. This information is included in
the Report to Shareholders in Item 1.
Item 7: Disclosure of Proxy Voting Policies and
Procedures for Closed-End Management Investment Companies.
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 8: Portfolio Managers of Closed-End Investment Companies.
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 9: Purchases of Equity Securities by Closed-End
Management Investment Company and Affiliated Purchasers.
Month Ending Total No. Avg. Price Total No. Maximum No.
Shares Paid Per Of Shares (or approximate
Purchased Shares Purchased value) of shares
As Part of that May Yet Be
Publicly Purchased Under
Announced the Plans or
Plans or Programs
Programs
January -0- * *
February -0-
March 60,294 $17.33 * *
April -0-
May -0-
June 88,316 $17.72 * *
* On a quarterly basis, it is a basic policy of the Fund
to offer to repurchase no less than 5% and no more than
25% of the Fund's outstanding shares at the then net asset
value per share. Notice of the terms and conditions of each
quarterly repurchase offer are sent to the shareholders in
advance of the offer. The Fund may impose a 2% fee on the
redemption of fund shares held for less than one year.
This fee is intended to compensate the Fund for expenses
related to such redemption. Shares are redeemed by treating
the shares first acquired by a shareholder as being redeemed
prior to shares acquired by such shareholders thereafter.
There were no redemption fees imposed during the period. It
is a basic policy of the Fund to offer on a quarterly basis to
repurchase no less than 5% and no more than 25% of the Fund's
outstanding shares at the then net asset value per share.
A Shareholder who desires to have Shares redeemed at the
close of a calendar quarter must submit a written request
by the 17th day of March, June, September or December,
as applicable (or the next business day if such day is
not a business day). Each such day is referred to as a
"Repurchase Request Deadline." The Fund will send a notice
to each Shareholder no less than twenty-one and no more than
forty-two days before each Repurchase Request Deadline with
the details regarding the repurchase offer. If the number
of Shares requested by the Shareholders for repurchase
exceeds the number of Shares in the repurchase offer, then
the Fund may repurchase an additional two percent of the
outstanding Shares. If there is still an excess, the Fund
will repurchase Shares on a pro rata basis. The Fund has
adopted written procedures reasonably designed to ensure
that the Fund's portfolio is sufficiently liquid to enable
the Fund to fulfill the repurchase requests. The Fund has
the right, under certain circumstances, to force the
redemption of all or a portion of the Shares held by a
Shareholder. The Fund may impose a 2% fee on the repurchase
of Shares held for less than one year, which fee is intended
to compensate the Fund for expenses related to such redemption.
Shares are deemed repurchased by treating the Shares first
acquired by a Shareholder as being repurchased prior to Shares
acquired by such Shareholder thereafter.
Item 10: Submission of Matters to a Vote of Security Holders.
No material change.
Item 11: Controls and Procedures
a) Registrant's principal executive officer and principal
financial officer have evaluated Registrant's disclosure
controls and Procedures within 90 days of this filing and
have concluded that Registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c)) were effective
as of that date, in ensuring that the information required
to be disclosed by Registrant in this Form N-CSR was recorded,
processed, summarized and reported on a timely basis.
Registrant's principal executive officer and principal
financial officer concluded that such procedures did not have
any significant deficiencies or material weaknesses that
require corrective action.
b) There were no changes in Registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under
the Investment Company Act of 1940) that occurred during
Registrant's second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably
likely to materially affect, Registrant's internal control
over financial reporting.
Item 12: Exhibits
(a)(1) Not applicable.
(a)(2) The certification required by Rule 30a-2(a)
under the Act (17 CFR 270.30a-2(a)) of each principal
executive officer of Registrant is attached.
(a)(3) Not applicable.
(b) No applicable.