Form N-CSRS/A
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, 2018 through
June 30, 2018
Item 1. Report to Stockholders
Zazove Convertible Securities Fund, Inc.
Semi-Annual Report
June 30, 2018 (Unaudited)
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
TABLE OF CONTENTS
Page
HISTORICAL RETURNS 1-2
FINANCIAL STATEMENTS:
Statement of Assets and Liabilities 3
Schedule of Investments 7-9
Statement of Operations 10
Statements of Changes in Net Assets 11
Statement of Cash Flows 12
Notes to Financial Statements 13-21
Financial Highlights 22
PROXY VOTING POLICIES,DIVIDEND REINVESTMENT PLAN 23
Zazove Convertible Securities Fund, Inc.
Relative Historical Returns (Unaudited)
For the Periods Ended June 30, 2018
[A graph illustrates the relative performance of the
Fund versus the S&P 500 , Russell 2000 Index and
Barclays Capital U.S. Aggregate Bond Index for the
one year, five year, ten year and fifteen year periods
ended June 30, 2018. As illustrated in the graph, during
this period the Fund's return was +11.02%,+2.70%, +5.73%
and +6.97%, respectively, while the return of
the S&P 500 was +14.36%, +13.41%, +10.17% and +9.30%,
respectively,the return of the Russell 2000 Index was
+17.56%,+12.45%, +10.60% and +10.49%, respectively, and
the return of the Barclays Capital U.S. Aggregate Bond
Index was -0.40%,+2.27%, +3.72% and +3.77%, respectively.
[A graph illustrates the relative performance of the Fund
versus the S&P 500 , Russell 2000 Index and Barclays Capital
U.S. Aggregate Bond Index for the period January 1, 1999 through
June 30, 2018. As illustrated in the graph,during this
period the Fund's cumulative return was +344.18%, while the
return of the S&P 500 was +207.45%, the return of the Russell
2000 Index was +398.03% and the return of the Barclays
Capital U.S. Aggregate Bond Index was +137.79%.
The returns for the Zazove Convertible Securities Fund, Inc.
are presented after all fees and expenses.The returns of the
S&P 500 Stock Index, the Russell 2000 Stock Index and the
Barclays Capital U.S. Aggregate Bond Index are presented
after the reinvestment of dividends and interest. Past results
are not a guarantee of future performance.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2018 (UNAUDITED)
ASSETS
Investments, at fair value (cost $49,253,774) $48,730,752
Cash and cash equivalents, at fair value
(cost $4,574,506) 4,574,506
Receivables:
Interest 189,976
Dividends 13,677
Other assets 9,800
Total assets 53,518,711
LIABILITIES
Payables:
Capital shares redeemed $3,118,119
Securities sold short, at fair value
(proceeds $106,985) 73,546
Due to broker 7,889
Transfer agency fees 7,125
Custody fees 650
Professional fees 39,817
Securities purchased 1,578,888
Total liabilities 4,826,034
NET ASSETS $48,692,677
ANALYSIS OF NET ASSETS:
Common stock
($.01 par value; 25,000,000 shares authorized;
2,482,383 shares issued and outstanding) $24,824
Paid-in surplus 49,191,428
Accumulated net realized gain on
investments and securities sold short 293,618
Accumulated net investment loss (327,610)
Net unrealized depreciation on investments
and securities sold short (489,583)
NET ASSETS $48,692,677
NET ASSET VALUE PER SHARE
(based on 2,482,383 shares outstanding) $19.62
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
SCHEDULE OF INVESTMENTS
June 30, 2018 (UNAUDITED)
Principal/ Fair
Shares/ Value
Contracts
INVESTMENTS - 100%
Convertible Preferred Stock - 8%
United States - 8%
Affiliated Managers Group,Inc. 5.150% 20,320 $1,217,981
Due 10-15-37
Bunge Limited 4.875% 18,800 2,047,978
Cowen Group, Inc. 5.625% 1,020 834,488
Total Convertible Preferred Stock
(cost $3,907,217) 4,100,447
Convertible Bonds - 76%
Canada-1%
First Majestic Silver (144A) 655,000 681,609
1.875% Due 03-01-23 (b)
China-5%
Ctrip.com International, Ltd. 980,000 1,122,737
1.990% Due 07-01-25 (d)
Weibo (144A) 1.250% 1,270,000 1,281,112
Due 11-15-22 (b)
Total China 2,403,849
France-2%
Total S.A (Reg S) 0.500% 600,000 655,500
Due 12-02-22 (e)
Vinci S.A (Reg S) 0.375% 400,000 430,000
Due 02-16-22 (e)
Total France 1,085,500
Germany-7%
Deutsche Bank AG London (JPM) 1,100,000 1,063,040
1.000% Due 05-01-23
Siemens AG (Reg S) 2,000,000 2,234,000
1.650% Due 08-16-19
Total Germany 3,297,040
Ghana-1%
Tullow Oil Jersey Ltd. (Reg S) 6.625%
Due 07-12-21 (e) 200,000 256,500
United States - 60%
Air Lease Corporation 3.875% 400,000 577,750
Due 12-01-18
Air Transport Services Group (144A) 800,000 779,040
1.125% Due 10-15-24 (b)
Akamai Tech (144A) 0.125% 210,000 210,282
Due 05-01-25 (b)
Altaba 0.000% 300,000 410,437
Due 12-01-18 (c)
Ascent Capital Group LLC 4.000% 1,100,000 654,500
Due 07-15-20
Atlas Air Worldwide Holdings 1.875% 400,000 530,000
Due 06-01-24
BioMarin Pharmaceutical, Inc. 215,000 253,969
1.500% Due 10-15-20
BioMarin Pharmaceutical, Inc. 815,000 828,753
0.599% Due 08-01-24 (d)
Booking Holdings 386,000 462,255
0.900% Due 09-15-21 (d)
Carriage Services 2.750% 200,000 243,250
Due 03-15-21
Clovis Oncology, Inc. 600,000 647,250
2.500% Due 09-15-21
Cowen Group, Inc. (144A) 205,000 211,919
3.000% Due 12-15-22 (b)
Dycom Industries, Inc. 0.750% 350,000 406,707
Due 09-15-21
Euronet Worldwide, Inc 1.500% 1,010,000 1,235,988
Due 10-01-44 (d)
Exact Sciences 230,000 242,075
1.000% Due 01-15-25
Flexion Therapeutics (144A) 1,200,000 1,473,000
3.375% Due 05-01-24 (b)(d)
Greenbrier Companies 2.875% 500,000 576,250
Due 02-01-24 (d)
Harmonic, Inc. 4.000% 527,000 540,649
Due 12-01-20 (d)
Insmed 1.750% 600,000 550,676
Due 01-15-25
InterDigital, Inc. 850,000 1,027,480
1.500% Due 03-01-20
Jazz Investments I (144A) 800,000 833,500
1.500% Due 08-15-24 (b)
Johnson & Johnson 270,000 450,577
0.000% Due 07-28-20 (c)
JPMorgan Chase Finance Co (144A) 1,500,000 1,430,700
0.250% Due 05-01-23 (b)
Liberty Interactive, LLC (144A) 1,270,000 1,391,134
1.750% Due 09-30-46 (b)
Liberty Media Corporation 1.375% 1,500,000 1,861,950
Due 10-15-23 (d)
Microchip Technology, Inc. (144A) 900,000 1,059,187
1.625% Due 02-15-27 (b)(d)
NantHealth 5.500% 1,130,000 796,650
Due 12-15-21
Neurocrine Biosciences (144A) 2.250% 370,000 537,194
Due 05-15-24 (b)
Oasis Petroleum 2.625% 500,000 649,375
Due 09-15-23
Par Pacific Holdings, Inc. 420,000 502,160
5.000% Due 06-15-21
Patrick Industries, Inc. (144A) 200,000 189,649
1.000% Due 02-01-23 (b)
Pernix Therapeutics Holdings 4.250% 530,000 211,908
Due 04-01-21 (d)
RH (144A) 0.000% 300,000 280,875
Due 06-15-23 (b)(c)
RPM International, Inc. 2.250% 460,000 556,025
Due 12-15-20
ServiceNow, Inc. (144A) 0.000% 600,000 812,460
Due 06-01-22 (b)(c)
Supernus Pharmaceuticals (144A) 550,000 670,992
0.625% Due 04-01-23 (b)
Theravance Biopharma 3.250% 800,000 788,000
Due 11-01-23
Vitamin Shoppe, Inc. 2.250% 1,550,000 1,224,500
Due 12-01-20
Workday, Inc. (144A) 0.250% 1,280,000 1,350,400
Due 10-01-22 (b)
Zillow 2.000% 780,000 985,764
Due 12-01-21 (d)
Zillow Group, Inc. - C 1.500% 600,000 612,750
Due 07-01-23
Total United States 29,057,980
Total Convertible Bonds (cost $35,274,436) 36,782,478
Corporate Bond Units - 2%
France - 2%
LVMH Moet Hennessy Louis Vuitton SE 2,820 973,605
(Reg S) (e)
Total Corporate Bond Units (cost $858,750) 973,605
Corporate Bonds - 1%
United States - 1%
Global Brokerage 7.000% 1,294,000 666,410
Due 02-08-23
Total Corporate Bonds (cost $564,858) 666,410
Common Stock - 10%
Bahamas - 2%
Vedanta Resources 212,493 906,695
China-0%
Emerald Plantation Holdings (c) 180,362 10,822
United States - 8%
Cinedigm Corporation (c) 34,541 53,538
Cumulus Media, Inc. (c) 35,003 638,805
Daseke (c) 8,000 79,440
Emmis Communication (c) 194,100 1,026,789
School Specialty, Inc. (c) 26,500 526,687
Urban One,Inc. (c) 680,000 1,411,000
Total United States 3,736,259
Total Common Stock (cost $6,532,097) 4,653,776
WARRANTS - 3%
United States - 3%
Ashland Global Holdings, Inc.,
$1,000 strike price,
expire 3-31-29 (c) 2,260 25,430
Cumulus Media, $0.0000001 strike price 5,340 97,188
expire 06-04-38 (c)
Daseke, $11.50 strike price 314,800 336,836
expire 2/27/2022 (c)
Hostess Brand, $11.50 strike price 178,300 328,072
expire 11-14-21 (c)
Simply Good Foods Company, $11.50 173,000 717,950
stirke price, expire 7/7/22 (c)
Total Warrants(cost $1,313,497) 1,505,476
Escrow-0%
China-0%
Sino Forest Corporation escrow 1,180,000 3,688
Georgia - 0%
MIG LLC escrow 5,158,766 30,953
United States - 0%
TerraVia Holdings 5% Escrow 690,000 11,040
TerraVia Holdings 6% Escrow 180,000 2,880
Total United States $13,920
Total Escrow (cost $802,919) 48,560
TOTAL INVESTMENTS (cost $49,253,774) 48,730,752
SECURITIES SOLD SHORT -(0%)
Common Stock - (0%)
United States- (0%)
Pernix Therapeutics Holdings (29,025) $(70,531)
Total Common Stock (proceeds $96,531) (70,531)
Call Options- (0%)
United States- (0%)
Pernix Therapeutics (11/16/18 $5.00 Call) (81) (1,013)
Pernix Therapeutics (8/17/18 $2.50 Call) (50) (1,750)
Pernix Therapeutics (8/17/18 $5.00 Call) (101) (253)
Total Call Options (proceeds $10,453) (3,015)
TOTAL SECURITIES SOLD SHORT (73,546)
(proceeds $106,985)
(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, 2018.
See notes to financial statements. (concluded)
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2018 (UNAUDITED)
INVESTMENT INCOME:
Interest $189,412
Dividends 129,143
Other 7,749
Total Investment Income 326,304
EXPENSES:
Custody fees 6,762
Director fees 9,000
Insurance expense 2,461
Management fees 447,455
Margin Interest 46,481
Professional fees 33,347
Transfer agency fees 57,704
Dividend expense 20,970
Other 22,111
Total expenses 646,291
NET INVESTEMENT LOSS (319,987)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
SECURITIES SOLD SHORT:
Net realized gain on investment 1,709,069
Net realized loss on securities sold short (79,879)
Net change in unrealized appreciation
of investments and securities sold short 1,057,892
Net realized and unrealized gain from investments and
securities sold short 2,687,082
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $2,367,095
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 2018 (UNAUDITED)
NET DECREASE IN NET ASSETS RESULTING FROM:
OPERATIONS:
Net investment loss $(319,987)
Net realized gain (loss) on investments and
securities sold short 1,629,190
Net change in unrealized appreciation
of investments and
securities sold short $1,057,892
Net increase in net assets
resulting from operations 2,367,095
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 199,242
Reinvestment of distributions 0
Payments for shares redeemed (8,216,588)
Net decrease in net assets resulting
from capital share transactions (8,017,346)
NET INCREASE IN NET ASSETS (5,650,251)
NET ASSETS-Beginning of the period 54,342,928
NET ASSETS-End of period $48,692,677
ACCUMULATED NET INVESTMENT LOSS $(327,610)
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS OF CASH FLOWS
SIX MONTH ENDED JUNE 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting
from operations $2,367,095
Adjustments to reconcile net increase
in net assets resulting from operations
to net cash provided by operating activities:
Net change in unrealized appreciation of
investments and securities sold short (1,057,892)
Net realized gain on investments and
securities sold short (1,629,190)
Net amortization and accretion 265,669
Purchases of investment securities (46,461,995)
Proceeds from sale of investment
securities 59,122,890
Purchase of securities sold short (4,852,294)
Proceeds from sale of securities
sold short 3,858,603
Changes in assets and liabilities:
Decrease in receivables 19,263
Increase in other assets (8,795)
Decrease in due to broker (514,469)
Decrease in payables (9,897)
Net cash provided by operating activities 11,098,988
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold 199,242
Payments for shares redeemed (6,729,747)
Payments for distributions to shareholders 0
Net cash used in financing activities (6,530,505)
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,568,483
CASH AND CASH EQUIVALENTS-Beginning of period 6,023
CASH AND CASH EQUIVALENTS-End of period $4,574,506
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 46,481
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2018(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's investments 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 custodian in the
amount of $112,463, cash held by the Fund's prime
broker in the amount of $3,593,610 and cash collateral
held by the Fund's prime broker in the amount
of $868,433. 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, 2018, 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, 2018:
Level1 Level2 Level3 Total
Convertible
Preferred
Stock 0 $4,100,447 $0 $4,100,447
Convertible Bonds 0 36,782,478 0 36,782,478
Corporate Bond Units 0 973,605 0 973,605
Corporate Bonds 0 666,410 0 666,410
Common Stock 1,798,572 1,948,509 906,695 4,653,776
Warrants 1,382,858 0 122,618 1,505,476
Escrow 0 0 48,560 48,560
Total
Investments $3,181,430 $44,471,449 $1,077,873 $48,730,752
The following table summarizes the Fund's common stock industry
concentrations as of June 30, 2018:
Level1 Level2 Level3 Total
Cable & Satellite TV $1,665,594 $0 $0 $1,665,594
Media Content 0 1,411,000 0 1,411,000
Metals/Mining
Excluding Steel 0 0 906,695 906,695
Paper & Forest 0 10,822 0 10,822
Products
Software/Services 53,538 0 0 53,538
Retail-Specialty 0 526,687 0 526,687
Trucking & Delivery 79,440 0 0 79,440
Total Common Stock $1,798,572 $1,948,509 $906,695 $4,653,776
The following table summarizes the inputs used to value the
Fund's securities sold short as of June 30, 2018:
Level1 Level2 Level3 Total
Common Stock
Pharmaceuticals $70,531 0 0 $70,531
Call Options 3,015 0 0 3,015
Total Securities $73,546 $0 $0 $73,546
Sold Short
The following is a reconciliation of Level 3 assets for which
significant unobservable inputs were used to determine fair
value:
Common
Stock
Balance as of December 31, 2017 $1,155,968
Realized gain (loss) 0
Net change in appreciation (249,273)
(depreciation)
Purchases 0
Sales/return of capital 0
Transfers into Level 3 0
Transfers out of Level 3 0
Balance as of June 30, 2018 $906,695
Warrants Escrow
Balance as of December 31, 2017 $26,141 $34,640
Realized gain (loss) 0 0
Net change in appreciation
(depreciation) (711) 0
Purchases 0 0
Sales/return of capital 0 0
Transfers into Level 3 97,188 13,920
Transfers out of Level 3 0 0
Balance as of June 30, 2018 $122,618 $48,560
For the six months ended June 30, 2018, the net change in
appreciation(depreciation) included in net assets related to
Level 3 investments still held at the reporting date are as
follows:
Common
Stock Warrants Escrow
$(249,273) $ (711) $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, 2018,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, 2018. 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, 2018 Technique Inputs Range
Assets:
Common Stock $906,695 Discount to Liquidity 50%
comparable Discount
securities
Warrants $25,430 Discount to Liquidity 50%
Black-Sholes Discount
pricing model
Warrants $ 97,188 Broker quote
Escrow $ 48,560 Broker quote
The significant unobservable input used in the fair value
measurement of the Fund's Level 3 common stocks and warrants
is a liquidity discount. A significant and reasonable
increase or decrease in the liquidity discount would result in
a significant decrease or increase in the unobservable inputs
for any of these Level 3 investments 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, 2018, 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, 2018 was
$1,505,476 and is included in investments of the statement of
assets and liabilities.
As of and for the six months ended June 30, 2018, the Fund
sold short 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, 2018 was $(3,015) and is included in
securities sold short 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
gain and net change in unrealized appreciation on derivative
instruments for the six months ended June 30, 2018:
Change in Net
Net Realized Unrealized Appreciation
Derivative Gain (Loss)
Warrants $145,700 $120,173
Call Options 0 7,438
$145,700 $127,611
The following table summarizes derivative transactions
for the six months ended June 30, 2018:
Call
Warrants Options
Held as of
December 31, 2017 180,560 0
Purchased 619,840 0
Sold/excercised (126,700) (232)
Held as of
June 30, 2018 673,700 (232)
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, 2018,
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 23, 2018, the Fund offered to repurchase shares
as of June 30, 2018, 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 2018.
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 10,372
Shares redeemed (425,443)
Net decrease (415,071)
Shares outstanding at the beginning of year 2,897,454
Shares outstanding at the end of period 2,482,383
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, 2018, certain employees and affiliates of
the Investment Advisor held 15.68% 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 2018.
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 positions should 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 2014 - 2017 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, 2017, the Fund had undistributed
ordinary income , undistributed
short term capital gains or undistributed long term
capital gains for federal income tax purposes.
At June 30, 2018, 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 $49,253,774
Proceeds of securities sold short
on Statement of Assets and Liabilities $(106,985)
Amortization and accretion
cost adjustments not
included in tax cost basis (150,298)
Market discount bond cost
adjustments for tax purposes 27,406
Cost of investments/proceeds of
securities sold short for tax purposes $49,023,897
Gross tax unrealized appreciation $3,847,633
Gross tax unrealized depreciation (4,214,325)
Net tax unrealized depreciation on investments
and securities sold short $(366,692)
8. INVESTMENT TRANSACTIONS
For the six months ended June 30, 2018, the cost
of purchases and proceeds from sales of investments
were $52,937,922 and $62,981,493, 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, 2018, the Fund's investments by industry
concentrations (as a percentage of net assets) were as follows:
Software/Services 12.3%
Pharmaceuticals 9.6%
Media Content 6.7%
Cable & Satellite TV 6.5%
Food - Wholesale 6.4%
Specialty Retail 6.2%
Support-Services 5.6%
Banking 5.1%
Diversified Capital Goods 4.6%
Electronics 4.3%
Medical Products 4.1%
Tech Hardware & Equipment 3.7%
Brokerage 3.5%
Metals/Mining Excluding Steel 3.3%
Investment & Misc Financial S 2.5%
Trucking & Delivery 2.5%
Health Services 2.1%
Energy - Exploration & Production 1.9%
Building & Construction 1.7%
Building Materials 1.5%
Integrated Energy 1.3%
Cons/Comm/Lease Financing 1.2%
Machinery 1.2%
Air Transportation 1.1%
Oil Refining & Marketing 1.0%
Media - Diversified 0.1%
Chemicals 0.1%
Forestry/Paper 0.0%
At June 30, 2018, the Fund's securities sold short by
industry concentrations (as a percentage of net assets)
were as follows:
Pharmaceuticals -0.2%
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.
* * * * *
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
Five-Year Period Ended June 30, 2018 (Unaudited)
Six Months
Ended
June 30,
2018 2017 2016 2015 2014
Net Asset Value-
Beginning of Year $18.76 $16.69 $14.93 $19.07 $20.55
INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income(loss)(a) (0.12) (0.18) (0.03) 0.04 0.09
Net realized and
unrealized gains or
losses on investments 0.98 2.30 1.92 (3.66) (0.55)
Total from investment
operations
0.86 2.12 1.89 (3.62) (0.46)
Less distributions
to shareholders:
From net investment
income and short term
capital gains 0.00 (0.00)* (0.13) (0.52) (0.02)
From net
capital gains 0.00 0.00 0.00 0.00 (0.96)
Return of capital 0.00 (0.05) 0.00 0.00 (0.04)
Total distributions
to shareholders 0.00 (0.05) (0.13) (0.52) (1.02)
Net Asset Value-
End of period or year $19.62 $18.76 16.69 $14.93 $19.07
TOTAL RETURN(b) 4.58% 12.71% 12.68% (19.11)% (2.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets-
end of period
or year $48,692,677 $54,342,928 $53,825,244 $52,155,936 $73,133,892
Ratio of expenses
to average net
assets(c) 1.21% 2.42% 2.18% 2.27% 2.20%
Ratio of net
investment income
(loss)to average
net assets (0.60)% (1.04)% (0.21)% 0.20% 0.44%
Portfolio turnover
rate 96% 132% 126% 89% 81%
(a) Net investment income(loss) allocated based on average shares method.
(b) Total return assumes reinvestment of all dividends and distributions.
(c) Ratio of expenses to average net assets is determined including
margin interest. The ratio excluding margin interest, which is
a cost of capital, was 1.12% for the six months ended June 30, 2018
and 2.22%, 2.09%, 2.01%,and 1.85%,for the years ended December 31, 2017,
2016, 2015,and 2014, respectively.
(*)Distributions is less than $0.005 per share.
See notes to 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 847-239-7100 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 266,517 $19.13 * *
April -0-
May -0-
June 158,926 $19.62 * *
* 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: Disclosure of Securities Lending Activities
Registrant did not engage in any securities lending for the period.
Item 13: 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.