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:
Greg Shorin
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, 2019 through
December 31, 2019
Item 1. Report to Stockholders
Zazove Convertible Securities Fund, Inc.
Annual Report
December 31, 2019
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
TABLE OF CONTENTS
Page
HISTORICAL RETURNS (UNAUDITED) 1-2
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 3
FINANCIAL STATEMENTS:
Statement of Assets and Liabilities 4
Schedule of Investments 5-10
Statement of Operations 11
Statements of Changes in Net Assets 12
Statement of Cash Flows 13
Notes to Financial Statements 14-24
Financial Highlights 25
PROXY VOTING POLICIES,DIVIDEND REINVESTMENT PLAN
AND TAX INFORMATION (UNAUDITED) 26
FUND EXPENSES (UNAUDITED) 27
INVESTMENT ADVISORY AGREEMENT APPROVAL
(UNAUDITED) 28
DIRECTORS AND OFFICERS (UNAUDITED) 29
Zazove Convertible Securities Fund, Inc.
Relative Historical Returns (Unaudited)
For the Periods Ended December 31, 2019
[A graph illustrates the relative performance of the Fund versus
the S&P 500 , Russell 2000 Index and Bloomberg Barclays Capital
U.S. Aggregate Bond Index for the one year, five year, ten year and
fifteen year periods ended December 31, 2019. As illustrated in
the graph, during this period the Fund's return was +22.39%,
+3.37%, +5.72% and +5.24%, respectively, while the return of
the S&P 500 was +31.48%, +11.69%, +13.55% and +9.00%,
respectively,the return of the Russell 2000 Index was +25.49%,
+8.21%, +11.82% and +7.91%, respectively, and the return of
the Bloomberg Barclays Capital U.S. Aggregate Bond Index was
+8.72%, +3.05%, +3.75% and +4.15%, 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
December 31, 2019. As illustrated in the graph,during this
period the Fund's cumulative return was +387.93%, while the
return of the S&P 500 was +276.51%, the return of the Russell
2000 Index was +416.42% and the return of the Bloomberg Barclays
Capital U.S. Aggregate Bond Index was +162.79%.
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Zazove Convertible Securities Fund, Inc.
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and
liabilities of Zazove Convertibl Securities Fund, Inc.
(the "Fund"), including the schedule of investments, as of
December 31, 2019, the related statements of operations and
cash flows for the year then ended, the statements of changes
in net assets for each of the two years in the period then
ended, the financial highlights for each of the five years
in the period then ended, and the related notes.
In our opinion, the financial statements and financial highlights
present fairly, in all material respects, the financial position
of the Fund as of December 31, 2019, and the results of its
operations and its cash flows 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.
Basis for Opinion
These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is
to express an opinion on the Fund's financial statements and
financial highlights based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Fund in accordance with the
U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement, whether due to error or fraud. The Fund is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control
over financial reporting but not for the purpose of expressing an
opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements and financial
highlights, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements and financial highlights.
Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements
and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 2019, by correspondence with
the custodian and brokers; when replies were not received from
brokers, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 24, 2020
We have served as the auditor of one or more Zazove investment
companies since 2002.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2019
ASSETS
Investments, at fair value
(cost $42,137,574) $ 41,914,574
Cash and cash equivalents, at fair value
(cost $1,077) 1,077
Receivables:
Interest 135,581
Dividends 2,710
Securities Sold 90,410
Other Assets 1,004
Total assets 42,145,356
LIABILITIES
Payables:
Capital shares redeemed 775,567
Securities sold short,at fair value
(proceeds $321,229) 351,673
Due to Broker 160,785
Transfer agency fees 17,329
Custody fees 650
Professional fees 52,606
Other 400
Total liabilities 1,339,010
NET ASSETS $ 40,806,346
Analysis of Net Assets:
Common stock ($.01 par value; 25,000,000 shares $ 21,321
authorized;2,132,073 shares issued and outstanding)
Paid-in surplus 40,859,418
Accumulated net realized loss on investments
and securities sold short (50)
Accumulated net investment gain 179,101
Net unrealized depreciation on investments
and securities sold short (253,444)
NET ASSETS 40,806,346
NET ASSET VALUE PER SHARE
(based on 2,132,073 shares outstanding) $19.14
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
SCHEDULE OF INVESTMENTS
December 31, 2019
Principal/ Fair
Shares/ Value
Contracts
INVESTMENTS - 103%
Convertible Preferred Stock - 4%
United States - 4%
Blueknight Energy Partners 11.000% 103,270 $558,174
Brarmar Hotels & Resorts 5.500% 5,770 109,832
Chesapeake Energy Series A 5.750% 1,450 287,390
Cowen Group, Inc. 5.625% 1,020 907,167
Total Convertible Preferred Stock (cost $1,863,342) 1,862,563
Convertible Bonds - 81%
Bermuda - 1%
Teekay 5.000%
Due 01-15-23 586,000 520,814
France-8%
Total S.A. (Reg S) 0.500%
Due 12-02-22 (e) 1,600,000 1,700,000
Vinci S.A (Reg S) 0.375%
Due 02-16-22 (e) 1,200,000 1,454,400
Total France 3,154,400
Germany-5%
Deutsche Bank AG London (JPM) 1.000%
Due 05-01-23(d) 1,780,000 1,983,588
Ghana -2%
Tullow Oil Jersey Ltd. (Reg S)6.625% 800,000 753,600
Due 07-12-21 (e)
Switzerland-3%
Credit Suisse AG London (Siemens) 1,050,000 1,204,140
(144A) 0.125% Due 03-25-24 (b)
Taiwan-1%
Sea Limited (144A)1.000% 520,000 567,450
Due 12-01-24 (b)
United States - 61%
Air Transport Services Group 590,000 573,717
1.125% Due 10-15-24 (d)
Altair Engineering 0.250% 520,000 533,178
Due 06-01-24
Alteryx (144A) 1.000% 880,000 862,650
Due 08-01-26 (b)
Chart Industries, Inc.(144A) 1.000% 350,000 461,125
Due 11-15-24 (b)
Cowen Group, Inc. 3.000% 205,000 225,767
Due 12-15-22
Flexion Therapeutics 3.375% 1,100,000 1,174,250
Due 05-01-24 (d)
HC2 Holdings (144A) 7.500% 750,000 539,110
Due 06-01-22 (b)
Hope Bancorp 2.000% 850,000 802,719
Due 05-15-38 (d)
IAC FinanceCo 2- A (144A) 0.875% 750,000 843,787
Due 06-15-26 (b)
Illumina, Inc.-B 0.500% 1,000,000 1,390,532
Due 06-15-21 (d)
Insmed 1.750% 800,000 774,480
Due 01-15-25
InterDigital, Inc. (144A) 2.000% 780,000 778,518
Due 06-01-24 (b)
Kaman Corporation 3.250% 1,260,000 1,512,000
Due 05-01-24 (d)
KBR (144A) 2.500% 320,000 425,200
Due 11-01-23 (b)
Liberty Media (LSXMA) 1.375% 875,000 1,178,516
Due 10-15-23(d)
Liberty Media (SIRI) (144A) 2.750% 440,000 461,296
Due 12-01-49(b)
Microchip Technology, Inc. 600,000 856,500
1.625% Due 02-15-27 (d)
NantHealth 5.500% 630,000 441,000
Due 12-15-21
New Relic 0.500% 440,000 429,550
Due 05-01-23
NII Holdings (144A) 4.250% 800,000 850,000
Due 08-15-23 (b)
NRG Energy, Inc. 2.750% 655,000 744,859
Due 06-01-48
Okta (144A) 0.125 % 280,000 272,300
Due 09-01-25 (b)
ON Semiconductor Corp. 1.625% 560,000 773,500
due 10-15-23 (d)
Palo Alto Networks 0.750% 1,070,000 1,184,490
Due 07-01-23 (d)
Pluralsight (144A) 0.375% 500,000 434,729
Due 03-01-24 (b)
Repligen 0.375% 400,000 432,292
Due 07-15-24
RH 0.000% 550,000 700,219
Due 06-15-23
Silicon Laboratories 1.375% 200,000 266,500
Due 03-01-22
Splunk 0.500% 60,000 72,415
Due 09-15-23
Splunk 1.125% 600,000 742,860
Due 09-15-25
Square 0.500% 850,000 949,391
Due 05-15-23 (d)
Team 5.000% 350,000 367,063
Due 08-01-23
Theravance Biopharma 3.250% 800,000 832,000
Due 11-01-23
Unisys 5.500% 300,000 408,414
Due 03-01-21
Workday, Inc. 0.250% 500,000 640,258
Due 10-01-22
Workiva (144A) 1.125% 600,000 540,375
Due 08-15-26 (b)
Zillow Group Inc.-C (144A) 1.375% 300,000 366,329
Due 09-01-26 (b)
Total United States 24,805,889
Total Convertible Bonds (cost $31,294,276) 32,989,881
Convertible Bond Units - 1%
France-1%
LVMH Moet Hennessy Louis Vuitton SE (Reg S) 550 274,093
0.000% Due 02-16-21 (c)(e)
Total Corporate Bond Units (cost $177,740) 274,093
Corporate Bonds - 0%
United States - 0%
Global Brokerage 7.000% 1,419,253 37,255
Due 02-08-23 (a)
Total Corporate Bonds (cost $715,221) 37,255
Common Stock - 10%
China-0%
Emerald Plantation Holdings (c) 180,362 5,411
United States - 10%
Bristow Group (c) 1,913 37,304
Cinedigm Corporation (c) 5,001 3,501
Clear Channel Holdings, Inc. (c) 185,000 529,100
Cumulus Media, Inc. (c) 70,000 1,229,200
Daseke (c) 16,720 52,835
Emmis Communication (c) 194,100 786,105
School Specialty, Inc. (c) 26,500 11,991
Urban One, Inc. (c)(d) 680,000 1,343,000
Total United States 3,993,036
Total Common Stock (cost $5,902,159) 3,998,447
WARRANTS - 7%
United States - 7%
Ashland Global Holdings, Inc., 2,260 11,604
$1,000 strike price,expire 03-31-29 (c)
Avaya Holdings, $25.55 strike price, 82,100 172,410
expire 12-15-22 (c)
Hostess Brands, $11.50 strike price, 428,000 798,220
expire 11-04-21 (c)
US Ecology, $58.67 strike price, 29,760 336,883
expire 10-17-23 (c)
Verra Mobility, $11.50 strike price, 160,000 644,800
expire 10-17-23 (c)
Willscot Corporation 11.50 strike price, 225,470 775,617
expire 11-29-22) (c)
Total United States 2,739,534
Total Warrants(cost $1,995,879) 2,739,534
Call Options- 0%
United States-0%
Weibo, $50.00 exercise price 100 3,500
expire 01-17-20 (c)
Total Call Options (cost $180,090) 3,500
Escrow-0%
China - 0%
Sino Forest Corporation escrow 1,180,000 3,688
Georgia-0%
MIG LLC escrow 5,158,766 5,613
Total Escrow (cost $8,867) 9,301
TOTAL INVESTMENTS (cost $42,137,574) 41,914,574
SECURITIES SOLD SHORT - (1%)
Common Stock - (1%)
United States - (1%)
Willscot Corporation (c) (14,000) $(258,860)
Total Common Stock (proceeds $250,329) (258,860)
Call Options - 0%
United States - 0%
Hostess Brands, $15 strike price,
expire 4-17-20(c) (340) (20,400)
Willscot Corporation, $17.50 stirke price, (305) (54,138)
expire 4-17-20 (c)
Willscot Corporation, $20.00 strike price, (170) (18,275)
Expire 7-17-20 (c)
Total Call Options (proceeds $70,900) (92,813)
TOTAL SECURITIES SOLD SHORT (proceeds $321,229) $(351,673)
(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 December 31, 2019.
See notes to financial statements. (concluded)
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2019
INVESTMENT INCOME:
Interest $270,027
Dividends 179,582
Other 197,526
Total investment income 647,135
EXPENSES:
Custody Fees 11,054
Director Fees 18,000
Insurance expense 4,921
Management fees 677,146
Margin interest 69,161
Professional fees 66,284
Transfer agency fees 120,184
Dividend expense 2,606
Other 16,213
Total expenses 985,569
NET INVESTMENT LOSS (338,434)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND SECURITIES SOLD SHORT:
Net realized gain on investments 1,564,799
Net realized gain on securities sold short 194,712
Net change in unrealized appreciation
of investments and securities sold short 6,963,897
Net realized and unrealized gain from
investments and securities sold short 8,723,408
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $8,384,974
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 2019 AND 2018
NET INCREASE (DECREASE) IN NET ASSETS 2019 2018
RESULTING FROM:
OPERATIONS:
Net investment loss $(338,434) $(343,155)
Net realized gain on investments 1,759,511 3,922,915
and securities sold short
Net change in unrealized appreciation 6,963,897 (5,669,866)
(depreciation)of investments and
securities sold short
Net increase (decrease) in net assets 8,384,974 (2,090,106)
resulting from operations
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income and
net capital gains (1,484,430) (1,935,237)
Return of capital (1,313,853) (54,900)
Net decrease in net assets resulting (2,798,283) (1,990,137)
from distributions to shareholders
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 299,885 366,978
Reinvestment of distributions 2,684,616 1,918,348
Payments for shares redeemed (7,538,317) (12,774,540)
Net decrease in net (4,553,816) (10,489,214)
assets resulting from capital
share transactions
NET INCREASE (DECREASE) IN NET ASSETS 1,032,875 (14,569,457)
NET ASSETS - Beginning of the year 39,773,471 54,342,928
NET ASSETS - End of year $40,806,346 $39,773,471
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from $8,384,974
operations
Adjustments to reconcile net
increase in net assets resulting from
operations to net cash provided
by operating activities:
Net change in unrealized appreciation (6,963,897)
of investments and securities sold short
Net realized gain on investments and securities (1,759,511)
sold short
Net amortization and accretion 382,470
Purchases of investment securities (49,484,808)
Proceeds from sale of investment securities 59,399,749
Purchases of securities sold short (4,937,216)
Proceeds from sale of securities sold short 5,371,077
Changes in assets and liabilities:
Decrease in receivables 116,179
Decrease in other assets 5,146
Decrease in due to broker (3,484,362)
Increase in payables 10,641
Net cash provided by operating activities 7,040,442
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold 299,885
Payments for shares redeemed (7,226,447)
Payments for distributions to shareholders (113,667)
Net cash used in financing activities (7,040,229)
NET INCREASE IN CASH AND CASH EQUIVALENTS 213
CASH AND CASH EQUIVALENTS - Beginning of year 864
CASH AND CASH EQUIVALENTS - End of year $1,077
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for interest $ 69,161
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2019
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 $1,077.
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.
Broker Balances-The Fund has established an account with a
prime broker (Citigroup) for the purpose of purchasing
securities on margin. At December 31, 2019, the Fund had a
margin account balance in the amount of $(160,785) for
securities purchased on margin, which is included in
due to broker on the statement of assets and liabilities.
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.
Recent Accounting Pronouncements- In August 2018, the FASB
issued ASU 2018-13, Fair Value Measurement (Topic 820) -
Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement ("ASU 2018-13"). The primary focus
of ASU 2018-13 is to improve the effectiveness of the disclosure
requirements for fair value measurements. The changes affect all
companies that are required to include fair value measurement
disclosures. In general, the amendments in ASU 2018-13 are
effective for all entities for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2019.
An entity is permitted to early adopt the removed or modified
disclosures upon the issuance of ASU 2018-13 and may delay
adoption of the additional disclosures, which are required
for public companies only, until their effective date.
The Fund is currently evaluating the potential impact of
this guidance on the Fund's financial statements and disclosures.
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 December 31, 2019:
Level1 Level2 Level3 Total
Convertible
Preferred Stock $558,174 $1,304,389 $0 $1,862,563
Convertible Bonds 0 32,989,881 0 32,989,881
Convertible Bonds Units 0 274,093 0 274,093
Corporate Bonds 0 37,255 0 37,255
Common Stock 2,600,741 1,397,706 0 3,998,447
Warrants 1,112,500 1,615,430 11,604 2,739,534
Call Options 3,500 0 0 3,500
Escrow 0 0 9,301 9,301
Total
Investments $4,274,915 $37,618,754 $20,905 $41,914,574
The following table summarizes the Fund's common stock industry
concentrations as of December 31, 2019:
Level1 Level2 Level3 Total
Advertising $529,100 $0 $0 $529,100
Cable & Satellite TV 2,015,305 0 0 2,015,305
Forestry & Paper 0 5,411 0 5,411
Media Content 0 1,343,000 0 1,343,000
Oil Field Equipment
& Services 0 37,304 0 37,304
Software/Services 3,501 0 0 3,501
Specialty Retail 0 11,991 0 11,991
Trucking & Delivery 52,835 0 0 52,835
Total Common Stock $2,600,741 $1,397,706 $0 $3,998,447
The following table summarizes the inputs used to value the
Fund's securities sold short as of December 31, 2019:
Level1 Level2 Level3 Total
Common Stock
Building &
Construction $258,860 $0 $0 $258,860
Call Options 38,675 54,138 0 92,813
Total securities
sold short $297,535 $54,138 $0 $351,673
The following is a reconcilation of Level 3 assets for which
significant unobservable inputs were used to determine fair
value:
Warrants Escrow
Balance as of
December 31, 2018 $12,127 $43,340
Realized gain(loss) 0 (769,869)
Net change in appreciation (523) 741,920
(depreciation)
Purchases 0 0
Sales/return of capital 0 (6,090)
Transfers into Level 3 0 0
Transfers out of Level 3 0 0
Balance as of
December 31, 2019 $11,604 $9,301
For the year ended December 31, 2019, the net change in
appreciation (depreciation) included in net assets related to
Level 3 investments still held at the reporting date are as
follows:
Warrants Escrow
$(523) $(25,340)
Topic 820 requires the following disclosures about fair value
measurements of assets and liabilities classified as Level 3
within the fair value hierarchy: 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 December 31, 2019. The table includes Level 3
investments with values derived from third parties. Such
investments may be 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 December 31, 2019 Technique Inputs Range
Assets:
Warrant $11,604 Discount to Liquidity 50%
Black-Scholes Discount
pricing model
Escrow $9,301 Broker quote
The significant unobservable input used in the fair value
measurement of the Fund's Level 3 warrants is a
liquidity discount. A significant and reasonable increase or
decrease 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 year ended December 31, 2019, 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 December 31, 2019 was $2,739,534 and is
included in investments on the statement of assets and liabilities.
As of and for the year ended December 31, 2019, 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
December 31, 2019 was $3,500 and is included in investments
on the statement of assets and liabilities. The fair value
of call options held short as of December 31,2019 was
$(92,813) 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 gain on investments on the statement of operations.
Change in unrealized appreciation (depreciation) on derivative
instruments is included in net change in unrealized appreciation
of investments and securities sold short on the statement of
operations.
The following table summarizes the net realized gain
(loss) and net change in unrealized appreciation (depreciation)
on derivative instruments for the year ended December 31, 2019:
Change in Net
Net Realized Unrealized Appreciation
Derivative Gain (loss) (Depreciation)
Warrants $(414,946) $1,306,748
Call Options 43,604 (190,912)
$371,342 1,115,836
The following table summarizes transactions in derivative
contracts for the year ended December 31, 2019:
Call
Warrants Options
Held as of
December 31, 2018 1,028,570 100
Purchased 700,160 2,167
Sold/exercised (801,140) (2,982)
Held as of
December 31,2019 927,590 (715)
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 statement 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 year ended December 31, 2019,
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 November 13, 2019, the
Fund offered to repurchase shares as of December 31, 2019, 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 were no redemption fees charged
during 2019.
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 2019 2018
Shares sold 15,837 18,811
Shares issued from reinvestment 143,179 107,712
of distributions
Shares redeemed (396,279) (654,641)
Net decrease (237,263) (528,118)
Shares outstanding at the
beginning of year 2,369,336 2,897,454
Shares outstanding at the
end of the year 2,132,073 2,369,336
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.
received management fees for the seven months ended July 31, 2019
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 $20,000,000 Net Assets
First $20,000,000 up to in Excess of
Net Assets in Net Assets $70,000,000 $70,000,000
Annual management
fee rate 2.00% 1.50% 1.00%
On August 1, 2019, the Fund's directors unanimously approved an
amendment to the management fee schedule in the Fund's Investment
Advisory Agreement. Beginning August 1, 2019, Zazove Associates,
L.L.C. will receive management fees based on the following
management fee schedule.
Net Assets in
First $20,000,000 Excess of
Net Assets in Net Assets $20,000,000
Annual management
fee rate 2.00% 1.00%
As of December 31, 2019, certain employees and affiliates
of the Investment Advisor held 14.45% 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 received $6,000 for their service to the Fund during
2019.
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 2016 - 2019 remain
subject to examination by the Internal Revenue Service.
It is the Fund's policy to meet the requirements for
qualification as 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.
The amount of distributions from net investment income and net
realized capital gain are determined in accordance with federal
income tax regulations, which may differ from accounting
principles generally accepted in the United States.
Book to tax differences are primarily attributable to tax rules
regarding contingent payment debt instruments and market discount
bonds. To the extent these book to tax differences are permanent
in nature, such amounts are reclassified among paid-in surplus,
accumulated undistributed net realized gain (loss) on investments
and accumulated net investment income (loss). Accordingly, at
December 31, 2019, reclassifications were recorded to increase
accumulated undistributed net investment gain by $275,081,
decrease accumulated net realized losses on investments and
securities sold short by $275,081.
At December 31, 2019, the Fund had no undistributed
ordinary income, undistributed short term capital gains or
undistributed long term capital gains for federal income tax
purposes.
At December 31, 2019, 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 Liabilities $42,137,574
Amortization and accretion cost adjustments
not included in tax cost basis (180,199)
Cost of investments for tax purposes $41,957,375
Proceeds of securities sold short on 321,229
Statement of Assets and Liabilities
Gross tax unrealized appreciation 3,818,400
Gross tax unrealized depreciation (3,891,645)
Net tax unrealized depreciation on investments $(73,245)
8. DISTRIBUTIONS TO SHAREHOLDERS
On August 1, 2019, the Fund's directors declared a dividend
payable December 1, 2019 to shareholders of record on
November 15, 2019. The December 1, 2019 dividend payment was
$1.38 per share.
The character of distributions paid during the years ended
December 31, 2019 and 2018 for federal income tax purposes
were as follows.
2019 2018
Distributions paid from net
investment income and
short-term capital gains $1,484,430 $1,935,237
Distributions paid from
long term capital gains 0 0
Return of Capital 1,313,853 54,900
Total distributions paid $2,798,283 $1,990,137
9. INVESTMENT TRANSACTIONS
For the year ended December 31, 2019, the cost of purchases
and proceeds from sales of investments were $54,381,020 and
$64,832,372, respectively. There were no purchases or sales
of long-term U.S. government securities.
10. 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 December 31, 2019, the Fund's investments by industry
concentrations (as a percentage of net assets) were as follows:
Software/Services 21.2%
Banking 9.8%
Media Content 8.7%
Health Services 6.4%
Electronics 5.9%
Building & Construction 5.5%
Cable & Satellite TV 4.9%
Integrated Energy 4.2%
Aerospace/Defense 3.7%
Medical Products 2.9%
Brokerage 2.9%
Energy - Exploration & Production 2.6%
Specialty Retail 2.4%
Telecom - Wireless 2.1%
Media - Diversified 2.1%
Pharmaceuticals 2.0%
Food - Wholesale 2.0%
Support-Services 1.9%
Electric-Generation 1.8%
Trucking & Delivery 1.5%
Gas Distribution 1.4%
Telecom - Wireline Integrated & Services 1.3%
Advertising 1.3%
Transport Infrastructure/Services 1.3%
Machinery 1.1%
Chemicals 0.9%
Tech Hardware & Equipment 0.7%
REITs 0.3%
Oil Field Equipment & Services 0.1%
Forestry/Paper <0.1%
At December 31, 2019, the Fund's securities
sold short by industry concentrations
(as a percentage of net assets) were as follows:
Building & Construction -0.8%
Food-Wholesale <-0.1%
11. SUBSEQUENT EVENTS
In accordance with FASB ASC Topic 855, Subsequent Events,
management has valuated 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 December 31, 2019
2019 2018 2017 2016 2015
Net Asset Value-
Beginning of Year $16.79 $18.76 $16.69 $14.93 $19.07
INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income(loss)(a) (0.15) (0.13) (0.18) (0.03) 0.04
Net realized and
unrealized gains or
losses on investments 3.88 (0.97) 2.30 1.92 (3.66)
Total from investment
operations
3.73 (1.10) 2.12 1.89 (3.62)
Less distributions
to shareholders:
From net investment
income and net
capital gains (0.73) (0.85) (0.00)* (0.13) (0.52)
Return of capital (0.65) (0.02) (0.05) 0.00 0.00
Total distributions
to shareholders (1.38) (0.87) (0.05) (0.13) (0.52)
Net Asset Value-
End of year $19.14 $16.79 $18.76 $16.69 $14.93
TOTAL RETURN(b) 22.39% (6.13)% 12.71% 12.68% (19.11)%
RATIOS/SUPPLEMENTAL DATA:
Net assets-
end of year $40,806,346 $39,773,471 $54,342,928 $53,825,244 $52,155,936
Ratio of expenses
to average net
assets(c) 2.36% 2.47% 2.42% 2.18% 2.27%
Ratio of net
investment income
(loss)to average
net assets (0.81)% (0.68)% (1.04)% (0.21)% 0.20%
Portfolio turnover
rate 127% 182% 132% 126% 89%
(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 2.19% 2.26%, 2.22%,2.09%, and 2.01%,for the
years ended December 31, 2019, 2018, 2017, 2016,and 2015, respectively.
(*)Distributions is less than $0.005 per share.
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
PROXY VOTING POLICIES (UNAUDITED)
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 (UNAUDITED)
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 the 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.
TAX INFORMATION (UNAUDITED)
For corporate shareholders, 9.00% of the distributions
qualify for the dividends received deduction.
Certain dividends paid by the Fund may be subject to a maximum tax
rate of 15%, as provided for by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. For the Year ended December 31, 2019,
9.00% of the dividends paid from net investment income from
the Fund is designated as qualified dividend income.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
FUND EXPENSES (UNAUDITED)
A shareholder of the Fund incurs two types of costs: (1) transaction
costs, such as redemption fees which may apply to shares held for
less than one year, and (2) ongoing costs, including investment
advisory fees, transfer agent fees, and other Fund expenses. The
examples below are intended to help shareholders understand the
ongoing costs (in dollars) of investing in the Fund and to compare
these costs with the ongoing costs of investing in other funds.
Actual Expenses
The following table provides information about actual account values
and actual fund expenses for shareholders. The table shows the
expenses that a shareholder would have paid on a $1,000 investment
in the Fund from July 1, 2019 to December 31, 2019 as well as how
much a $1,000 investment would be worth at the close of the period,
assuming actual fund returns and expenses. A shareholder can estimate
expenses incurred for the period by dividing the account value at
December 31, 2019 by $1,000 and multiplying the results by the number
in the Expenses Paid During the Period row as shown below.
Beginning Account Value $1,000.00
Ending Account Value $1,058.67
Expenses Paid During Period* $ 11.61
Annualized Expense Ratio 2.24%
Hypothetical Example for Comparison Purposes
The following table provides information about a hypothetical
account value and hypothetical expenses for the period July 1, 2019
to December 31, 2019 based upon the Fund's actual expense ratio and
an assumed rate of return of 5% per year before expenses, which is
not the Fund's actual return. The hypothetical account value and
expenses may not be used to estimate the actual ending account
balance or expenses shareholders paid for the period. Shareholders
may use this information to compare the ongoing costs of investing
in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to
highlight your ongoing costs only and do not reflect any transaction
costs, such as redemption fees. Therefore, the third line of the
table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds.
In addition, if these transaction costs were included, your costs
would have been higher.
Beginning Account Value $1,000.00
Ending Account Value $1,013.90
Expenses Paid During Period* $ 11.36
Annualized Expense Ratio 2.24%
* Expenses are equal to the Fund's annualized expense ratio,
multiplied by the average account value over the period,
multiplied by 184 (the number of days in the most recent fiscal
half-year) divided by 365 (to reflect the one-half year
period). For this purpose, margin interest is treated as an
expense as opposed to a cost of capital.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
INVESTMENT ADVISORY AGREEMENT APPROVAL (Unaudited)
Both the Investment Company Act of 1940 and the terms of the Fund's
investment advisory agreement require that the investment advisory
agreement between the Fund and its investment adviser be approved
annually both by a majority of the Board and by a majority of the
independent Directors.
On December 9, 2019, the Board of Directors, including the
independent Directors (referred to collectively as the "Directors")
unanimously determined that the terms of the investment advisory
agreement are fair and reasonable and approved the continuance of
the investment advisory contract as being in the best interests of
the Fund and its shareholders. In approving the investment
advisory agreement, the Directors reviewed the statutory and
regulatory requirements for approval and disclosure of investment
advisory agreements.
The Directors evaluated, among other things, the items set forth
below, and, after considering all factors together, determined, in
the exercise of its business judgment, that approval of the investment
advisory agreement was in the best interests of the Fund and its
shareholders. The following summary provides more detail on certain
matters considered by the Directors.
Nature, Extent and Quality of the Services Provided.
The Directors considered the roles and responsibilities of the
Investment Advisor. The Directors discussed with the Investment
Advisor the systems and resources utilized in managing the Fund
and providing additional services including, accounting, legal,
administrative, marketing and client service. The Directors
determined that the nature, extent and quality of the services
provided by the Investment Advisor support its decision to approve
the investment advisory contract.
Performance, fees and expenses of the Fund.
The Directors compared the Fund's performance to its peers in the
open-end convertible fund universe. In addition, on a regular basis,
the Directors review the Fund's performance verses appropriate market
indices. When considering the Fund's performance, the Directors
discussed with the Investment Advisor the performance goals and the
actual results achieved in managing the Fund with an emphasis placed
on long-term returns. The Directors discussed with the Investment
Advisor the level of advisory fees for the Fund relative to
other products advised by the adviser and the level of Fund expenses,
including advisory fees, relative to comparable funds in the marketplace.
The Directors reviewed not only the advisory fees but also other fees
and expenses incurred by the Fund and the Fund's overall expense ratio.
The Directors determined that the performance, fees and expenses of
the Fund support its decision to approve the investment advisory contract.
Investment Adviser's Expenses in Providing the Service and Pofitability.
The Directors discussed the substantial resources that the Investment
Advisor utilizes in performing its services for the Fund as well as the
profitability of the Fund as compared to other products managed by
the Investment Advisor. The Directors determined that the analysis of the
investment adviser's expenses and profitability support its decision to
approve the investment advisory contract.
Economies of Scale.
The Directors considered the size of the Fund, the breakpoints
in the management fee structure and how it relates to the Fund's
expense ratio. The Directors determined that its review of the
actual and potential economies of scale of the Fund support its
decision to approve the investment advisory contract.
DIRECTORS AND OFFICERS (UNAUDITED)
Number of
Name, Address Position(s)Term of office Principal Portfolios Other
and Age held with and Length Occupation(s)in Fund Director-
the fund of Time Served Complex ships
Overseen Held by
by Director
Director
Gene T. Pretti Director Indefinite CEO and Sr. N/A N/A
1001 Tahoe BlvdPresident 26 years Portfolio Mngr.
Incline Village, Zazove Associates, LLC
Nv 89451
Age: 58
Steven M. Secretary 24 years Executive Partner N/A N/A
Kleiman Treasurer and general counsel
520 Lake Cook Zazove Associates, LLC
Rd., Suite 178
Deerfield, IL 60015
Age: 58
Andrew J. Director Indefinite Investment Advisor N/A N/A
Goodwin, III 26 years Optimum Investment Advisors
1201 Cromwell Ct.
Alpharetta, GA 30022
Age: 76
Jack L. Hansen Director Indefinite Portfolio Manager N/A N/A
3600 Minnesota Dr 24 years The Clifton Group
Suite 327
Edina, MN 55435
Age: 59
Peter A. Director Indefinite Physician at N/A N/A
Lechman 26 years Northwestern Memorial
914 Wagner Road
Glenview, IL 60025
Age: 56
1 "Interested person" as defined in the Investment Company Act of
1940, as amended.
2 Includes time served as Director General Partner with Zazove
Convertible Fund, L.P., the predecessor to the Fund.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
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 Deloitte & Touche LLP
PUBLIC ACCOUNTING FIRM 111 South Wacker Drive
Chicago, IL 60606
DIVIDEND-DISBURSING UMB Fund Services, Inc.
AND TRANSFER AGENT 235 W. Galena Street
Milwaukee, WI 53212
Item 2: Code of Ethics
(a) Registrant has adopted a code of ethics (the "Code of Ethics")
that applies to its principal executive officer and principal
financial officer(s).
(b) No action required.
(c) Registrant did not adopt any amendment to the Code of Ethics
during the period covered.
(d) Registrant has not granted a waiver or an implicit waiver from its
Code of Ethics during the period covered by the shareholder report
presented in Item 1 hereto.
(e) Not applicable.
(f) (1) The registrant's Code of Ethics is attached as an Exhibit
hereto.
(2) Not applicable.
(3) Upon request, registrant will provide a copy without charge
of its Code of Ethics. Requests may be made by contacting
registrant by telephone at 847.239.7100.
Item 3: Audit Committee Financial Expert
Although Registrant's disinterested directors are sophisticated
and financially literate and have the necessary education and
experience to be effective directors, no director possesses
all of the specified attributes required to qualify as an audit
committee financial expert under the rules.
Item 4: Principal Accountant Fees and Services
(a) Audit Fees:
Audit Fees for the year ended December 31, 2018 $36,500
Audit Fees for the year ended December 31, 2019 $37,600
(b) Audit Related Fees:
Audit-Related Fees for the year ended December 31, 2018 $0.00
Audit-Related Fees for the year ended December 31, 2019 $0.00
(c) Tax Fees:
Tax Fees for the year ended December 31, 2018 $14,569
Tax Fees for the year ended December 31, 2019 $14,900
The foregoing fees were incurred for professional services
rendered by Registrant's principal accountant for tax
Compliance and tax return preparation.
(d) All Other Fees:
All Other Fees for the year ended December 31, 2018 $0.00
All Other Fees for the year ended December 31, 2019 $0.00
(e) Audit Committee's Procedures (Rule 2-01 of Regulation S-X).
This Rule is not applicable since Registrant is not a reporting
company under the Securities Exchange Act of 1934.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Registrant's accountant
for services rendered to Registrant for the years ended
December 31, 2018 and December 31, 2019 were $14,569 and
$14,900, respectively.
The aggregate non-audit fees billed by Registrant's accountant
for services rendered to Registrant's investment advisor for
the years ended December 31, 2018 and December 31, 2019
were $19,525 and $20,115, respectively.
(h) Registrant's board of directors was made aware of the fact that
Registrant's principal accountant provides tax preparation and
audit services for Registrant's investment advisor and for
investment partnerships managed by investment advisor.
Item 5: Audit Committee of Listed Registrants
This item only applies to a registrant that is a listed issuer
as defined in Rule 10A-3 under the Exchange Act
(17 CFR 240.10A-3) and is therefore not applicable.
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.
A copy of Registrant's Proxy Voting Policies and
Procedures are included as an Exhibit hereto.
Item 8: Portfolio Managers of Closed-End Management Investment
Companies
(a)
(1) Zazove Associates, LLC is engaged as the Fund's Investment Advisor
pursuant to the terms of an Investment Advisory Agreement. The
Investment Advisor is registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940, as amended.
Gene T. Pretti serves as President of the Fund and has served as
the Investment Advisor's Chief Executive Officer, Sr. Portfolio
Manager and Chief Investment Officer since October 1989.
Mr. Pretti is responsible for the day-to-day management of the Fund
and is also primarily responsible for managing certain other
investment portfolios managed by the Investment Advisor.
(2) The following chart provides certain information with regard
to the other accounts over which Mr. Pretti is primarily responsible
for the day-to-day management:
Category No. of Accounts Assets
Registered investment companies -0- -0-
Other Pooled investment vehicles 2 $89.7 million
Other Accounts 70 $1.6 billion
No. of Accounts
With Performance
Based Fees Assets
Registered investment companies -0- -0-
Other Pooled investment vehicles 1 $47.4 million
Other Accounts 35 $1.0 billion
The Investment Advisor engages in the practice of placing aggregate
orders for the purchase or sale of securities on behalf of its
clients, which could include the Fund. It is often the case that
larger principal transactions can be executed at more favorable
prices than multiple smaller orders. In addition, larger broker
transactions may often be executed at lower commission costs on a
per-dollar basis than multiple small orders. In all cases in which
an aggregate order to purchase or sell securities is placed by the
Investment Advisor, each account that participates in the aggregated
order will participate at the average price and all transactions
costs will be shared pro rata. The Investment Advisor will act in
good faith in the allocation of an aggregated order among accounts
(including the Fund) such that no account is favored over any
other account. The Investment Advisor may have financial or other
incentives to favor certain other accounts over the Fund (e.g.,
another account pays higher fees), but the Investment Advisor
intends to treat all accounts (including the Fund) in a fair,
reasonable and equitable manner.
(3) Portfolio Manager Compensation
Mr. Pretti receives a fixed salary that is not dependent on the
performance of the Fund or any other accounts that he is primarily
responsible for managing. As the Investment Advisor's majority
equity holder, Mr. Pretti receives a distributive share of the
Investment Advisors net income.
(4) Portfolio Manager Beneficial Ownership in the Fund
The dollar range of Mr. Pretti's beneficial interest of equity
securities in the Fund is $500,000 - $1,000,000.
(b) Not applicable.
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 157,613.33 $18.62 * *
April -0-
May -0-
June 68,559.94 $19.41 * *
July -0-
August -0-
September 130,629.70 $20.29 * *
October -0-
November -0-
December 39,475.83 $16.79 * *
* 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 2019. 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 last fiscal half-year (Registrant's second
fiscal half-year in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, Registrant's internal control over financial
reporting.
Item 12: Exhibits
(a)(1) Registrants Code of Ethics is attached as an exhibit.
(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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934 and the Investment Company Act of 1940, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Zazove Convertible Securities Fund, Inc.
By: /s/ Gene T. Pretti
---------------------------------
Name: Gene T. Pretti
Title: Principal Executive Officer
Date: February 27, 2020
By: /s/ Steven M. Kleiman
---------------------------------
Name: Steven M. Kleiman
Title: Principal Financial Officer
Date: February 27, 2020