Zazove Convertible Securities Fund, Inc.
Semi Annual Report
June 30, 2000
Unaudited
TABLE OF CONTENTS
Portfolio Manager's Remarks 1
Year to Date Performance Summary 2
Schedule of Investments 3
Balance Sheet 6
Statement of Operations 7
Statement of Changes in Shareholders' Capital 8
Statement of Cash Flows 9
Notes to Financial Statements 10
This report has been prepared for the general information of
shareholders in the Zazove Convertible Securities Fund, Inc.
Portfolio Manager's Remarks
Dear Zazove Convertible Securities Fund Shareholder,
The first six months of the new millennium were marked by
extreme volatility. During this period, most of the broad
stock market indices lost ground (Dow -8.44%; NASDAQ -2.54%;
S&P 500 -0.42%; and Russell 2000 +3.03%), marking the
most extended stock market decline since 1994.
In this challenging environment, the Zazove Convertible
Securities Fund fared well, significantly out-pacing the
broad equity market and an improving bond market. For the
first six months of 2000, the Zazove Convertible Securities
Fund grew 16.41%. The Fund's returns were driven by an
improvement in a variety of factors, including the continued
resurgence of small and medium-sized company stock prices,
improved liquidity, and a strong bond market. This volatile
period underscores the value of our strategy as a risk
efficient way in which to achieve equity-type returns over
the long-run. From a risk/reward standpoint, we believe that
the Fund is well positioned to participate in a rising stock
market should the bull market continue, while being
protected from a significant portion of a potential market
decline.
As always, please do not hesitate to call us with your
questions, comments, and suggestions. We appreciate your
continued confidence and the opportunity to manage risk on
your behalf in this challenging market environment. We look
forward to a rewarding second half of the year.
Sincerely,
Gene T. Pretti
President and Portfolio Manager
Year to Date Performance Summary
As of June 30, 2000
Monthly Quarterly Year-to-date
Performance Performance Performance
January, 2000 +1.01% +1.01%
February, 2000 +5.28% +6.33%
March, 2000 +1.17% +7.58% +7.58%
April, 2000 +0.88% +8.53%
May, 2000 +1.25% +9.89%
June, 2000 +5.94% +8.21% +16.41%
Returns are presented after all fees and expenses. Past results are
not a guarantee of future performance.
Schedule of Investments
As of June 30, 2000 (Unaudited)
Principal Market Value
CONVERTIBLE BONDS - 78.64%
APP Finance VII Mauritius + 3,980,000 656,700
0.000% Due 11-18-12
APP Finance VII Mauritius * 1,245,000 915,075
3.500 % Due 04-30-03
Aames Financial Corp. 35,000 7,088
5.500% Due 03-15-06
Alterra Healthcare Corp. 40,000 15,800
6.750% Due 06-30-06
Altos Hornos De Mexico ^ 500,000 187,500
5.500% Due 12-15-01
BankAtlantic Bancorp Inc. 1,647,000 1,416,420
6.750 % Due 07-01-06
BankAtlantic Bancorp Inc. 12,000 7,890
5.625 % Due 12-01-07
Cox Communications (PCS) 2,000,000 1,037,500
0.426% Due 04-19-20
DRS Technologies Inc. 165,000 218,387
9.000 % Due 10-01-03
EBRD BK Reconst & Dev/MATAV 1,000,000 1,066,250
0.750 % Due 07-02-01
Elan Corp. 1,000,000 1,415,000
4.750 % Due 11-15-04
Four Seasons + 2,800,000 1,001,000
0.000% Due 09-23-29
Gener S.A. 1,200,000 1,231,500
6.000 % Due 03-01-05
Interpublic Group Co. Inc. 600,000 582,750
1.870 % Due 06-01-06
Jacor Communications Inc. + 2,000,000 1,195,000
0.000 % Due 02-09-18
Johnson and Johnson 600,000 826,500
4.750% Due 02-15-05
Kellstrom Industries 35,000 16,800
5.750% Due 10-15-02
Lamar Advertising 10,000 11,106
5.250% Due 09-15-06
Magna Int'l Inc. 1,200,000 1,224,000
5.000% Due 10-15-02
Mail-Well Inc. 20,000 16,275
5.000% Due 11-01-02
NCS Healthcare Inc. 750,000 101,250
5.750 % Due 08-15-04
Network Associates Inc.+ 1,280,000 456,000
0.000 % Due 02-13-18
Pep Boys + 2,000,000 1,120,000
0.000% Due 09-20-11
Personnel Group 3,000,000 1,335,000
5.750 % Due 07-01-04
Phoenix Investment Partners Ltd. 1,502,000 2,005,170
6.000 % Due 11-01-15
Quadramed Corporation 965,000 337,750
5.250% Due 05-01-05
Rite Aid Corporation 2,530,000 1,532,231
5.250% Due 09-15-02
Solectron Corp. + 1,500,000 1,021,875
0.000 % Due 01-27-19
SpaceHab Inc. 250,000 175,000
8.000 % Due 10-15-07
Standard Commercial Corp. 50,000 29,500
7.250% Due 03-31-07
Thermo Fibertek Inc. * 1,325,000 1,073,250
4.500 % Due 07-15-04
Triarc Companies + 7,150,000 1,841,125
0.000 % Due 02-09-18
Tribune (Times Mirror Co.) + 2,000,000 1,132,500
0.000% Due 04-15-17
U.S. Diagnostic Labs Incorporated 1,544,000 1,080,800
9.000% Due 03-31-03
U.S. Diagnostic Labs Inc. * 630,000 551,250
6.500 % Due 06-30-01
Wellpoint Health Network * 1,900,000 1,315,750
0.000% Due 07-02-19
Young and Rubicam * 350,000 357,875
3.000% Due 01-15-05
Total convertible bonds (cost--$28,894,573) 28,514,867
CONVERTIBLE PREFERRED - 30.10% Shares Market Value
Budget Group Capital TR $3.125 34,400 756,800
Carriage Services Cap Trust $3.50 46,200 1,155,000
Fleetwood Capital Trust $3.00 30,000 757,500
Frontier Insurance $3.125 85,300 554,450
General Datacomm Industries $2.25 25,000 406,250
Hercules Inc. $65.00 1,020 566,100
Hybridon Inc. $6.50 5,698 313,390
Lehman Brothers $1.95 23,500 837,188
Metromedia Int'l Group, Inc.$3.625 45,000 1,260,000
Sovereign Capital Trust $3.750 20,000 925,000
Titanium Metal Inc. $3.3125 500 5,125
Treev PIK $0.84 166,800 2,668,800
Village Roadshow $3.25 * 25,500 709,729
Total preferred stocks (cost--$11,889,274) 10,915,331
Other Securities - .77% Amount Market Value
Ascent Assurance, Inc. 54,676 170,861
Treev Inc. 11,159 72,534
Hybridon Class A Wts '03 29,671 37,089
Total other securities (cost--$631,326) 280,483
Other assets less liabilities - (9.51)% (3,450,603)
PARTNERS' CAPITAL - - 100% 36,260,079
+ Nonincome producing.
* These securities are subject to contractual or legal restrictions
on their resale. As of June 30, 2000 the value of these securities
as a percentage of investment assets was 12.39%.
^ Bond is currently in default on its previous coupon interest payment.
Percentages are taken as a percent of Shareholders' Capital as of
June 30, 2000.
Balance Sheet
As of June 30, 2000 (Unaudited)
ASSETS:
Investments, at market value - cost $41,415,173 $39,710,682
Receivables -
Dividends 100
Interest 355,849
Total Receivables 355,949
Total Assets 40,066,632
LIABILITIES & SHAREHOLDERS' CAPITAL:
Liabilities -
Due to Shareholders $266,145
Margin account due to brokers 3,513,765
Accounting Payable 11,000
Other payables 15,644
Total liabilities 3,806,553
Shareholders' Capital 36,260,079
Total Liabilities and Shareholders' Capital 40,066,632
Statement of Operations
For the six months ended June 30, 2000
(Unaudited)
INVESTMENT INCOME
Dividends $480,931
Interest 625,002
Other 4,349
TOTAL INVESTMENT INCOME 1,110,282
EXPENSES:
Management fee 295,039
Margin Interest 204,400
Custodian fees 3,165
Director fees 3,000
Other fees - clearance fees; filing fees 5,197
Accounting and legal expense 12,200
Transfer agency fee 26,929
TOTAL EXPENSE 549,931
NET INVESTMENT INCOME 560,351
NET REALIZED AND UNREALIZED
GAINS ON INVESTMENTS:
Net realized gain on investments 4,280,480
Net change in unrealized appreciation or
depreciation of investments 271,691
NET GAIN ON INVESTMENTS 4,552,172
NET INCREASE IN SHAREHOLDERS' CAPITAL
RESULTING FROM OPERATIONS $5,112,523
Statement of Changes in Shareholders' Capital
For the six months ended June 30, 2000
(Unaudited)
OPERATIONS:
Net investment income $560,351
Net realized gain on investments 4,280,480
Net change in unrealized appreciation/
depreciation of investments 271,691
Net increase in partners' capital
resulting from operations 5,112,523
SHAREHOLDERS' CAPITAL TRANSACTIONS:
Contributions 1,886,682
Withdrawals (1,499,481)
Dividend Distribution (995,557)
Dividend Reinvestment 989,091
Net Contributions 380,736
Net increase in shareholders' capital 5,493,258
SHAREHOLDERS' CAPITAL
Beginning of period 30,766,821
End of period $36,260,079
Statement of Cash Flows
For the six months ended June 30, 2000
(Unaudited)
Cash Flows from Operating Activities:
Net increase in shareholders' capital from operations $5,112,523
Adjustments to reconcile net decrease in shareholders'
Capital from operations to cash used in operations -
Net change in unrealized gains/losses on investments (271,691)
Net realized gain on investment (4,280,480)
Decrease in dividends receivable 50,517
Increase in interest receivable (51,804)
Decrease in accounting payable (11,000)
Increase in margin interest payable 233
Decrease in due to shareholders (2,078,154)
Cash received from -
Sale of securities 26,024,400
Securities sold short 1,882,038
Securities sold in prior period,
settled this period 2,768,163
Cash paid to-
Purchase securities (24,423,068)
Cover short sales (2,816,090)
Securities bought in prior period,
settled this period 0.00
Net cash used in operations (1,905,586)
Cash Flows from Financing Activities:
Shareholder's contributions (cash only) 1,358,055
Shareholder's withdrawals (1,499,481)
Dividend Distribution (995,557)
Dividend Reinvestment 989,091
Decrease in margin account due to brokers (1,760,217)
Net cash provided by financing (1,908,109)
Net increase in cash and cash equivalents (2,523)
Cash and Cash Equivalents, beginning of period 2,523
Cash and Cash Equivalents, end of period $0.00
Notes to Financial Statements
For the six months ended June 30, 2000
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
Zazove Convertible Securities Fund, Inc., a Maryland corporation
(the "Fund") is registered under the Investment Company Act of l940
as a non-diversified management 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 will pursue this objective primarily through
investing in a portfolio of convertible securities. The convertible
strategy will focus primarily on opportunities in the United States,
although the Fund may invest abroad. Zazove Associates, LLC, is the
Fund's Investment Advisor.
The following is a summary of significant accounting policies:
Security Valuations
Securities 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. Securities 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. If the market for a security exists predominantly through a
limited number of market makers, the security is valued by attaining an
independent bid and offer by at least two market makers in the security
and valuing the security at the mid-point of the quote that, under the
circumstances and in the good faith judgment of Investment Advisor
represents the fair value of the security. Securities for which market
quotations are not available are valued at a fair value as determined
in good faith by the Investment Advisor with oversight of the Board of
Directors.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market investments.
Other Policies
The accounts of the Fund are kept on the accrual basis of accounting.
Security transactions are recorded on the trade date. Realized gains
or losses from sales of securities are generally determined on the
first-in, first-out ("FIFO") cost basis. Dividend income is
recognized on the ex-dividend date. Interest income and expense are
recognized on the accrual basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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.
Notes to Financial Statements
For the six months ended June 30, 2000
(Unaudited)
2. GOVERNING:
The overall responsibility for the management and operation of the
Fund is vested in the Directors. The Bylaws authorize the Board to be
comprised of not less than five (5) or more than seven (7) directors.
The Board consists of five directors: Gene T. Pretti, Steven M.
Kleiman, Andrew J. Goodwin III, Jack L. Hansen, and Peter A. Lechman.
Each of the three Director who are not affiliated with the Investment
Advisor receive $2,000 annually for their service to the Fund.
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.
Except for certain actions requiring the approval of the Shareholders
or the 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. Management of the Fund is vested exclusively in the
Directors. There will not be any Shareholder vote unless required by
the Investment Company Act.
3. SHARES:
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.
Shares may be purchased as of the first business day of each month upon
approval of the Directors at the then net asset value per Share. All
subscription funds received after the first business day of the month
will be added to the general funds of the Fund at the beginning of the
following month.
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.
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.
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.
4. MANAGEMENT ARRANGEMENTS:
Zazove Associates, LLC has been engaged as the Fund's Investment
Adviser pursuant to the terms of an Investment Advisory Agreement.
As Investment Advisor to the Fund, Zazove Associates, LLC will receive
management fees per the following management fee schedule. Management
fees are computed and paid on a monthly basis.
Annual Management
Fee Rate 2.00% 1.50% 1.00%
Fund Capital First $20,000,000 Capital in excess Capital in excess
in capital of $20,000,000 up of $70,000,000
to $70,000,000
5. EXPENSES:
The Fund bears all normal costs and expenses of its operations
including: management fees, brokerage commissions; custody 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 Fund will not incur costs and expenses associated with offering
Shares in the Fund. No portion of the Investment Advisors or its
affiliate's general overhead costs will be allocated to the Fund.
6. INCOME TAXES:
The Fund intends to elect to be treated and to qualify each year as a
"regulated investment Company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and therefore will not
generally be liable for Federal income taxes to the extent earnings
are distributed on a timely basis.
7. INVESTMENT TRANSACTIONS:
For the six months ended June 30, 2000, purchases of investment
securities (excluding short-term securities) were $24,423,068, and
proceeds from sales of investment securities were $26,024,400. For
federal income tax purposes, at June 30, 2000, the gross unrealized
appreciation on investments was approximately $3,428,883 and the gross
unrealized depreciation was approximately $(5,133,347). The cost at
June 30, 2000 of investments for federal income tax purposes was
approximately $41,415,173.
8. OFF BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK:
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 hedged positions 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
convertible position.
At June 30, 2000, the three largest industry concentrations were as
follows (as a percentage of investment securities at market value):
Computer Software and Services 9.6%
Telecommunication Services 9.1%
Misc. Financial 7.8%
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. The resulting concentration of credit risk is
mitigated by the custodian's obligation to comply with the rules and
regulations of the Securities and Exchange Act of 1934. In addition,
the Fund has established an account with a brokerage firm (Bear Stearns
Securities Corp.) for the purpose of purchasing securities on margin.
At June 30, 2000, the Fund owed the brokerage firm $3,513,765 for
securities purchased on margin. The Fund pays interest on any margin
balance which is calculated as the daily margin account balance times
the broker's margin interest rate.
9. ORGANIZATION:
The Fund initially acquired its portfolio pursuant to a merger whereby
the Zazove Convertible Fund, L.P., a Delaware limited partnership was
merged into the Fund on January 1, 1999.
DIRECTORS Andrew J. Goodwin, III
Jack L. Hansen
Steven M. Kleiman
Peter Lechman
Gene T. Pretti
OFFICERS Gene T. Pretti
Steven M. Kleiman
INVESTMENT ADVISOR Zazove Associates, LLC
940 Southwood Blvd., Suite 200
Incline Village, NV 89451
CUSTODIAN UMB Bank N.A.
928 Grand Avenue
Kansas City, MO 64106
INDEPENDENT ACCOUNTANTS Arthur Andersen, LLP
33 W. Monroe Street
Chicago, IL 60603
DIVIDEND-DISBURSING
AND TRANSFER AGENT Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, WI 53202
