Zazove Convertible Fund, L.P.
Semi Annual Report
June 30, 1996 (Unaudited)
Table of Contents
The Manager's Overview
Historical Performance Summary
Schedule of Investments
Balance Sheet
Statement of Operations
Statement of Changes in Partners' Capital
Statement of Cash Flows
Notes to Financial Statements
Zazove Convertible Fund, L.P.
The Manger's Overview
Dear Partners:
I thought that I would take this opportunity to express our views on the
recent turmoil in the stock market. Although this report summarizes the
Fund as of June 30, 1996, this letter is being written in mid-August after a
particularly volatile six weeks. The S & P 500 stock index fell more than 7%
from its June highs to its low in late July, while the broader based Russel
2000 and NASDAQ Composite indices both fell more than 15% during a
similar period. A significant portion of these losses were recovered as of
mid-August.
There are several observations that we can make regarding this market
correction:
* This is not unusual; market declines of this magnitude tend to occur
every two years or so. In fact, what has been unusual is that it has been
nearly six years since the last such decline.
* These corrections are nearly impossible to predict, both in timing and
duration. The 1990 decline was caused by a specific unforeseen event
(the Kuwait Invasion) while the more recent decline really had no clear
catalyst. History has shown market declines to be random and
unpredictable.
* Our convertible strategy did its job. The Fund was sheltered from much
of the recent decline relative to the broad market.
Our disciplined strategy is designed to achieve the long-term returns
typical of the stock market with significantly reduced risk. This ensures
our ability to enjoy favorable markets like the last six years and
comfortably withstand corrections such as July's . . . without relying on
prediction.
Sincerely,
Gene T. Pretti
President and Portfolio Manager
Zazove Convertible Fund, L.P.
Historical Performance Summary
Description:
The Semi Annual Report includes a chart and graph that detail the
performance of the Fund since September 30, 1990. The Chart compares
the Fund's cumulative performance to the cumulative performance of the
S&P 500 Stock Index and the Lehman Int. Govt/Corp Bond Index for the six
months, one year,three year and five year periods ended June 30, 1996 and for
the period beginning September 30, 1990 and ending June 30, 1996. These
results are as follows: Fund - six month return 12.92%; one year return
27.29%; three year return 45.49%; five year return 147.34%; since September
30, 1996 209.16%. S&P 500 Stock Index- six month return 10.09%; one year
return 26.00%; three year return 61.04%; five year return 107.58%;
since September 30, 1996 158.44%. The Lehman Int. Govt/Corp Bond Index -
six month return (.21)%; one year return 5.00%; three year return 15.58%;
five year return 44.52%; since September 30, 1996 56.99%.
The Chart also details the average annualized returns for the Fund,
the S&P 500 Stock Index and the Lehman Int. Govt/Corp Bond Index
for the three year and five year periods ended June 30, 1996 and for the
period beginning September 30, 1990 and ending June 30, 1996. These
results are as follows: Fund - three year average annualized return
13.31%; five year average annualized return 19.86%; average annualized
return since September 30, 1990 21.69%. S&P 500 Stock Index -
three year average annualized return 17.21%; five year average
annualized return 15.73%; average annualized return since September
30, 1990 17.95%. The Lehman Int. Govt/Corp Bond Index - three year
average annualized return 4.94%; five year average annualized return
7.64%; average annualized return since September 30, 1990 8.16%.
The Graph details the growth of a $100,000 investment in the Fund for
the period beginning September 30, 1996 and ending June 30, 1996.
The Graph also details the performance of the S&P 500 Stock Index
and the Lehman Int. Govt/Corp Bond Index during this period.
The vertical axis reflects the cumulative dollar value of the investment
and the horizontal axis reflects the date.
The following disclosure is presented at the bottom of the page that
includes the Historical Performance Summary:
Returns for the Fund are after all fees and expenses. The S&P 500 Stock
Index includes the reinvestment of dividends. The Lehman Intermediate
Government/Corporate Bond Index includes the reinvestment of
interest. Past results are not a guarantee of future performance.
Zazove Convertible Fund, L.P.
Schedule of Investments
As of June 30, 1996 (unaudited)
CONVERTIBLE BONDS - DOMESTIC 68.15%
Principal Market
Amount (000's) Value
*ADT Operations Inc. 2,000.00 1,120,000.00
0.000% Due 07/06/10
**All American Comm. 550.00 497,750.00
6.500% Due 10/01/03
All American Comm. 705.00 638,025.00
6.500% Due 10/01/03
Alliance Gaming Corp. 2,300.00 1,569,750.00
7.500% Due 09/15/03
**American Medical 770.00 845,075.00
5.250% Due 02/01/01
**Apple Computer Inc. 950.00 916,750.00
6.000% Due 06/01/01
Argosy Gaming Co. 850.00 790,500.00
12.000% Due 06/01/01
Bank Atlantic Bancorp 1,000.00 1,025,000.00
6.750% Due 07/01/06
Chock Full O' Nuts 120.00 102,300.00
7.000% Due 04/01/12
Complete Management 985.00 1,036,712.50
8.000% Due 08/15/03
**Cyrix Corporation 850.00 635,375.00
5.500% Due 06/01/01
Diagnostic/Retrieval Sys. 650.00 858,000.00
9.000% Due 10/01/03
Emerson Radio 1,260.00 1,089,900.00
8.500% Due 08/15/02
ICN Pharmaceuticals 750.00 918,750.00
8.500% Due 11/15/99
MacNeal-Schwendler Corp. 750.00 652,500.00
7.875% Due 08/18/04
**North American Vaccine 500.00 476,250.00
6.500% Due 05/01/03
**Z Physicians Clinical Lab900.00 337,500.00
7.500% Due 08/15/00
Pioneer Financial Services 750.00 1,063,125.00
8.000% Due 07/15/00
Pioneer Financial Services 115.00 118,162.50
6.500% Due 04/01/03
**Quintiles Transnational 650.00 658,125.00
4.250% Due 05/31/00
**Richey Electronics 500.00 515,000.00
7.000% Due 03/01/06
Roadmaster Industries 1,500.00 1,010,625.00
8.000% Due 08/15/03
**Sepracor, Inc. 680.00 676,600.00
7.000% Due 12/01/02
Sierra Tahoe Bancorp 385.00 558,250.00
8.500% Due 02/01/04
**U.S. Diagnostic Labs Inc.340.00 506,600.00
9.000% Due 03/31/03
**United Waste Systems Inc.900.00 1,017,000.00
4.500% Due 06/01/01
CONVERTIBLE BONDS - International 17.14%
**Advance Agro Public Co. 600.00 596,250.00
3.500% Due 06/14/01
Banco De Galicia 460.00 508,300.00
7.000% Due 08/01/02
Empresas ICA Socieded 1,000.00 650,000.00
5.000% Due 03/15/04
MBL Intl Finance 500.00 583,750.00
3.000% Due 11/30/02
**New World Infrastructure 600.00 574,500.00
5.000% Due 07/15/01
**Phoenix Shannon 800.00 776,000.00
9.500% Due 11/01/00
**United Communication Ind. 500.00 500,000.00
2.750% Due 04/04/06
**Winbond Electronics Corp. 750.00 749,062.50
2.000% Due 03/13/03
TOTAL CONVERTIBLE BONDS - 85.29% 24,571,487.50
(Cost: $24,282,675)
CONVERTIBLE PREFERRED STOCK - 11.71%
Market
Shares Value
Banco Comerc Portugues $4.000 20,000.00 995,000.00
Network Imaging $2.00 53,000.00 801,625.00
Public Storage $2.0625 31,000.00 1,077,250.00
Walden Res'l. Prop. Inc. $2.29 20,000.00 500,000.00
TOTAL CONVERTIBLE PREFERRED STOCK 3,373,875.00
(Cost $3,140,350)
COMMON STOCK/PARTNERSHIPS - 4.83%
Alliance Capital Management 25,000.00 600,000.00
Oppenheimer Capital L.P. 11,700.00 340,762.50
Pacific Crest Capital Corp. 33,000.00 284,625.00
Sunsource LP (Class B) 39,000.00 165,750.00
TOTAL COMMON STOCK/PARTNERSHIPS 1,391,137.50
(Cost $1,276,027)
WARRANTS - 2.64%
Audiovox 16,800.00 29,400.00
Viacom Class E 300,000.00 731,250.00
TOTAL WARRANTS 760,650.00
(Cost $1,180,942)
COMMON STOCK SOLD SHORT - (2.42%)
ADT, Ltd. (25,000.00) (475,000.00)
Banco De Galicia (8,000.00) (206,000.00)
Roadmaster Industries (9,900.00) (14,850.00)
TOTAL COMMON STOCK SOLD SHORT (695,850.00)
(Cost $700,542)
OTHER ASSETS LESS LIABILITIES - (2.05%) (590,547.00)
PARTNERS' CAPITAL - 100% 28,810,753.00
*Nonincome producing.
**These securities are subject to contractual or legal restrictions on their
resale. At June 30, 1996, the value of these securities represented 35.67%
of partners' capital.
Z This security is currently a non-performing asset. The interest payments
due and payable on August 15, 1995 and February 15, 1996 have not been
paid.
The above percentages were computed as a percentage of partners'
capital.
See accompanying notes which are an integral part of the financial
statements.
Zazove Convertible Fund, L.P.
Balance Sheet
As of June 30, 1996 (unaudited)
ASSETS:
Cash and cash equivalents 190,975.83
Investments, at market value -
cost $29,879,994.28 (Note 1) 30,097,150.00
Receivables -
Dividends 4,970.00
Interest 328,638.78
Total Receivables 333,608.78
Organizational Costs 18,636.93
TOTAL ASSETS 30,640,371.54
LIABILITIES & PARTNERS' CAPITAL:
Securities purchased,
not settled 1,103,851.00
Securities sold short -
cost $(700,541.52) (Note 8) 695,850.00
Accounting payable 10,000.02
Margin interest payable 2,403.66
Payable for custody of assets 1,404.84
Misc. payable 15,984.38
Payable to adviser 125.08
TOTAL LIABILITIES 1,829,618.98
Partners' Capital (Note 3) 28,810,752.56
TOTAL LIABILITIES AND
PARTNERS' CAPITAL 30,640,371.54
Net Asset Value per Unit: 12.75
(Based on 2,260,540.82 Units Outstanding)
See accompanying notes which are an integral part of the financial
statements.
Zazove Convertible Fund, L.P.
Statement of Operations
For the six months ended June 30, 1996 (unaudited)
INVESTMENT INCOME:
Dividends 183,932.47
Interest 738,142.27
TOTAL INVESTMENT
INCOME 922,074.74
EXPENSES:
Management fee (Note 4) (262,485.24)
Margin interest (93,703.22)
Custodian fees (6,820.09)
Director fees (3,000.00)
State taxes (100.00)
Organizational expense (3,607.14)
Accounting and legal expense (11,547.75)
Misc. expense (445.36)
Dividend expense on short
positions (10,332.00)
Printing expense (1,280.56)
TOTAL EXPENSE (393,321.36)
NET INVESTMENT INCOME 528,753.38
NET REALIZED/ UNREALIZED
GAINS ON INVESTMENTS:
Net realized gain on investments 3,319,149.31
Net change in unrealized
appreciation or depreciation of
investments (636,216.40)
NET GAIN ON INVESTMENTS 2,682,932.91
NET INCREASE IN PARTNERS'
CAPITAL RESULTING FROM
OPERATIONS 3,211,686.29
See accompanying notes which are an integral part of the financial
statements.
Zazove Convertible Fund, L.P.
Statement of Changes in Partners Capital
For the six months ended June 30, 1996 (unaudited)
OPERATIONS:
Net investment income 528,753.38
Net realized gain on investments 3,319,149.31
Net change in unrealized
appreciation/depreciation
of investments (636,216.40)
Net increase in partners' capital
resulting from operations 3,211,686.29
PARTNERS' CAPITAL TRANSACTIONS:
Contributions 1,746,239.85
Withdrawals (1,086,085.99)
Net Contributions 660,153.86
Net increase in partners' capital 3,871,840.15
PARTNERS' CAPITAL
Beginning of period 24,938,912.41
End of period 28,810,752.56
See accompanying notes which are an integral part of the financial
statements.
Zazove Convertible Fund, L.P.
Statement of Cash Flows
For the six months ended June 30, 1996 (unaudited)
Cash Flows from Operating Activities:
Net increase in partner's capital from
operations 3,211,686.29
Adjustments to reconcile net decrease
in partner's capital from operations to
cash used in operations -
Net change in unrealized gains/losses
on investment 636,216.40
Net realized gain on investment (3,319,149.31)
Decrease in dividends receivable 8,484.40
Decrease in interest receivable 9,093.95
Decrease in organizational expenditures 3,607.14
Decrease in payable for tax reserve (17,729.02)
Increase in margin interest payable 783.29
Decrease in adviser payable (78.65)
Decrease in payable for director fees (1,000.00)
Decrease in accounting payable (6,249.98)
Increase in payable for custody of assets 216.42
Cash received from -
Sale of securities 38,773,076.44
Securities sold short 3,652,468.26
Securities sold in prior period, settled
this period
cash paid to-
Purchase securities (38,189,046.28)
Cover short sales (4,188,309.50)
Securities bought in prior period,
settled this period (1,240,815.00)
Net cash used in operations (666,745.15)
Cash Flows from Financing Activities:
Partner's contributions 1,746,239.85
Partner's withdrawals (1,086,085.99)
Net cash provided by financing 660,153.86
Net increase in cash and cash
equivalents (6,591.29)
Cash and Cash Equivalents,
beginning of period 197,567.12
Cash and Cash Equivalents,
end of period 190,975.83
See accompanying notes which are an integral part of the financial
statements.
Zazove Convertible Fund, L.P.
Notes to Financial Statements
As of June 30, 1996 (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
Zazove Convertible Fund L.P., a Delaware limited partnership, (the
"Partnership") 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 investment objective of the
Partnership is to maximize long term appreciation and to preserve
capital primarily through investments in convertible debt and equity
securities.
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 offer prices. Securities convertible into equity securities are valued
at the mean between the bid and offer quotes from a principal market
maker. Securities for which market quotations are not available are
valued at a fair value as determined in good faith by the Managing
General Partner.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash and money market investments. Total interest payments
made during the six month period ended June 30, 1996 were $93,703.22.
Other Policies
The accounts of the Partnership 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 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. GENERAL PARTNERS:
The Partnership's business and affairs are managed by its General Partners,
which consist of the Managing General Partner and five Director General
Partners.
Managing General Partner
The Zazove Convertible Management Limited Partnership, an Illinois
limited partnership that is an affiliate of the Investment Advisor and is
controlled by Gene T. Pretti, is responsible for the supervision of the
business and affairs of the Partnership. Except for certain actions requiring
the approval of the Partners or the Director General Partners, the Managing
General Partner has the power and authority to take all actions that it
deems necessary and appropriate to pursue the Partnership's objective.
Director General Partners
Gene T. Pretti, Andrew J. Goodwin, III, Peter A. Lechman, Steven M.
Kleiman, and Jack L. Hansen are the Partnership's Director General
Partners (see Note 8). The Managing General Partner must receive the
approval of the Director General Partners before taking any action on
certain major decisions (e.g., retaining the Partnership's investment
adviser and independent public accountant).
3. CONTRIBUTIONS AND WITHDRAWALS:
Capital contributions may be accepted as of the first business day of
each month upon approval of the Managing General Partner. All
subscription funds received after the first business day of the month
will be added to the general funds of the Partnership at the beginning
of the following month.
Quarterly Repurchase Policy
On a quarterly basis, the Partnership offers to repurchase no less than
5% and no more than 25% of the Partnership's outstanding Units at
the then net asset value per Unit. Notice of the terms and conditions
of each quarterly repurchase offer are sent to the Partners in advance
of the offer.
In the case of the termination of the Partnership, distributions to the
Partners will be made in proportion to their respective Unit ownership
after the payment of all Partnership creditors.
4. MANAGEMENT ARRANGEMENTS:
For the six months ended June 30, 1996, Zazove Associates, LLC, the
Partnership's Investment Adviser, received a monthly management fee
from the Partnership equal to .166% (2% annualized rate) of the first $25
million of net asset value of the Partnership as of the opening of business
on the first business day of each month. The management fee is reduced
to .125% (1.5% annualized rate) for the Partnership's net asset value in
excess of $25,000,000.
5. EXPENSES:
The Partnership bears all of the costs and expenses of its operations,
including the compensation of the Investment Adviser, reimbursement
of costs paid on its behalf by the Managing General Partner, fees for
professional services, fees and reimbursements paid to Director General
Partners, custodial fees, brokerage and other costs of portfolio
transactions, the cost of regulatory compliance, the costs associated with
maintaining the Partnership's legal existence and the costs involved with
communicating with Limited Partners.
6. INCOME TAXES:
No provision for federal income tax has been made because net income
of the Partnership is not taxable as such for federal income tax purposes
but is included in the income tax returns of the individual partners.
7. INVESTMENT TRANSACTIONS:
For the six months ended June 30, 1996 and the year ended December
31, 1995, the purchases of investment securities (excluding short-term
securities) were $42,377,356 and $36,906,754, respectively, and
proceeds from sales of investment securities were $42,425,544 and
$38,019,168, respectively.
8. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK:
The Partnership may engage in the short sale of securities. Securities
sold short, not yet purchased, represent obligations of the Partnership
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. At June 30, 1996, the
market value of the common stock sold short was $695,850. These short
positions are hedged positions and, as a result, any increase in the
Partnership's obligation related to these short positions will generally
be offset by gains in the related long convertible position.
At June 30, 1996, the three largest industry concentrations were as
follows (as a percentage of total investments at market value):
Banking 12.8%
Technology 10.8%
Hospital/ Medical Services 9.5%
Since the Partnership does not clear its own investment transactions, it
has established an account with a brokerage firm for this purpose. The
resulting concentration of credit risk is mitigated by the broker's
obligation to comply with the rules and regulations of the Securities
and Exchange Act of 1934. At June 30, 1996, the Partnership did not
owe carry a net margin balance with the brokerage firm. The
Partnership pays interest on any margin balance which is calculated as the
daily margin account balance times the broker's margin interest rate.
9. FINANCIAL HIGHLIGHTS:
Per Unit Operating Performance
Net asset value per unit, beginning of period: $11.29
Net investment income .25
Net gains on securities (realized and unrealized) 1.21
Net asset value per unit, end of period $12.75
TOTAL INVESTMENT RETURN 12.93%
Ratios/Supplemental Data
Partners' capital, end of period $28,810,753
Ratio of expenses (excluding margin
interest) to average partner's capital 1.04%
Ratio of net investment income
to average partner's capital 1.83%
Portfolio turnover rate 147%
