REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Zazove Convertible Fund, L.P.:
We have audited the accompanying balance sheet of
ZAZOVE CONVERTIBLE FUND L.P. (a Delaware limited
partnership), including the schedule of investments,
as of December 31, 1996, and the related statements of
operations, and cash flows for the year then ended and
the statements of changes in partners' capital and
financial highlights for each of the two years in
the period then ended. These financial statements
and financial highlights are the responsibility of
the Managing General Partner. Our responsibility is
to express an opinion on these financial statements
and financial highlights based on our audit.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31,
1996, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles
used and significant estimates made by the Managing General
Partner, as well as evaluating the overall financial
statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Zazove Convertible
Fund L.P. as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended and
the changes in its partners' capital and the financial
highlights for each of the two years in the period then
ended, in conformity with generally accepted accounting
principles.
[Signature]
Arthur Andersen LLP
Chicago, Illinois
February 7, 1997
ZAZOVE CONVERTIBLE FUND, L.P.
Balance Sheet
As of December 31, 1996
ASSETS:
Cash and cash equivalents $ 41,633.00
Investments, at market value - cost $35,857,641 38,228,610.55
Receivables -
Securities sold, not settled 966,744.18
Interest 344,099.92
Total Receivables 1,310,844.10
Capital Expenditures 15,029.79
Total Assets 9,596,117.44
LIABILITIES & PARTNERS' CAPITAL:
Liabilities -
Securites purchased, not settled 2,278,568.50
Securities sold short - cost $(1,416,592) 1,480,445.00
Margin account due to brokers 990,673.60
Accounting Payable 20,000.00
Margin interest payable 5,682.33
Payable for custody of assets 1,425.40
Dividend expense payable 5,817.38
Misc. Payable 35,234.38
Payable to Adviser 3,599.83
Total liabilities 4,821,446.42
Partners' Capital 34,774,671.02
Total Liabilities and Partners' Capital 39,596,117.44
Partners' Capital
General Partners
Zazove Convertible Management, L.P. 338,836.82
Gene Pretti 704.64
Andrew Goodwin 7,166.23
Peter Lechman 704.64
Jack Hansen 624.34
Steve Kleiman 624.34
Total General Partners' Capital 348,661.01
Limited Partners' Capital 34,426,010.01
Total Partners' Capital 34,774,671.02
Zazove Convertible Fund, L.P.
Schedule of Investments
As of December 31, 1996
(Unaudited)
Principal Market Value
CONVERTIBLE BONDS - 74.92%
ADT Operations, Inc. * 2,000,000 1,305,000.00
American Medical Response t 770,000 822,937.50
Apple Computer Incorporated 950,000 931,000.00
Argosy Gaming Co. 850,000 690,625.00
Banco De Galicia 1,000,000 1,178,750.00
BankAtlantic Bancorp Inc. 1,000,000 1,103,750.00
Chock Full O' Nuts 120,000 101,250.00
Complete Management Inc. 325,000 328,250.00
Complete Management Inc. 850,000 892,500.00
Diagnostic/Retrieval Systems 650,000 976,625.00
Emerson Radio 2,050,000 1,127,500.00
Empresas ICA Socieded 1,000,000 707,500.00
FPA Medical Management t 720,000 727,200.00
ICN Pharmaceuticals 750,000 817,500.00
Inversiones y Representaciones S 200,000 199,000.00
Lernout & Hauspie Speech Product1,000,000 1,010,000.00
Liblife Int'l BV * 285,000 320,625.00
North American Vaccine t 500,000 524,375.00
Occusystems Inc. T * 1,000,000 1,110,000.00
Office Depot, Inc. 1,000,000 600,000.00
Offshore Logostics t 600,000 631,500.00
Phoenix Shannon 9.500% t x 1,300,000 650,000.00
PhyMatrix Corp. 800,000 664,000.00
Physicians Resource Group t 1,000,000 980,000.00
Pier 1 Imports 900,000 1,023,750.00
Plasma & Materials Tech t 450,000 450,000.00
Quintiles Transnational t 300,000 315,750.00
Reno Air 750,000 765,000.00
Sepracor, Inc. T * 680,000 717,400.00
Sierrawest Bancorp. 385,000 596,750.00
Tenet Healthcare Corp. 1,000,000 1,057,500.00
U.S. Diagnostic Labs Incorporate 700,000 878,500.00
United Waste Systems Incorporate 900,000 1,086,750.00
Uromed Corp. T 800,000 762,000.00
Total convertible bonds (cost--$25,077,8$26,053,287.50)
CONVERTIBLE PREFERRED - 27.76% Shares Market Value
Alliance Gaming Corp. PIK 11.50% 24,437 1,970,259.57
Banco Comerc Portugues $4.000 20,000 1,032,500.00
Fuji Int'l Finance Trust $.0672 23,000 606,050.00
General Datacomm Industry $2.25 25,000 631,250.00
Globalstar Telecom $3.25 10,000 556,250.00
Network Imaging $2.00 53,000 798,312.50
Noram Financing $3.125 19,500 1,238,250.00
PennCorp Financial Group Inc. $3 15,000 885,000.00
Phoenix Duff & Phelps (Class A) 8,000 200,000.00
Public Storage $2.0625 20,000 1,042,500.00
Walden Residential Prop (Class A 24,000 693,000.00
Total preferred stocks (cost--$8,514,867$9,653,372.07
COMMON STOCK - 3.55% Shares Market Value
Alliance Capital Management, L.P 25,000 665,625.00
Oppenheimer Capital L.P. 11,700 409,500.00
Sunsource LP (Class B) 39,000 160,875.00
Total common stock (cost--$1,103,527.48)$1,236,000.00
SHORT STOCK - (4.26)% Shares Market Value
Globalstar Telecommunication -6,100 (376,675.00)
Plasma & Materials Tech. -5,000 (60,000.00)
Public Storage Inc. -33,670 (1,043,770.00)
Total short stock (cost--($1,416,592.59)($1,480,445.00)
WARRANTS - 3.70% Warrants Market Value
Audiovox (3/15/01, 7.125 Strike) 16,800 25,200.00
Viacom Class E 504,300 1,260,750.00
Total warrants (cost--$1,161,394.80) $1,285,950.00
Other assets less liabilities $1,973,494.53)
PARTNERS' CAPITAL - - 100% $34,774,670.04
* Non-income producing.
t These securities are subject to contractual or legal
restrictions on their resale. As of December 31, 1996
the value of these securities as a percentage of
investment assets was 31.68%.
x The Novemeber 1, 1996 interest payment due on this
security was not paid.
Percentages are taken as a percent of Partners'
Capital on December 31, 1996.
ZAZOVE CONVERTIBLE FUND, L.P.
Statement of Operations
For the year ended December 31, 1996
INVESTMENT INCOME
Dividends 590,155.32
Interest 1,439,990.80
Other 6,684.84
TOTAL INVESTMENT INCOME 2,036,830.96
EXPENSES:
Management fee 559,416.17
Margin Interest 178,408.70
Custodian fees 15,210.67
Director fees 6,000.00
State taxes 100.00
Organizational expense 7,214.28
Accounting and legal expense 21,547.73
Misc. expense 801.36
Dividend expense on short positions 16,369.38
Printing expense 2,500.89
TOTAL EXPENSE 807,569.18
NET INVESTMENT INCOME 1,229,261.78
NET REALIZED AND UNREALIZED
GAINS ON INVESTMENTS:
Net realized gain on investments 3,901,786.04
Net change in unrealized appreciation or
depreciation of investments 1,449,052.39
NET GAIN ON INVESTMENTS 5,350,838.43
NET INCREASE IN PARTNERS' CAPITAL
RESULTING FROM OPERATIONS 6,580,100.21
ZAZOVE CONVERTIBLE FUND, L.P.
Statement of Changes in Partners' Capital
For the year ended December 31, 1996
OPERATIONS:
Net investment income 1,229,261.78
Net realized gain on investments 3,901,786.04
Net change in unrealized appreciation/
depreciation of investments 1,449,052.39
Net increase in partners' capital
resulting from operations 6,580,100.21
PARTNERS' CAPITAL TRANSACTIONS:
Contributions 5,165,982.76
Withdrawals (1,910,324.36)
Net Contributions 3,255,658.40
Net increase in partners' capital 9,835,758.61
PARTNERS' CAPITAL
Beginning of period 24,938,912.41
End of period 34,774,671.02
ZAZOVE CONVERTIBLE FUND, L.P.
Statement of Cash Flows
For the year ended December 31, 1996
Cash Flows from Operating Activities:
Net increase in partner's capital from
operations 6,580,100.21
Adjustments to reconcile net decrease in
partner's capital from operations to cash
used in operations -
Net change in unrealized gains/losses
on investment (1,449,052.39)
Net realized gain on investment (3,901,786.04)
Decrease in dividends receivable 13,454.40
Increase in interest receivable (6,367.19)
Decrease in organizational expenditures 7,214.28
Decrease in payable for tax reserve (17,729.02)
Increase in margin interest payable 4,061.96
Increase in adviser payable 3,396.10
Decrease in payable for director fees (1,000.00)
Increase in dividend expense payable 5,817.38
Increase in misc. payable 19,250.00
Increase in accounting payable 3,750.00
Increase in payable for custody of assets 236.98
Cash received from -
Sale of securities 81,663,855.79
Securities sold short 10,210,714.38
Securities sold in prior period, settled this period
Cash paid to-
Purchase securities (86,123,911.98)
Cover short sales (10,173,455.00)
Securities bought in prior period, settled
this period (1,240,815.00)
Net cash used in operations (4,402,265.14)
Cash Flows from Financing Activities:
Partner's contributions 5,165,982.76
Partner's withdrawals (1,910,324.36)
Increase in margin account due to brokers 990,673.60
Net cash provided by financing 4,246,332.00
Net increase in cash and cash equivalents (155,933.14)
Cash and Cash Equivalents, beginning of period 197,567.12
Cash and Cash Equivalents, end of period 41,633.98
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. Zazove
Associates, LLC, is the Partnership'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
the Managing General Partner, 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 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 1996 were
$11,426 and $174,348, respectively.
Organizational Costs
Costs incurred by the Partnership in connection with
its organization and registration were $36,000. These
costs are being charged ratably against income over 60
months from commencement of operations by the Partnership.
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 specific identification
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, Steven M. Kleiman,
Jack L. Hansen and Peter A. Lechman are the Partnership's
Director General Partners. 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). Each of the three Director
General Partners who are not affiliated with the Investment
Advisor received $2,000 for their service to the Partnership
in 1996.
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 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 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
% (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 years ended December 31, 1996 and 1995, purchases
of investment securities (excluding short-term securities)
were $96,297,367 and $36,906, respectively, and proceeds
from sales of investment securities were $91,874,570 and
$38,019,168, respectively. For federal income tax purposes,
at December 31, 1996, the gross unrealized depreciation on
investments was approximately $1,433,072, and the gross
unrealized appreciation was approximately $3,804,041.
The cost of investments for federal income tax purposes
was approximately $38,857,641 at December 31, 1996.
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 December 31, 1996,
the market value of the common stock sold short was $1,480,445.
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 December 31, 1996, the three largest industry concentrations
were as follows (as a percentage of investment securities at
market value):
Medical management services 13.9%
Financial 8.0%
Banking 7.2%
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 December 31, 1996, the Partnership owed
the brokerage firm $990,674 for securities purchased on
margin. The Partnership held cash and cash equivalents of
$41,633 and had a receivable of $966,744, which could be
used to effectively offset this margin balance. 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 Year ended December 31,
1996 1995
Net asset value per unit,
beginning of period: $11.29 $8.96
Net investment income 0.54 0.51
Net gains on securities
realized and unrealized) 2.26 1.82
Net asset value per unit,
end of period $14.09 11.29
TOTAL INVESTMENT RETURN 24.80% 25.90%
Ratios/Supplemental Data
Partners' capital, end of period $34,774,671 $24,938,913
Ratio of expenses (excluding margin
interest) to average partner's capital 2.31% 2.23%
Ratio of net investment income to average
partner's capital 4.51% 5.07%
Portfolio turnover rate 276% 155%
Average commission rate paid .0391
