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<PAGE> PAGE 9
SIGNATURE GENE T PRETTI
TITLE PRESIDENT
To the Partners of
Zazove Convertible Fund, L.P.:
In planning and performing our audit of the financial statements of ZAZOVE
CONVERTIBLE FUND, L.P. for the year ended December 31, 1998, we considered
its internal control, including control activities for safeguarding
securities, in order to determine our auditing procedures for the purpose
of expressing our opinion on the financial statements and to comply with
the requirements of Form N-SAR, not to provide assurance on internal
control.
The management of Zazove Convertible Fund, L.P. is responsible for
establishing and maintaining internal control. In fulfilling this
responsibility, estimates and judgments by management are required to
assess the expected benefits and related costs of control activities.
Generally, control activities that are relevant to an audit pertain to
the entity's objective of preparing financial statements for external
purposes that are fairly presented in conformity with generally accepted
accounting principles. Those control activities include the safeguarding of
assets against unauthorized acquisition, use or disposition.
Because of inherent limitations in internal control, errors or
irregularities may occur and not be detected. Also, projection of any
evaluation of internal control to future periods is subject to the risk
that it may become inadequate because of changes in conditions or that the
effectiveness of the design and operation may deteriorate.
Our consideration of internal control would not necessarily disclose all
matters in internal control that might be material weaknesses under
standards established by the American Institute of Certified Public
Accountants. A material weakness is a condition in which the design or
operation of any specific internal control components does not reduce to
a relatively low level the risk that errors or irregularities in amounts
that would be material in relation to the financial statements being audited
may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. However, we noted no
matters involving internal control, including control activities for
safeguarding securities, that we consider to be material weaknesses as
defined above as of December 31, 1998.
This report is intended solely for the information and use of management and
the Securities and Exchange Commission.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 12, 1999
Attachment in response to Item 77 C.
On November 9, 1998, the Zazove Convertible Fund, L.P. solicted the
consent of its partners to approve a proposed merger of the Zazove
Convertible Fund, L.P. into the Zazove Convertible Securities Fund,
Inc. The Merger was approved by receiving consents of holders of
73.05% of the outstanding Partnership units. The following
attachment is a copy of the Solicitation of Consents that was
mailed to the partners of the Zazove Convertible Fund, L.P.
on November 9, 1998.
SOLICITATION FOR CONSENTS
BY THE MANAGING GENERAL PARTNER OF
ZAZOVE CONVERTIBLE FUND, L.P.
FOR THE MERGER OF ZAZOVE CONVERTIBLE FUND L.P.
WITH AND INTO
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
ZAZOVE CONVERTIBLE MANAGEMENT LIMITED PARTNERSHIP
MANAGING GENERAL PARTNER
4801 WEST PETERSON AVENUE, SUITE 615
CHICAGO, IL 60646
DATED: NOVEMBER 9, 1998
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OR AN OFFER TO BUY THE
SECURITIES DESCRIBED HEREIN IN ANY JURISDICTION IN WHICH OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SALE.
_________________________
IN MAKING AN INVESTMENT DECISION, LIMITED PARTNERS MUST RELY ON THEIR
OWN EXAMINATION OF THE TERMS OF THE MERGER, INCLUDING THE MERITS AND
RISKS INVOLVED. NO FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY HAS RECOMMENDED THESE SECURITIES. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT OR ANY OF ITS RELATED MATERIALS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
_________________________
PARTNERS SHOULD NOT CONSTRUE THE CONTENTS OF THIS SOLICITATION FOR
CONSENTS, ANY OF ITS RELATED DOCUMENTS OR ANY OTHER COMMUNICATION
FROM ZAZOVE CONVERTIBLE MANAGEMENT LIMITED PARTNERSHIP AS INVESTMENT,
TAX OR LEGAL ADVICE. THIS SOLICITATION FOR CONSENTS, ITS RELATED
DOCUMENTS, AND ANY SUCH OTHER MATERIALS, AS WELL AS THE NATURE OF
AN INVESTMENT IN SECURITIES SUCH AS THOSE OFFERED HERE, SHOULD BE
REVIEWED BY EACH PARTNER AND THAT PARTNER'S INVESTMENT, TAX, LEGAL,
ACCOUNTING AND OTHER ADVISERS.
_________________________
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS SOLICITATION FOR CONSENTS
OR IN THE DOCUMENTS SUMMARIZED HEREIN OR ATTACHED AND, IF GIVEN
OR MADE, THAT OTHER INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON.
TABLE OF CONTENTS
I. THE MERGER
SUMMARY OF THE MERGER 4
THE CONSENT PROCEDURE AND OTHER ADMINISTRATIVE INFORMATION 4
TERMS OF THE MERGER 5
REASONS TO CONVERT TO CORPORATE FORM AND PURPOSE OF MERGER 5
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS 6
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 8
TAX STATUS OF CORPORATION 8
DIRECTORS, MANAGEMENT AND INVESTMENT ADVISOR 9
IMPACT ON CONTINUING OPERATIONS 11
SUMMARY COMPARISON OF UNITS AND SHARES 12
DESCRIPTION OF THE CORPORATION'S SECURITIES 14
DIVIDEND REINVESTMENT PLAN 14
ORGANIZATION OF THE CORPORATION 15
THE CORPORATION'S ARTICLES OF INCORPORATION AND BYLAWS 15
SELECTED FINANCIAL INFORMATION 15
II. INVESTMENT STRATEGY 15
I. THE MERGER.
SUMMARY OF TRANSACTION
Zazove Convertible Fund L.P., A Delaware limited partnership
(the "Partnership"), is soliciting consents from the partners of the
Partnership (individually "Unitholder" and collectively "Unitholders"),
to approve the plan to merge the Partnership with and into Zazove
Convertible Securities Fund, Inc., a Maryland corporation (the
"Corporation") (the "Merger"). In order to effect the Merger, the
Partnership requires written consents from Unitholders holding more
than 50% of the outstanding Partnership units ("Units") (a "Majority in
Interest").
If approved by a Majority in Interest, the Partnership will merge
with and into the Corporation. The Corporation will be the sole surviving
entity after the Merger. All assets and liabilities of the Partnership
will become assets and liabilities of the Corporation by operation of law.
The Unitholders of the Partnership will receive one (1) share of common
stock of the Corporation in exchange for each Unit of the Partnership
owned by them immediately prior to the Merger. The Unitholders will
become stockholders of the Corporation (collectively the "Stockholders"
and each individually a "Stockholder"). The Corporation intends to
operate as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended ("Code").
For the reasons stated herein, the Managing General Partner and
the Director General Partners (referred to collectively as the "General
Partners") believe that it is in the best interests of the Partnership
and its Limited Partners to merge the Partnership into the Corporation.
The resulting effect of the Merger will be that the Partnership will be
converted to a corporation, with the Unitholders retaining the same
percentage of ownership in the Corporation as they held in the
Partnership. As successor to the Partnership, the Corporation will
continue the active management of the investment fund (the "Fund")
without interruption. The General Partners believe that the Merger
will not have a material adverse effect on the operations of the Fund.
THE CONSENT PROCEDURE AND
OTHER ADMINISTRATIVE INFORMATION
Consent Procedure
The written consent of a Majority in Interest is required to merge
the Partnership with the Corporation. As of November 1, 1998 there were
2,350,135.3734 Units outstanding and held by the Unitholders. Based on
the number of Units outstanding, to effect the transaction, the Partnership
must receive written consent from Unitholders representing at least
1,175,068 of those Units. To provide this consent, Unitholders must
complete and return the Consent Letter attached to this Solicitation for
Consents as soon as possible. If a sufficient number of consents are
received, the Managing General Partner will cause the Partnership to
begin the Merger process. The effective time of the Merger (the
"Effective Time") will be 12:01 A.M. Eastern Standard Time January 1,
1999.
For more information on the Consent Procedure, call Steven M.
Kleiman at (773) 283-8822.
TERMS OF THE MERGER
Description of the Merger
If approved and implemented, the Merger will be effected as
follows:
1. The Partnership will be merged with and into the
Corporation pursuant to Delaware and Maryland law.
2. Subsequent to the Merger, the separate existence of the
Partnership will cease.
3. Unitholders will receive one (1) share of common stock of the Corporation
for each one (1) Partnership Unit held by such Unitholders on
the record date.
4. The Director General Partners of the Partnership will
become directors of the Corporation.
The Merger will be effected pursuant to an Agreement and Plan
of Merger between the Partnership and the Corporation, a form of which
is attached hereto as Exhibit A. The capital structure of the
Partnership prior to the Merger and the Corporation following the
Merger is set forth below:
Partnership:
12/31/97 11/1/98 1/1/99
Outstanding Units 2,424,990.5529 2,350,135.3734
Partner's Capital $37,347,667.03 $32,561,595.63
Corporation:
Common Stock, par value $0.01,
Authorized 25,000,000
Issued and Outstanding One share per outstanding unit
at the effective time of the Merger
Information regarding the Corporation's Securities is found in the
section entitled "Description of the Corporation's Securities."
REASONS TO CONVERT TO CORPORATE FORM AND
PURPOSES OF MERGER
The General Partners believe there are four principal reasons
to convert the Partnership to corporate form at this time. These
factors are closely interrelated and relative weights were not assigned
to them.
1. Elimination of Unrelated Business Tax. Although tax exempt
investors such as pension plans and individual retirement accounts are
generally not subject to Federal or state income tax, under certain
circumstances a portion of a tax exempt investor's income can be subject
to unrelated business tax. This tax arises if the tax exempt investor
has income that is derived from "debt financed property." A tax exempt
investor that has an interest in an investment partnership that carries
a margin balance could be subject to this tax since the margin
indebtedness will result in a portion of the partnership's income
being derived from "debt financed property". Historically, the
Partnership' has maintained a margin indebtedness that has averaged
approximately 10% of the Partnership's capital. As a result, in prior
years, many of the Partnership's tax exempt partners have been liable
for unrelated business tax. Unrelated business tax is not imposed on a
shareholder of a corporation that operates as a regulated investment
company under Subchapter M of the Code. Therefore, after the
conversion to corporate form, the tax exempt Stockholders in the
Corporation will not be subject to unrelated business tax as a result
of their investment in the Corporation (assuming that the tax exempt
investor did not purchase the shares with borrowed funds).
2. Simplification of Tax Reporting. The complexities of tax
reporting on both the Federal and state levels resulting from an
investment in a limited partnership can be overly burdensome for
many investors. The corporate form will greatly simplify the tax
reporting obligations for the investors. In lieu of a Schedule
K-1 (Partner's Share of Income, Deductions, etc.) that is typically
delivered to each Unitholder in early March, each Stockholder will
receive a Form 1099 within 30 days after the close of each year.
The Form 1099 will set forth the ordinary dividends and capital
gain dividends received by each Stockholder for the year.
3. Elimination of Corporate Income Tax. In February, 1994, the
Partnership registered with the Securities and Exchange Commission under
the Investment Company Act of 1940 ("Investment Company Act") as a closed
end interval fund. In connection with the registration, the Partnership
received a tax opinion from its legal counsel that it would be treated
as a partnership for Federal income tax purposes as opposed to an
association taxable as a corporation. If the Partnership was taxable
as an association, it would be liable for corporate income tax and the
Unitholders would bear the burden of a double layer of taxation (i.e.,
corporate tax and individual tax on the Unitholder's share of the
Fund income). The basis for the tax opinion was, in large part,
Internal Revenue Service Notice 88-75 which set forth certain
safe-harbors for partnerships to avoid the incidence of corporate
level taxation, including a safe-harbor for private offerings with
500 or fewer partners (the "Private Offering Safe-Harbor"). The
Private Offering Safe-Harbor was repealed by the issuance of Treasury
Regulations on December 4, 1995. Under the new rules, an investment
partnership with more than 100 partners that is registered under the
Investment Company Act will be treated as a publicly traded partnership,
which is taxable as a corporation. The regulations include a transition
rule that allows an existing partnership to continue to rely on the
Private Offering Safe-Harbor through December 31, 2004. As a result
of these rules, if the Partnership is to continue to be operated with
more than 100 partners, it must convert to corporate form prior to
December 31, 2004 in order to avoid corporate level taxation.
4. Expansion of Investor Base. A corporate structure should enable
the Fund to raise additional capital from categories of investors that
might not consider an investment in an investment fund structured as a
limited partnership. For example, tax exempt investors may be more
likely to invest in the Fund in corporate form since a corporate
structure will alleviate any concern with regard to incurring an
unrelated business tax liability. Additions to the Fund capital
base provides various advantages, such as reducing fixed operating
costs as a percentage of investors' capital and providing greater
leverage in dealing with brokers and dealers.
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS
UNITHOLDERS ARE URGED TO CONSIDER THE FOLLOWING RISK FACTORS.
EACH INVESTOR IS URGED TO CONSULT HIS, HER OR ITS OWN TAX, FINANCIAL
AND LEGAL COUNSEL IN RELATION TO THIS PROPOSED MERGER
Pursuant to the terms of the Merger, Unitholders will receive
one share of common stock, $0.01 par value in the Corporation
(the "Shares") in exchange for each Partnership Unit held immediately
prior to the Merger. Holding Shares involves a number of risks.
The following risk factors should be considered carefully.
Investment Risks
The securities market is generally affected by real and
perceived economic conditions, business trends, world affairs and
other factors outside the control of the Fund. The success of the
Fund will depend, in part, on the ability of Zazove Associates,
L.L.C., as the Fund's Investment Advisor (the "Investment Advisor"),
to understand and react appropriately to changing markets.
All investments in securities involve a risk of loss of capital,
and no guaranty or representation can be made that the Fund's
activities will result in profits or that capital invested may
not be lost. Recent years have evidenced periods of significant
volatility in the securities markets. Increased volatility in
the future could increase the risk of loss in value of securities
as compared to the risk of loss in more stable market conditions.
Reliance on Investment Advisor
The operations of the Fund are substantially dependent upon the skill,
judgment and expertise of certain key officers and employees of the
Investment Advisor. In the event of the death, disability or other
unavailability of such personnel, the Corporation could be materially
adversely affected.
Liquidity
There is no market for the Shares and it is unlikely that a
market will develop. The Corporation's Bylaws provide that a
Stockholder may not transfer any Shares without the prior written
consent of the Corporation. In addition, the Shares have not been
registered under the Securities Act of 1933 and, therefore, cannot
be sold unless they are subsequently registered or an exemption from
registration is available.
The Corporation will offer to purchase not less than 5% nor
more than 25% of the outstanding Shares on a quarterly basis at the
then net asset value per Share. Adequate notice must be given by a
Stockholder to the Corporation to participate in any such repurchase.
In the event of an oversubscription, Stockholders may be unable to
liquidate only a portion of the Shares submitted for repurchase on
a particular quarterly repurchase date.
The Corporation is required to meet certain liquidity standards
imposed under the Investment Company Act in connection with its
obligation to repurchase Shares on a quarterly basis. As a result,
the Fund may be required to dispose of investments before it would
otherwise have chosen to do so in order to meet such liquidity
standards and obtain sufficient cash for the repurchase of Shares.
This disposition or liquidation may be at a time which the Investment
Advisor believes the investments liquidated are trading for
less than their fair value due to adverse market conditions.
In such event, the Fund's overall rate of return on its investments
may be adversely affected.
No Right to Manage
Unitholders will become Stockholders in the Corporation and
will be unable to exercise any management functions. Management
of the Corporation is vested exclusively in the Directors. There
will not be any Stockholder vote unless required by the Investment
Company Act.
Conflicts of Interest
Gene T. Pretti and Steven M. Kleiman are directors of the
Corporation and are also principal officers of the Investment
Advisor. The Investment Advisor currently manages investments
for various other accounts and investments partnerships. 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 the higher fees), but the Investment
Advisor intends to treat all accounts (including the Fund) in a
fair, reasonable and equitable manner. The relationship between
the Investment Advisor and the Corporation will be governed by an
agreement substantially similar to the Investment Advisory
Agreement attached hereto and made a part hereof as Exhibit "B".
Diversification
Unlike a diversified investment company, the Fund, which
will be classified as a non-diversified investment company under
the Investment Company Act, is not restricted in the amount of
assets that it may invest in a single issuer. Although there is
no formal procedure, the Fund presently intends to diversify its
portfolio of investments in a variety of issuers and industries to
the extent that it can practicably do so. If the Fund's investments
were to become concentrated in a small number of issuers or industries,
the Fund would be exposed to the risk of adverse developments in or
affecting a single issuer or industry to a greater extent than if its
investments were diversified over a larger number of issuers and
industries.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Partnership has been advised by Holleb & Coff as counsel
to the Partnership that the principal Federal income tax consequences
of the Merger of the Partnership with and into the Corporation are
as follows: (a) no gain or loss will be recognized by the
Partnership or the Corporation as a result of the Merger; (b)
no gain or loss will be recognized by holders of Units upon their
receipt of Corporation common stock in exchange for their Units;
c) the tax basis of the Corporation common stock received by the
Unitholders will be the same as the tax basis of the Units exchanged
therefor; and (d) the holding period of Shares in the hands of the
Unitholders will include the holding period of the Units exchanged
therefor, provided that such Units are held as a capital asset
immediately prior to the Effective Date of the Merger.
TAX STATUS OF CORPORATION
The Corporation intends to elect to be treated and to qualify
each year as a "regulated investment company" under Subchapter M of
the Code, and therefor will not generally be liable for Federal
income taxes to the extent earnings are distributed on a timely basis.
For Federal income tax purposes, all dividends paid by the
Corporation and net realized short-term capital gains are taxable
as ordinary income, whether received in cash or reinvested in
additional Shares, unless a Stockholder is exempt from taxation or
entitled to a tax deferral. Distributions paid by the Corporation
from net long-term capital gains, whether received in cash or
reinvested in additional Shares, are generally taxable as a
long-term capital gain. For purposes of determining whether
capital gains recognized by the Corporation are long-term or
short-term, the capital gain holding period is determined by
the length of time the Corporation has held the security and
not the length of time a Stockholder has held Shares in the
Corporation. Investors are informed within 30 days after the
close of each year as to the amount and nature of all dividends
and capital gains paid during the prior year. Such capital gains
and dividends may also be subject to state or local taxes.
The Corporation anticipates distributing dividends and
capital gains annually in December. When a dividend or capital
gain is distributed, the Corporation's net asset value decreases
by the amount of the payment. If a Stockholder purchases Shares
shortly before a distribution, it will be subject to income taxes
on the distribution, even though the value of its investment (plus
cash received, if any) remains the same. This result is often referred
to as "buying a dividend". All dividends and capital gain distributions
will automatically be reinvested in Corporation Shares at the then
prevailing net asset value unless an investor specifically requests
in writing that dividends or capital gains or both be paid in cash.
If a Stockholder does not furnish the Corporation with its correct
social security number or taxpayer identification number, or if otherwise
required pursuant to the Code, the Corporation is required to withhold
Federal income tax from such distributions and redemption proceeds at a
rate of 31%.
This section is not intended to be a full discussion of Federal
income tax laws and the effect of such laws on each Stockholder.
There may be other Federal, state or local tax considerations
applicable to a particular investor. Each Stockholder is urged
to consult his own tax adviser.
DIRECTORS, MANAGEMENT AND INVESTMENT ADVISOR
Directors
The overall responsibility for the management and operation of
the Corporation will be vested in the Directors. The Bylaws will
initially authorize the Board to be comprised of not less than five
(5) or more than seven (7) directors. The initial Board will consist
of five directors: Gene T. Pretti, Steven M. Kleiman, Andrew J.
Goodwin III, Jack L. Hansen, and Peter A. Lechman, each of whom
are currently Director General Partners of the Partnership.
Mr. Andrew J. Goodwin III
Mr. Goodwin, age 55, is a general partner in the investment
management firm of Graver, Bokhof, Goodwin & Sullivan, L.P.,
located at 100 S. Wacker Drive, Suite 320, Chicago, Illinois
60606. Prior to joining Graver, Bokhof, Goodwin & Sullivan,
L.P. in 1990, Mr. Goodwin worked for approximately ten years
as an institutional securities salesman at the First Boston
Corporation. Mr. Goodwin has served as a Director General
Partner of the Partnership since it was registered in 1994.
Mr. Jack L. Hansen
Mr. Hansen, age 37, is a principal with the investment management
firm The Clifton Group and serves as Director of Equity Investments.
The Clifton Group is located at 309 Clifton Avenue in Minneapolis,
Minnesota 55403. Since joining the Clifton Group in 1985, Mr.
Hansen has played a leading role in the research and development of
their indexed equity products. He is a Chartered Financial Analyst
and a member of the Twin Cities Society of Security Analysts. Mr.
Hansen has served as a Director General Partner of the Partnership
since January 1, 1996.
Mr. Steven M. Kleiman
Mr. Kleiman, age 37, serves as Treasurer and Secretary of
the Corporation. In addition, Mr. Kleiman is Chief Operating
Officer and General Counsel of the Investment Advisor. Prior
to joining the Investment Advisor in March of 1994, Mr. Kleiman
was a partner with the law firm of McDermott, Will & Emery.
Mr. Kleiman practiced law with the law firm of Skadden, Arps,
Slate, Meagher & Flom prior to becoming a member of McDermott,
Will & Emery. He received certification as a CPA in 1983. Mr.
Kleiman has served as a Director General Partner of the
Partnership since January 1, 1996.
Dr. Peter A. Lechman
Dr. Lechman, age 35, is currently a pediatrician with the
Glen Ellyn &Wheaton Medical Clinic. Prior to practicing medicine,
Dr. Lechman earned an MBA degree from the Kellogg School of
Management and was employed for approximately two years as a
consultant with the Boston Consulting Group, which provides
strategic consulting services for Fortune 500 companies. Dr.
Lechman has served as a Director General Partner of the
Partnership since it was registered in 1994.
Mr. Gene T. Pretti
Mr. Pretti, age 37, serves as President and Chairman of the
Board of the Corporation. In addition, Mr. Pretti serves as Chief
Executive Officer and Senior Portfolio Manager of the Investment
Advisor, of which he is the controlling equity holder. Prior to
joining the Investment Advisor in 1989, Mr. Pretti worked in the
Chicago and New York offices of the First Boston Corporation for
approximately four years where he specialized in institutional
equity sales. He also has served as an analyst with CUNA Mutual
Insurance Co. and Robert W. Baird & Co. Mr. Pretti has served
as a Director General Partner of the Partnership since it was
registered in 1994.
Officers
Gene T. Pretti, President and Steven M. Kleiman, Secretary
and Treasurer, are the principal officers of the Corporation and
are responsible for the day to day supervision of the business
and affairs of the Corporation. Except for certain actions
requiring the approval of the Stockholders or the Directors,
the principal officers of the Corporation have the power and
authority to take all actions deemed necessary and appropriate
to pursue the Corporation's objective. The General Partners'
believe that the conversion to corporate form will have no
material impact on the investment operation of the business of the
Fund.
Investment Advisor
Zazove Associates, L.L.C. will continue as the Investment
Advisor of the Fund pursuant to the terms of an Investment Management
Agreement. The Investment Advisor is registered with the Securities
and Exchange Commission under the Investment Advisors Act of 1940.
It manages investment portfolios for insurance companies, investment
partnerships, individuals, corporate trusts, foundations, pensions
and others. Zazove Associates, L.L.C. is the successor to Zazove
Associates, Inc., which was organized in 1989 to carry on the
investment management business of Dr. Earl Zazove which he began
in 1971.
The Investment Advisor is an independent adviser and is not
affiliated with any brokerage firm or other financial institution.
Gene T. Pretti has been the Chief Executive Officer and Portfolio
Manager of the Investment Advisor and its predecessor since its
organization in 1989.
Brokerage
The Investment Advisor is responsible for selecting brokers for the
Fund's portfolio transactions. In selecting brokers and dealers, the
Investment Advisor will seek the best overall terms available taking
into consideration a number of factors including, price, size of order,
quality of execution, service capabilities and reasonableness of
commissions. In addition, the Investment Advisor may execute
brokerage transactions for the Fund through brokers who also provide
the Advisor with "research services," as defined in Section 28(e)(3)
of the Securities Exchange Act of 1934, as amended. Commissions
paid to such brokers may be in excess of the amount of commissions
another broker would charge for the same transaction. Before
effecting any such transaction, the Investment Advisor will determine
in good faith that the amount of such commission is reasonable in
relation to the value of the brokerage and research services
provided by such broker. The research services may include,
among other things, research reports on companies, industries
or securities; economic and financial data; financial publications;
research oriented computer hardware, software and services; and
quotation terminals and related services. Research furnished by
brokers may benefit all or only some of the Investment Advisor's
clients, including the Fund, and could be used in connection with
accounts other than those that generated the commission to the
brokers providing the services.
Disclosure of Executive Compensation
The Corporation may pay reasonable compensation to the Directors
for their services as Directors of the Corporation. The Directors are
entitled to be reimbursed by the Corporation for reasonable out-of-pocket
expenses incurred in performing their duties to the Corporation.
In consideration for their services to the Corporation as independent
directors, Messrs. Goodwin, Hansen and Lechman will each receive annual
compensation $2,000 payable quarterly by the Corporation. Messrs.
Pretti and Kleiman will not be compensated by the Corporation for
the services provided as directors and officers of the Corporation.
IMPACT ON CONTINUING OPERATIONS
Consummation of the Merger
The General Partners believe that the consummation of the Merger
will have no material negative impact on the operations of the Fund.
Based on current Partnership capital, it is estimated that the
transaction costs from the Merger will be approximately 0.125%
of Partnership capital (approximately $40,000). These costs are
attributable primarily to legal and regulatory fees. The costs
incurred in carrying out the Merger will be incurred by the
Partnership and the Corporation and will be currently expensed.
Third Party Transfer Agent
The General Partners believe that the consummation of the
Merger will have no material negative impact on the continued
operation of the Corporation as an investment company. Although
the operation of the Fund will remain substantially the same in
corporate form as in partnership form, one significant change is
that as a corporation the Fund will need to engage a third party
transfer agent. The primary responsibilities of the transfer
agent will be to: (i) maintain the Stockholder registrar, (ii)
process Stockholder subscriptions and redemptions, including
generating confirms, and (iii) process and distribute to the
Stockholders annual tax reporting information on Form 1099.
The Partnership has been in negotiations with Sunstone Financial
Group, Inc. to act as transfer agent of the Fund. Sunstone Financial
Group, Inc. specializes in providing transfer agency and other
services to investment companies and currently provides services
to investment funds with combined assets in excess of $14 billion.
The fees payable to the transfer agent will be a Fund expense.
Based on current Partnership capital, the annual cost of the
transfer agent is estimated to be approximately 0.16% of capital
($50,000).
Management Fees
In order to minimize the impact of the foregoing fees, the
Investment Advisor has agreed to the following revision to the
management fee schedule:
Annual Management Fee Rate
Current Fee Schedule
2.0% First $25,000,000 in capital
1.5% Capital in excess of $25,000,000
1.0% Not applicable.
Revised Fee Schedule
2.0% First $20,000,000 in capital
1.5% Capital in excess of $20,000,000 up to $70,000,000
1.0% Capital in excess of $70,000,000
Based on current Partnership capital, the revised fee
schedule will reduce the Fund current annual operating costs by
$25,000. If the Fund reaches $100 million in capital, the annual
savings from the revised fee schedule will exceed $175,000.
SUMMARY COMPARISON OF UNITS AND SHARES
The following summary compares a number of differences
between ownership of Partnership Units and Corporation Shares.
This summary is qualified in its entirety by the disclosure of
the Units and the Shares contained under "Description of the
Corporation's Securities", the Limited Partnership Agreement
and the articles of incorporation of the Corporation ("Articles
of Incorporation"). The summary below includes only a brief
description of the most significant, but not all of, the rights
of Unitholders in the Partnership and Stockholders in the
Corporation.
Taxation
Units: The Partnership, as a limited partnership, is not a
taxable entity under the Code. However, Unitholders report and
pay taxes on the basis of their allocated share of Partnership
income, gains, losses, credits and deductions, regardless of
whether or not any cash distributions are actually made to the
Unitholders.
Shares: To the extent the Corporation qualifies as a
"regulated investment company" under Subchapter M of the Code,
the Corporation will not be a taxable entity, to the extent earnings
are distributed on a timely basis. Stockholders will generally be
taxed on dividends and capital gain distributions received from the
Corporation. Accordingly, Stockholders, unlike Unitholders, will not
be allocated taxable income in the absence of distributions of
earnings, whether in Shares or cash. Cash dividends may, however, be
immediately reinvested in additional Shares of the Corporation
pursuant to the Fund's dividend reinvestment program. Income
tax will be payable on the dividends reinvested, whether such
dividends represent ordinary income or capital gains of the
Fund, pursuant to the Fund's dividend reinvestment plan.
Distributions and Dividends
Units: Distributions may be paid if, as and when determined
by the General Partner in its discretion, subject to legal and
contractual limitations.
Shares: See "Dividend Reinvestment Plan" below.
Voting
Units: Each Unit entitles its holder to cast one vote on all
matters presented to Unitholders. A Majority in Interest must consent
before the Managing General Partner may take any action which requires
approval of the Unitholders pursuant to the Investment Company Act
and the Regulations.
Shares: Each voting Share entitles its holder to cast one vote
on all matters presented to the Stockholders. Approval of matters
will generally require the same voting threshold as was required in
partnership form, with certain refinements contained in the Articles
of Incorporation. Generally, approval of matters submitted to the
Stockholders of the Corporation will require a majority vote of all
voting Shares outstanding including the following matters (i) any
merger, consolidation or combination of the Corporation's business or
assets or reformation or reorganization under the laws of another
state; (ii) sale of all or substantially all of the Corporation's
assets; or (iii) amendment of any provision of the Articles of
Incorporation.
Management
Units: The General Partners have exclusive discretion to
manage and control the business and affairs of the Partnership.
Shares: The business and affairs of the Corporation are
managed by or under the direction of the Board of Directors of the
Corporation. The Board of Directors has vested the officers of
Corporation with the authority to manage the day-to-day operations
of the Corporation.
Limited Liability
Units: Unitholders are limited partners in a Delaware limited
partnership and, as such, generally do not have personal liability for
obligations of the Partnership, although certain events could cause
the Unitholders to lose their limited personal liability.
Shares: The Shares will be fully paid and non-assessable.
Stockholders generally will not have personal liability for
obligations of the Corporation.
Liquidity and Marketability
Units: There is no public market for Units, nor is there
expected to be one in the foreseeable future. Unitholders'
liquidity for their Units is limited to their right to request
the redemption of Units on a quarterly basis pursuant to the
Partnership's policy of offering to repurchase each quarter no
less than 5% and no more than 25% of the outstanding Units at
the then net asset value per Unit.
Shares: There is currently no public market for the Shares.
The Corporation does not intend at this time to register its Shares
with the Securities and Exchange Commission or to list its Shares on
a securities exchange. Stockholders' liquidity for their Shares
will be limited to their right to request the redemption of Shares on
a quarterly basis pursuant to the Corporation's policy of offering to
repurchase each quarter no less than 5% and no more than 25% of the
outstanding Shares at the then net asset value per Share.
Continuity of Existence
Units: The Limited Partnership Agreement provides for the
Partnership to continue perpetually, unless dissolved upon a
determination of the Managing General Partner or under the
circumstances set forth in the Limited Partnership Agreement.
Shares: The Certificate provides for perpetual existence,
subject to Maryland law.
Indemnification
Units: The Limited Partnership Agreement provides that the
Managing General Partner, the Director General Partners, the
Investment Advisor and its directors, officers and employees
shall be indemnified against losses sustained by any of them
by reason of any acts arising out of their activities on behalf
of the Partnership, provided that such acts were not the result
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of duties in the performance of such activities.
Shares: Maryland corporation law permits a corporation to
indemnify any person who is or is threatened to be made a party to
a suit due to the fact that such person is a director, officer,
employee or agent acting on behalf of such corporation, subject
to a determination by the board that such person has acted in
good faith and in a manner he or she reasonably believes to be in or
not opposed to the best interests of the corporation. The
Corporation's Articles and Bylaws require the Corporation to
indemnify any director or officer and permit the Corporation to
indemnify any employee or agent of the Corporation to the extent
permitted by Maryland corporation law. The Corporation may also
enter into indemnification agreements with its officers, directors
and agents of the Corporation, such as the Investment Advisor.
DESCRIPTION OF THE CORPORATION'S SECURITIES
The Corporation's Articles of Incorporation authorizes
25,000,000 shares of common stock, $0.01 par value. Pursuant
to the terms of the Merger, the Corporation will issue one share
of common stock for each then outstanding Partnership Unit. The
Stockholders are entitled to one vote per Share on all corporate
issues put to vote of the Stockholders, although the Corporation
oes not contemplate holding annual meetings to elect directors or
for any other purpose.
Stockholder Reports
Stockholders will be provided at least semi-annually with a
report showing the Fund's holdings and annually after the close of
the Corporation's fiscal year, which ends December 31, with an
annual report containing audited financial statements. In addition,
an individual account statement will be sent to you by the transfer
agent at least quarterly. Stockholders will also receive an annual
statement from the transfer agent after the end of the calendar year
listing all transactions in Shares of the Corporation during such year.
DIVIDEND REINVESTMENT PLAN
The Corporation offers an automatic dividend reinvestment plan
whereby all dividends or capital gain distributions of the Fund are
automatically reinvested in Shares at the then prevailing net asset
value unless a Stockholder specifically requests in writing that
dividends or capital gains or both be paid in cash.
It is anticipated that the Corporation will declare and pay
dividends annually in December.
ORGANIZATION OF THE CORPORATION
The Corporation was organized as a Maryland corporation on
November 9, 1998. The Corporation is authorized to issue 25,000,000,
$0.01 par value shares. Each Share is entitled to one vote on all
questions put to Stockholder vote.
The Corporation will not hold annual Stockholders meeting except
when required by the 1940 Act. The Corporation has adopted procedures
in its Bylaws for the removal of directors by the Stockholders as well
as by the Board of Directors. As of December 31, 1998, no person
shall own a controlling interest in the Corporation.
THE CORPORATION'S ARTICLES OF INCORPORATION AND BYLAWS
See the Articles of Incorporation and By-Laws for Zazove
Convertible Securities Fund, Inc. on Exhibit "C" and Exhibit "D",
respectively, attached hereto and made a part hereof.
SELECTED FINANCIAL INFORMATION
The selected financial information presented below for, and as
of, each of the years in the five-year period ended December, 31,
1997, has been derived from the selected financial statements of
Zazove Convertible Fund, L.P. which financial statements have been
audited by Arthur Andersen LLP, certified public accountants. The
selected financial information presented below as of September 30,
1998 and for the nine month period ended September 30, 1998 has
been derived from the unaudited selected financial statements of the
Zazove Convertible Fund, L.P. The results for the nine months ended
September 30, 1998 are not necessarily indicative of the results
expected for the year ended December 31, 1998 or for any other
future periods.
See Selected Financial Information on Exhibit "E" attached
hereto and made a part hereof.
II. INVESTMENT STRATEGY
Zazove Convertible Strategy.
The Partnership's portfolio is managed by the Investment
Advisor under the Zazove Convertible Strategy. Under this strategy,
the Investment Advisor utilizes a proprietary valuation model that
identifies statistically undervalued convertible securities with
attractive risk/reward characteristics. The investment process
relies on a quantitative approach to investment and generally does
not rely on economic, interest rate or stock market forecasts,
fundamental or technical analysis or market timing. In managing the
Partnership's portfolio, the Investment Advisor considers the entire
universe of convertible opportunities, including non-investment grade
convertible securities (those rated below BBB- by Standard & Poors or
below Baa3 by Moody's Investor Services). These securities make up a
significant portion of the convertible market. By including these
securities in the Partnership's portfolio, it has been able to enhance
its ability to build a portfolio that was broadly diversified by both
issuer and industry. The market in these securities has been
relatively inefficient and, in recent years, many of the non-investment
grade issues have had the most attractive risk/reward profile within
the parameters of the Zazove Convertible Strategy.
Increased Volatility.
Over the last eighteen (18) months, the Partnership has experienced
an increase in the volatility of its returns as compared to its historic
stability. The volatility has in large part been the result of extreme
selling pressure in the convertible securities market. A significant
portion of this selling pressure has been generated by the increasing
influence of highly leveraged hedge funds that dominate the market for
non-investment grade convertible securities. In difficult markets, a
highly leveraged fund is forced to sell positions to maintain its
required equity. These forced liquidations, which often are at
distressed prices, tend to force further liquidations by other
leveraged funds as the selling pressure drives down prices. In
previous periods, the Partnership's non-investment grade securities
held up reasonably well in declining equity markets. However, this
has not been the case over the last eighteen (18) months. We believe
that this is attributable, in part, to the fundamental shift that has
occurred in the investor base for non-investment grade convertible
securities.
Shift to Higher Credits.
The Investment Advisor believes that by improving the overall
credit quality of the Fund's portfolio, it will provide for additional
downside protection in difficult markets and reduced volatility over
the long term. To this end, the Partnership has begun to reposition
its investments with the goal of achieving and maintaining an investment
grade average credit rating for the Fund's portfolio. The time period
over which this will be accomplished will depend in large part on
market conditions, but it is expected that the transition to an
investment grade average portfolio will be occur by the end of the
first quarter of 1999. Over the long-run, the cost associated with
shifting to a more conservative investment strategy (i.e., the
maintenance of an investment grade average portfolio) is likely
to be a reduction in the Fund's overall return. It is believed that
the benefit realized from a shift to an investment grade average
portfolio will include improved downside protection in difficult
markets and reduced volatility in the Fund's returns over the
long-run.
EXHIBITS
A. Agreement and Plan of Merger
B. Investment Advisory Agreement (Draft)
C. Articles of Incorporation
D. By-Laws
E. Selected Financial Information
Signature
Pursuant to the requirements of the Investment Company Act of 1940,
as amended, Zazove Convertible Fund, L.P., the registrant, has duly
caused this report to be signed on its behalf by the undersigned.
City: Chicago
State of: Illinois
Date: February 25, 1999
Zazove Convertible Fund, L.P.
By: Zazove Convertible Management, L.P.
By: /s/ Gene T. Pretti, General Partner
