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, 1998, 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, 1998, 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,
1998, 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 12, 1999
ZAZOVE CONVERTIBLE FUND, L.P.
Balance Sheet
As of December 31, 1998
ASSETS:
Investments, at market value
cost $40,149,306 (Note 1) $ 35,875,364
Cash and cash equivalents 446
Receivables -
Dividends 56,596
Interest 353,801
Securities sold, not settled 1,427,878
Organizational costs (Note 1) 4,113
Total Assets 37,718,198
LIABILITIES & PARTNERS' CAPITAL:
Payables-
Margin account due to brokers $ 1,244,800
Accounting fees 22,000
Management fee 54,384
Payable to advisor 6,926
Other broker payable 6,532
Total liabilities 1,334,642
Partners' capital (Note 3)
General partners 368,042
Limited partners 36,015,514
Total partners' capital
(net asset value) 36,383,556
Total liabilities and
partners' capital $ 37,718,198
Net asset value per unit (based
On 2,351,805 units outstanding) 15.47048
The accompanying notes to financial statements are an
integral part of this balance sheet.
Zazove Convertible Fund, L.P.
Schedule of Investments
December 31, 1998
CONVERTIBLE PREFERRED - 25% Shares Market Value
BTI Capital Trust $3.25 ** 30,000 735,000
Elsag Bailey $2.75 20,000 1,217,500
Fleetwood Capital Trust, $3.00 13,000 612,625
Freeport McMoran (Cl A) $1.75 13,400 199,325
Frontier Financing Trust $3.125 30,000 1,228,125
General Datacomm Ind. $2.25 25,000 287,500
Hybridon Inc. $6.50 5,177 258,850
Lab Corp of
America(Class B)$4.250 PIK 39,842 1,643,483
Metromedia Int'l
Group, Inc. $3.625 45,000 1,192,500
Treev $0.84 PIK 163,800 1,197,788
Walden Res. Prop(Class B)$2.29 24,400 561,200
Total preferred stocks
(cost--$11,017,773) 9,133,895
Principal Market Value
CONVERTIBLE BONDS - 62%
APP Finance VII Mauritius** 2,120,000 1,192,500
3.500 % Due 04-30-03
Altos Hornos De Mexico 500,000 200,000
5.500 % Due 12-15-01
Amkor Technology, Inc. 1,000,000 996,250
5.750 % Due 05-01-03
Aspect Telecommunications **+3,500,000 840,000
0.000% Due 08-10-18
BankAtlantic Bancorp Inc. 670,000 730,300
6.750% Due 07-01-06
BankAtlantic Bancorp Inc. 900,000 693,000
5.625% Due 12-01-07
Berkshire Hathaway(Citigroup)1,200,000 1,867,500
1.000% Due 12-02-01
Boston Chicken Inc. * 170,000 6,800
7.750% Due 05-01-04
China Petrochemical Dev Corp**1,500,000 1,020,000
1.000 % Due 05-08-08
Chock Full O' Nuts 120,000 112,800
7.000% Due 04-01-12
Complete Management Inc. 960,000 211,200
8.000% Due 08-15-03
DRS Technologies Inc. 140,000 177,800
9.000 % Due 10-01-03
Elan Corp. **+ 3,000,000 1,704,375
0.000% Due 12-14-18
Fuisz Technologies Ltd. 250,000 270,000
7.000 % Due 10-15-04
General DataComm Ind.Inc. 1,000,000 620,000
7.750 % Due 09-30-02
Intevac Inc. 500,000 305,000
6.500% Due 03-01-04
Inversiones y Rep. S.A. ** 200,000 200,000
4.500% Due 08-02-03
Liberty Media Group 1,200,000 1,290,000
4.500% Due 02-15-06
Mail Well Inc. 400,000 360,000
5.000% due 11-01-02
New World Infrastructure ** 500,000 423,750
1.000 % Due 04-15-03
New World Infrastructure ** 95,000 83,363
5.000 % Due 07-15-01
North American Vaccine 640,000 324,800
6.500% Due 05-01-03
Paliburg Int'l (Regal Hotel) 1,050,000 635,250
3.500 % Due 02-06-01
Phoenix Inv. Partners Ltd. 415,500 460,095
6.000 % Due 11-01-15
Pier 1 Imports 1,150,000 1,488,531
5.750 % Due 10-01-03
Reno Air 815,000 847,600
9.000% Due 09-30-02
SpaceHab Inc. 250,000 232,500
8.000 % Due 10-15-07
Sunbeam Corporation **+ 3,000,000 360,000
0.000 % Due 03-25-18
Thermo Fibertek Inc. ** 1,250,000 1,070,313
4.500 % Due 07-15-04
Tingyi Holding Corp. ** 250,000 153,750
1.625 % Due 07-17-02
Total Renal Care Holdings** 220,000 244,200
7.000% due 05-15-09
Triarc Companies + 7,000,000 1,487,500
0.000 % Due 02-09-18
U.S. Diagnostic Labs Inc. 1,505,000 880,425
9.000% Due 03-31-03
U.S. Diagnostic Labs Inc. ** 630,000 393,750
6.500 % Due 06-30-01
Westbridge Capital Corp. * 625,000 140,625
7.500% Due 05-01-04
World Airways, Inc. 1,355,000 399,725
8.000 % Due 08-26-04
Total convertible bonds
(cost--$27,478,308) 22,443,702
Other Securities - 12% Amount Market Value
Alliance Capital Management, L.P. 28,000 721,000
Audiovox Wts. 16,800 28,325
Hybridon Class A Wts 29,671 5,563
Pimco Advisors Holdings LP 34,050 1,059,806
Treev Inc. 5,520 9,142
Viacom Class E Wts 216,300 2,473,931
Total other securities
(cost--$1,653,225) 4,297,767
Total Investment Securities
(cost-$40,149,306) 35,875,364
Other assets less liabilities - 1% 508,192
PARTNERS' CAPITAL - 100% $ 36,383,556
The above percentages were computed as a percentage
Of partners' capital.
+ Nonincome producing.
* This security is currently in default and interest is not
being accrued on this position.
** These securities are subject to contractual or legal
restrictions on their sale. At December 31, 1998, the
value of these securities was $8,421,000, representing
23.5% of investment securities at market value.
The accompanying notes to financial statements are an
Integral part of this schedule.
ZAZOVE CONVERTIBLE FUND, L.P.
Statement of Operations
For the Year Ended December 31, 1998
INVESTMENT INCOME
Interest $ 1,317,870
Dividends 1,010,639
Other 30,707
TOTAL INVESTMENT INCOME 2,359,216
EXPENSES:
Management fee (Note 4) 695,440
Margin interest 238,532
Custodian fees 23,202
Director fees 6,000
Organizational expense 37,214
Accounting expense 22,000
Foreign currency loss 25,959
Other 9,483
TOTAL EXPENSE 1,057,830
NET INVESTMENT INCOME 1,301,386
NET REALIZED AND UNREALIZED
GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on
Investments (1,421,181)
Net change in unrealized
depreciation of investments (58,050)
NET LOSS ON INVESTMENTS (1,479,231)
NET DECREASE IN PARTNERS' CAPITAL
RESULTING FROM OPERATIONS $ (177,845)
The accompanying notes to financial statements
are an integral part of this statement.
ZAZOVE CONVERTIBLE FUND, L.P.
Statement of Changes in Partners' Capital
For the Years Ended December 31, 1998 and 1997
OPERATIONS: 1998 1997
Net investment income $ 1,301,386 $ 1,672,129
Net realized gain (loss)
on investments (1,421,181) 8,067,197
Net change in unrealized
Appreciation of investments (58,050) (6,523,009)
Net increase (decrease) in
partners' capital resulting
from operations (177,845) 3,216,317
PARTNERS' CAPITAL TRANSACTIONS:
Contributions 7,028,279 5,304,428
Withdrawals (7,814,546) (5,947,748)
Net contributions/(withdrawals) (786,267) (643,320)
Net increase (decrease)
in partners' capital (964,112) 2,572,997
PARTNERS' CAPITAL, beginning
of year 37,347,668 34,774,671
PARTNERS' CAPITAL, end of year $ 36,383,556 $37,347,668
The accompanying notes to financial statements
are an integral part of these statements.
ZAZOVE CONVERTIBLE FUND, L.P.
Statement of Cash Flows
For the Year Ended December 31, 1998
Cash Flows from Operating Activities:
Net increase in partner's capital resulting
from operations $ (177,845)
Adjustments to reconcile net increase
in partner's capital resulting from operations
to cash provided by operating activities-
Net change in unrealized appreciation
of investments 58,050
Net realized loss on investments 1,421,181
Increase in dividends receivable (26,092)
Decrease in interest receivable 86,755
Decrease in organizational costs 3,702
Decrease in contributions held in advance (172,673)
Increase in advisor payable 5,471
Increase in management fee payable 54,384
Increase in accounting fees payable 5,500
Decrease in other payables (1,306)
Net cash provided by operating
Activities 1,257,127
CASH FLOW FROM INVESTING ACTIVITIES:
Cash received from -
Sale of investment securities 144,637,859
Common stock sold short 737,326
Securities sold in prior period,
settled this period 547,162
Cash paid-
To purchase investment securities (145,808,530)
To cover short sales (743,462)
For securities purchased in prior period,
settled this period (1,078,313)
Net cash used in investing activities (1,707,958)
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' contributions 7,028,279
Partners' withdrawals (7,814,546)
Increase in margin account due to brokers 1,230,362
Net cash provided by financing activities 444,095
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,736)
CASH AND CASH EQUIVALENTS, beginning of year 7,182
CASH AND CASH EQUIVALENTS, end of year $ 446
The accompanying notes to financial statements are an integral
part of this statement.
Zazove Convertible Fund, L.P.
Notes to Financial Statements
December 31, 1998
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.
On January 1, 1999, the Partnership merged into the Zazove
Convertible Securities Fund, Inc., a Maryland corporation
(the "Fund").
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 during 1998 were $238,026.
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. An
additional $40,000 of organizational costs were incurred
in connection with the merger into the Fund. Of which,
$30,000 were expensed in 1998.
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
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 1998.
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 1998, 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 .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 year ended December 31, 1998, purchases of investment
securities (excluding short-term securities) were $146,551,992
and proceeds from sales were $146,803,063. For federal income
tax purposes, at December 31, 1998, the gross unrealized
depreciation on investments was approximately $8,666,219,
and the gross unrealized appreciation was approximately
$4,392,277. The cost of investments for federal income tax
purposes was approximately $40,149,306 at December 31, 1998.
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, 1998, the
Partnership had no short securities positions.
At December 31, 1998, the three largest industry concentrations
were as follows (as a percentage of investment securities
at market value):
Broadcasting/Cable TV 10.49%
Medical Services 8.81%
Drugs 7.15%
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, 1998, the Partnership
owed the brokerage firm $1,244,800 for securities purchased
on margin. The Partnership held cash and cash equivalents
of $446 and had a receivable of $1,427,878, 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,
1998 1997
Net asset value per unit,
beginning of period $15.40 $14.09
Net investment income .54 .70
Net gain on securities (both
realized and unrealized) (.47) .61
Net asset value per unit,
end of period $15.47 $15.40
Total investment return .45% 9.30%
Ratios/Supplemental Data
Partners' capital,
end of period $36,383,556 $37,347,668
Ratio of expenses (excluding
margin interest) to average
partners' capital 2.16% 2.00%
Ratio of net investment income
to average partners' capital 3.43% 4.57%
Portfolio turnover rate 365% 405%
