Convertible
Holdings,
Inc.
Semi-Annual Report
June 30, 1994
Convertible Holdings, Inc.
Officers and Directors
Arthur Zeikel--President and Director
Terry K. Glenn--Executive Vice President
and Director
Kenneth S. Axelson--Director
Herbert I. London--Director
Joseph L. May--Director
Andre F. Perold--Director
N. John Hewitt--Senior Vice President
Vincent T. Lathbury III--Vice President and
Portfolio Manager
Donald C. Burke--Vice President
Barton A. Vogel--Vice President
Gerald M. Richard--Treasurer
Mark B. Goldfus--Secretary
<PAGE>
Custodian
National Westminster Bank NJ
10 Exchange Place
Jersey City, New Jersey 07302
Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(617) 328-5000
This report, including the financial information herein, is
transmitted to the shareholders of Convertible Holdings, Inc. for
their information. It is not a prospectus, circular or
representation intended for use in the purchase of shares of the
Company or any securities mentioned in the report. Past performance
results shown in this report should not be considered a
representation of future performance.
Convertible Holdings, Inc.
Box 9011
Princeton, NJ 08543-9011
Dear Shareholders:
For the six-month period ended June 30, 1994, Convertible Holdings,
Inc. Capital Shares had a total investment return of -12.27%, based
on a change in per share net asset value from $13.21 to $11.58, and
assuming reinvestment of $0.008 per share short-term capital gains.
During the same period, total investment return on Income Shares was
+6.45%, based on a change in per share net asset value from $9.30 to
$9.59, and assuming reinvestment of $0.303 per share income
dividends.
<PAGE>
The Environment
The stock and bond market environment changed significantly since
the Federal Reserve Board boosted short-term interest rates by 125
basis points (1.25%) since early February in an attempt to forestall
an increase in inflation. While last year presented the best of all
worlds for financial assets--a slow-growing economy, subdued
inflation and declining interest rates--it appears now that the
Federal Reserve Board has more tightening to do because the economy
is not slowing, even if it has stopped accelerating. In addition, a
weak dollar versus the so-called hard currencies (Swiss franc,
German mark and Japanese yen) gives reason to expect that the
Federal Reserve Board will tighten policy further by pushing short-
term interest rates a notch or two higher later in the year.
The convertible market's year-to-date underperformance reflects the
combined impact of sharply rising interest rates and a falling
equity market. The winning strategies of the past three years proved
unsuccessful as the market environment changed. Investors who had
outperformed by overweighting small company issues (most
convertibles are issued by small-capitalization companies) and lower-
grade credits were penalized as small stocks underperformed and
credit spreads widened. Convertible returns were also impacted by
overweighting relative to the Standard & Poor's 500 Index (S&P 500)
in underperforming sectors. With interest rates rising and trading
volume slowing, conversion premiums continued under pressure. In
this environment, all of the major stock indexes declined. For the
six months ended June 30, 1994, the Dow Jones Industrial Average
dropped 3.44%, the S&P 500 declined 4.76%, and the NASDAQ Composite
Index fell 9.12%. Very unusual was the fact that the Merrill Lynch
All Convertible Index failed to outperform its underlying stocks in
a down market, and the Merrill Lynch Domestic Convertible Bond Index
declined 6.4%. Contrary to 1993, investment-grade convertibles
outperformed non-investment grade convertibles, registered
convertibles outperformed non-registered convertibles, and
convertible bonds outperformed convertible preferreds.
The increase in interest rates had a particularly adverse impact on
homebuilding stocks which performed poorly as investors questioned
whether a peak in the cycle had been reached. Electric utility
stocks also were negatively impacted by higher interest rates.
Conversely, basic industry stocks such as chemicals, aluminum, steel
and copper benefited from an improving economy and the ability to
raise prices because of tight capacities.
Investment Activities
We continue to take a conservative position in the market. In the
past six months we increased our holdings of commercial paper from
3.5% of net assets to 12.5%. We also have about $8.3 million in
short stock positions hedging about $12 million in bonds.
<PAGE>
New additions to our portfolio during the last six months include
AMC Entertainment, Inc., Argosy Gaming Company, Arkansas Best
Corporation, Avnet Inc., Banc One Corporation, CML Group, Inc.,
Fourth Financial Corporation, GranCare Inc., HEALTHSOUTH Rehab,
James River Corporation, Kulicke & Soffa Industries Inc., Magma
Copper Company, Masco Corporation, Masco Tech, Inc., Mobile
Telecommunications Technologies Corporation, Pacific Physician
Services, Inc., Peregrine Investment Holdings, Pittston Minerals
Group, RJR Nabisco Holdings, Inc., Toll Brothers Inc. and Westbridge
Capital Corporation.
For the first time in quite a while we now believe there is value in
the convertible securities market. We were recently able to identify
145 stocks underlying convertible securities that are down at least
20% from their 12-month highs. We are carefully reviewing these
securities for future purchases.
A bright spot in the convertible market's recent sell-off is an
enhancement in the attractiveness of convertible securities versus
stocks and bonds. After peaking in March of 1994, the major
valuation measures of the convertible market--conversion premium,
investment premium and break-even times--have all improved. (See the
Glossary on page 15 of this report to shareholders.)
We thank you for your support of Convertible Holdings, Inc., and we
look forward to serving your investment needs in the months and
years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent T. Lathbury III)
Vincent T. Lathbury III
Vice President and Portfolio Manager
August 5, 1994
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1994
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Advertising-- BBB+ Baa3 $ 500,000 Omnicom Group, Inc., 4.50% due 9/01/2000++++ $ 500,000 $ 515,000
0.2%
Aerospace-- B+ B2 1,770,000 UNC, Inc., 7.50% due 3/31/2006** 1,760,463 1,398,300
0.6%
Automobile BB+ Ba3 1,250,000 Arvin Industries, Inc., 7.50% due 9/30/2014 1,249,840 1,250,000
Parts--0.5%
Banking & BB- NR 1,000,000 Mark Twain Bancshares, Inc., 7.00%
Finance--3.2% due 6/01/1999 1,129,755 1,982,400
NR NR 2,500,000 Peregrine Investment Holdings, 4.50% due
12/01/2000++++ 2,500,000 1,925,000
NR NR 4,000,000 Pioneer Financial Services Inc., 8.00%
due 7/15/2000 4,028,750 4,080,000
------------ ------------
7,658,505 7,987,400
Biotechnology-- B+ B2 4,000,000 Genzyme Corp., 6.75% due 10/01/2001++++ 3,960,000 3,570,000
1.4%
Building & CCC+ B3 3,730,000 Continental Homes Holding Corp.,
Construction-- 6.875% due 3/15/2002 3,630,816 3,114,550
6.4% NR NR 2,850,000 Engle Homes, Inc., 7.00% due 3/01/2003++++ 2,574,975 2,536,500
NR NR 3,000,000 Kumagai Gumi Ltd., 4.875% due 12/08/1998++++ 2,925,000 2,685,000
BBB Baa2 3,500,000 Masco Corp., 5.25% due 2/15/2012 3,235,000 3,150,000
B+ Ba3 2,251,000 Toll Brothers Inc., 4.75% due 1/15/2004 2,049,620 1,800,800
B- B2 4,000,000 US Home Corp., 4.875% due 11/01/2005 3,805,625 2,680,000
------------ ------------
18,221,036 15,966,850
Cement--1.6% B B3 3,656,000 Giant Group, Ltd., 7.00% due 4/15/2006** 3,510,930 3,400,081
B+ B1 750,000 Medusa Corp., 6.00% due 11/15/2003 750,000 720,000
------------ ------------
4,260,930 4,120,081
Communica- BBB- Ba2 3,000,000 IDB Communications Group, Inc., 5.00%
tions--2.0% due 8/15/2003 3,000,000 2,422,500
A- Baa3 2,188,000 Park Communications Inc., 6.875%
due 3/15/2011 2,683,100 2,647,480
------------ ------------
5,683,100 5,069,980
<PAGE>
Computers-- B B2 2,751,000 Storage Technology Corp., 8.00% due 5/31/2015 2,752,913 2,902,305
2.0% B- B2 2,000,000 Systems and Computer Technology Corp.,
6.25% due 9/01/2003 2,430,309 2,220,000
------------ ------------
5,183,222 5,122,305
Conglomer- NR B3 596,000 Lynch Corp., 8.00% due 7/15/2006 527,950 606,430
ates--0.2%
Disk Drive-- B B1 2,750,000 Conner Peripherals, Inc., 6.50% due 3/01/2002** 2,462,610 2,241,250
0.9%
Drugs--0.4% BB- Ba3 1,200,000 Bindley Western Industries Inc., 6.50% due
10/01/2002** 1,109,700 1,068,000
Electronics-- BB+ Baa3 1,500,000 Arrow Electronics, Inc., 5.75% due 10/15/2002 1,500,000 1,755,000
3.0% A+ A3 3,500,000 Avnet Inc., 6.00% due 4/15/2012 3,692,500 3,430,000
B+ B2 2,821,000 Willcox & Gibbs, Inc., 7.00% due 8/01/2014** 2,444,795 2,285,010
------------ ------------
7,637,295 7,470,010
Energy--0.2% B B2 500,000 Cross Timbers Oil Co., 5.25% due 11/01/2003 500,000 420,000
Entertainment-- BB+ Ba3 2,236,000 Time Warner, Inc., 8.75% due 1/10/2015 2,377,773 2,244,385
0.9%
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1994 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Environmen- NR NR $ 1,000,000 Phillips Environmental, Inc., 6.00%
tal--0.9% due 10/15/2000 $ 1,000,000 $ 1,060,000
B+ B2 1,117,000 Sanifill Inc., 7.50% due 6/01/2006** 1,123,951 1,117,000
------------ ------------
2,123,951 2,177,000
Foreign--0.8% NR A2 1,145,000 Hanson Trust PLC, 9.50% due 1/31/2006 2,038,034 1,873,346
Funeral BBB+ Baa1 1,175,000 Service Corporation International, 6.50%
Services--0.6% due 9/01/2001 1,298,563 1,504,000
Gaming--0.4% B- B3 1,000,000 Argosy Gaming Company, 12.00% due
6/01/2001 1,000,000 1,020,000
<PAGE>
Health Care-- B- B2 1,100,000 Genesis Health Ventures Inc., 6.00% due
6.4% 11/30/2003 1,100,000 1,336,500
B B3 1,000,000 GranCare Inc., 6.50% due 1/15/2003 1,017,500 960,000
B B1 750,000 HEALTHSOUTH Rehab, 5.00% due
4/01/2001 750,000 735,000
B- B2 3,550,000 Integrated Health Services, Inc., 6.00% due
1/01/2003 3,608,230 3,851,750
NR NR 3,500,000 IVAX Corporation, 6.50% due 11/15/2001++++ 3,457,500 2,848,125
B- NR 4,000,000 Mediplex Group, Inc., 6.50% due 8/01/2003 4,499,521 4,600,000
B- NR 1,000,000 Pacific Physician Services, Inc., 5.50% due
12/15/2003 750,000 735,000
B- B3 700,000 Summit Health Ltd., 7.50% due 4/01/2003** 841,750 1,050,000
------------ ------------
16,024,501 16,116,375
Instruments-- NR NR 2,889,000 Quixote Corp., 8.00% due 4/15/2011** 2,994,168 3,120,120
1.6% CCC+ B3 918,000 Recognition Equipment, Inc., 7.25%
due 4/15/2011 823,700 817,020
------------ ------------
3,817,868 3,937,140
Insurance-- BBB- Ba2 2,500,000 Leucadia National Corp., 5.25% due
1.2% 2/01/2003 2,500,000 2,125,000
BBB Baa3 875,000 Re Capital Corp., 5.50% due 8/01/2000 910,625 813,750
------------ ------------
3,410,625 2,938,750
Oil & Gas B B3 3,560,000 SEACOR Holdings, Inc., 6.00% due
Diversified-- 7/15/2003++++ 3,773,275 3,462,100
3.0% BB+ Ba2 2,000,000 USX-Corp., 7.00% due 6/15/2017 1,955,000 1,750,000
B- B3 2,500,000 The Western Co. of North America,
7.25% due 1/15/2015 2,576,250 2,387,500
------------ ------------
8,304,525 7,599,600
Paper--0.8% BB- Ba3 500,000 Albany International Corp., 5.25%
due 3/15/2002 468,930 447,500
BB- Baa2 1,500,000 Champion International Corp., 6.50%
due 4/15/2011 1,486,250 1,563,750
------------ ------------
1,955,180 2,011,250
Restaurants-- NR B3 1,475,000 DAKA International, Inc., 7.00% due 3/15/2003** 1,581,548 1,696,250
1.2% B- B2 1,500,000 Flagstar Corp., 10.00% due 11/01/2014 1,583,750 1,230,000
------------ ------------
3,165,298 2,926,250
Retailing--1.0% NR NR 3,150,000 CML Group, Inc., 5.50% due 1/15/2003 3,115,938 2,394,000
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1994 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Retail B- NR $ 1,844,000 Ben Franklin Retail Stores Inc., 7.50%
Stores--4.5% due 6/01/2003** $ 1,844,019 $ 1,502,860
B B2 3,052,000 Big B Inc., 6.50% due 3/15/2003** 3,371,023 3,280,900
B+ Ba3 3,388,000 Ingles Markets, Inc., 10.00% due 10/15/2008 3,661,046 3,523,520
B B2 3,000,000 Kroger Company, 8.25% due 4/15/2011++++ 3,121,250 3,030,000
------------ ------------
11,997,338 11,337,280
Semicon- B- NR 1,000,000 Kulicke & Soffa Industries Inc., 8.00% due
ductors--0.4% 3/01/2008 997,500 970,000
Specialty B B1 3,000,000 Pier 1 Imports, Inc., 6.875% due 4/01/2002 3,143,375 2,850,000
Retailer--1.1%
Telecommuni- NR NR 1,552,500 Intelcom Group Inc., 7.00% due
cations--0.5% 10/30/1998++ 1,552,697 1,157,165
Textiles-- B+ Ba3 3,200,000 Interface Flooring Systems, Inc.,
1.2% 8.00% due 9/15/2013 3,255,250 3,008,000
Transporta- B+ B1 3,000,000 Varlen Corp., 6.50% due 6/01/2003 3,046,250 2,790,000
tion--1.1%
Waste B B3 2,736,000 USA Waste Services, Inc., 8.50% due
Management-- 10/15/2002** 3,171,411 2,790,720
1.1%
Total Convertible Debentures--51.3% 136,510,728 128,450,867
<CAPTION>
Shares
Held Convertible Preferred Stocks
<S> <S> <S> <C> <S> <C> <C>
Airlines-- BB- Ba1 20,000 AMR CORP., $3.00 Series A++++ 1,000,000 900,200
0.8% B+ B1 25,000 Delta Air Lines, Inc., $3.50 Series C 1,250,000 1,131,250
------------ ------------
2,250,000 2,031,450
Automobile BB- Ba3 200,000 Masco Tech, Inc. 3,033,875 2,850,000
Parts--1.1%
<PAGE>
Banking & BBB- Baa3 40,000 Ahmanson Bank, $3.00 2,000,000 1,855,000
Finance--7.8% A A1 30,400 Banc One Corporation, $3.75 Series C 2,009,162 1,892,400
BBB- NR 90,200 Fourth Financial Corporation, $1.75 2,491,925 2,446,675
BBB+ A1 25,500 National City Corp., $4.00 1,528,680 1,676,625
NR NR 32,500 Olympic Financial, Ltd., $2.00 812,500 901,875
NR NR 138,200 ONBANCorp. Inc., $1.6875 Series B 4,169,801 3,610,475
BB+ Baa1 135,900 Southern National Corp., $1.6875 3,780,234 4,212,900
BB+ NR 59,400 Union Planters Corp., $2.00 Series E 1,770,475 2,034,450
BBB- Baa3 10,000 Washington Mutual Savings Bank, $6.00 998,750 932,500
------------ ------------
19,561,527 19,562,900
Cement & B B3 16,300 Southdown, Inc., $2.875 815,000 696,825
Aggregates--
0.3%
Coal--0.3% BB+ Ba3 20,000 Pittston Minerals Group, $3.125++++ 1,000,000 820,000
Entertainment-- B B3 40,000 AMC Entertainment, Inc., $1.983 1,000,000 965,000
0.4%
Environmen- NR NR 15,000 Allied Waste Industries, Inc., $3.75++ 1,500,000 1,656,300
tal--0.7%
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1994 (continued)
<CAPTION>
S&P Moody's Shares Value
Industry Rating Rating Held Convertible Preferred Stocks Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Forest Prod- BB Ba2 50,000 Boise Cascade Corp. $1.79 Series E $ 1,134,250 $ 1,106,250
ucts--0.4%
Insurance-- NR NR 2,000 Westbridge Capital Corporation++++ 2,000,000 1,935,000
0.8%
Machinery-- B B3 84,000 AGCO Corp., $1.625 Series 2,119,000 4,158,000
1.6%
Metals--0.4% BB+ B1 16,000 Magma Copper Company, $2.812 Series D 992,960 960,000
Oil & Gas--1.4% B B2 50,000 Gerrity Oil & Gas Corporation, $1.50 790,000 812,500
B+ B1 112,000 Snyder Oil Corporation, $6.00 3,057,390 2,842,000
------------ ------------
3,847,390 3,654,500
Paper--0.6% BB+ Ba2 83,400 James River Corporation Virginia, $8.25
Series P 1,438,650 1,469,925
<PAGE>
Real Estate-- BBB- Baa3 40,000 Merry Land & Investment Services, Inc., $1.75 1,000,000 1,080,000
2.3% BBB+ Baa3 80,000 Property Trust of America, $1.75 2,000,000 1,990,000
NR Ba1 100,000 Storage Equities Inc., $2.062 2,518,600 2,750,000
------------ ------------
5,518,600 5,820,000
Software-- NR NR 80,000 Network Imaging Corporation, $2.00 2,000,000 1,740,000
Computer--0.7%
Telecommunica- B NR 50,000 Mobile Telecommunications Technologies
tions--0.6% Corporation, $2.25++++ 1,462,500 1,406,250
Tobacco--0.4% AAA NR 150,000 RJR Nabisco Holdings, Inc. 975,000 993,750
Transporta- BBB- Baa2 15,000 Burlington Northern Inc., $3.125 Series A 750,000 948,750
tion--0.7% B+ Ba3 10,000 UAL Corp., $6.25 Series A++++ 1,008,750 852,500
------------ ------------
1,758,750 1,801,250
Trucking-- BBB- Ba3 58,000 Arkansas Best Corporation, $2.875 Series A 2,916,550 2,407,000
1.0%
Total Convertible Preferred Stocks--22.3% 55,324,052 56,034,400
<CAPTION>
Common Stocks
<S> <C> <S> <C> <C>
Automobile 20,445 Magna International, Inc. 455,258 817,800
Parts--0.3%
Banking--4.8% 155,211 BB&T Financial Corp. 3,245,163 4,850,344
59,000 Deposit Guaranty Corp. 891,024 1,711,000
96,848 First of America Bank Corp. 2,969,412 3,450,210
15,000 Mellon Bank Corp. 495,270 843,750
53,761 Washington Mutual Savings Bank 592,119 1,108,820
------------ ------------
8,192,988 11,964,124
Drugs--2.8% 153,715 Bindley Western Industries, Inc. 2,150,910 1,786,937
100,000 Bristol-Myers Squibb Co. 4,985,776 5,362,500
------------ ------------
7,136,686 7,149,437
Food Processing--1.5% 210,955 Hudson Foods, Inc.--Class A 3,138,340 3,744,452
Forest Products--1.0% 139,745 Pope & Talbot Inc. 3,320,729 2,515,410
Machinery--1.8% 128,479 Trinity Industries Leasing Co. 2,974,237 4,512,825
<PAGE>
Medical Supplies--1.5% 140,584 Baxter International, Inc. 2,230,959 3,690,330
Retail Stores--0.0% 10,000 Ben Franklin Retail Stores Inc. 57,650 36,250
Total Common Stocks--13.7% 27,506,847 34,430,628
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1994 (concluded)
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <S> <C> <C>
Commercial $ 5,000,000 B.A.T. Capital Corp., 4.30% due 7/20/1994 $ 4,988,055 $ 4,988,055
Paper*--12.5% 5,000,000 Ciesco L.P., 4.23% due 7/11/1994 4,993,538 4,993,538
5,000,000 First Boston, Inc., 4.28% due 7/08/1994 4,995,244 4,995,244
9,321,000 General Electric Capital Corp., 4.30%
due 7/01/1994 9,319,886 9,319,886
7,000,000 Motorola Inc., 4.25% due 7/14/1994 6,988,430 6,988,430
------------ ------------
31,285,153 31,285,153
Total Short-Term Securities--12.5% 31,285,153 31,285,153
Total Investments--99.8% $250,626,780 250,201,048
============
Short Sales--(proceeds--$8,479,205) (3.3%) (8,296,073)
Other Assets Less Liabilities--3.5% 8,657,380
------------
Net Assets--100.0% $250,562,355
============
<FN>
++Restricted securities as to resale.
Acquisition Value
Issue Date Cost (Note 1a)
Allied Waste
Industries, Inc. 9/23/93 $1,500,000 $ 1,656,300
Intelcom Group Inc. 10/26/93 1,552,697 1,157,165
Total $3,052,697 2,813,465
==========
++++Other restricted securities $ 26,485,675
Total Restricted Securities--11.69% $ 29,299,140
===========
<PAGE>
*Commercial Paper is traded on a discount basis and amortized to maturity.
The interest rates shown are the discount rates paid at the time of
purchase by the Company.
**Covered Short Sales entered into as of June 30, 1994 are
as follows:
Value
Shares Issue (Note 1a)
124,662 Ben Franklin Retail Stores Inc. $ (498,648)
126,000 Big B Inc. (1,464,750)
24,200 Bindley Western Industries Inc. (287,375)
55,000 Conner Peripherals, Inc. (666,875)
85,000 DAKA lnternational, Inc. (1,115,625)
25,200 Giant Group, Ltd. (270,900)
42,100 Quixote Corp. (831,475)
13,400 Sanifill Inc. (338,350)
40,000 Summit Health Ltd. (730,000)
64,200 Sun Healthcare Group+++ (1,195,725)
18,600 USA Waste Services, Inc. (216,225)
46,000 UNC Inc. (253,000)
67,000 Willcox & Gibbs, Inc. (427,125)
Total (proceeds--$8,479,205) $ (8,296,073)
============
+++Sun Healthcare Group hedges the Mediplex Group, Inc. convertible
debentures as a result of a recent merger.
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Statement of Assets, Liabilities and Capital as of June 30, 1994
<CAPTION>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$250,626,780)(Note 1a) $250,201,048
Cash 4,032,732
Receivables:
Securities sold $ 3,913,837
Short sales (Note 1g) 2,896,150
Interest 2,512,386
Investment adviser (Note 2) 920,424
Dividends 268,546 10,511,343
------------
Deferred organization expenses (Note 1e) 136,735
Prepaid registration fees and other assets 10,853
------------
Total assets 264,892,711
------------
<PAGE>
Liabilities:
Common stocks sold short, at market value (proceeds--$8,479,205)(Note 1g) 8,296,073
Payables:
Securities purchased 5,262,292
Capital shares repurchased 530,418
Dividends to shareholders 146,114 5,938,824
------------
Accrued expenses and other liabilities 95,459
------------
Total liabilities 14,330,356
------------
Net Assets $250,562,355
============
Capital (Note 5):
Income Shares:
Par value $.10 per share; 15,000,000 shares authorized; 11,840,300 shares issued $ 1,184,030
Liquidation capital in excess of par 108,930,760
------------
110,114,790
Undistributed investment income--net 3,375,005
------------
Net asset value, equivalent to $9.59 per share based on 11,840,300 shares outstanding
(market value--$10.75) $113,489,795
Capital Shares:
Par value $.10 per share; 15,000,000 shares authorized; 11,840,300 shares issued 1,184,030
Paid-in capital in excess of par 131,996,105
------------
Total 133,180,135
------------
Undistributed realized gain on investments--net* 4,132,970
Unrealized depreciation on investments--net (240,545)
------------
Total 3,892,425
------------
Net asset value, equivalent to $11.58 per share based on
11,840,300 shares outstanding (market value--$9.00) 137,072,560
------------
Net Assets $250,562,355
============
<PAGE>
<FN>
*Net of taxes on undistributed net realized long-term capital gains (Note 1c).
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Statement of Operations for the Six Months Ended June 30, 1994
<CAPTION>
<S> <C> <C>
Investment Income (Note 1d):
Interest and discount earned $ 6,088,940
Dividends (net of $1,915 foreign withholding tax) 2,104,913
------------
Total income $ 8,193,853
Expenses:
Investment advisory fees (Note 2) 797,837
Interest on securities sold short 84,642
Dividends on securities sold short 69,920
Transfer agent fees 62,563
Accounting services (Note 2) 61,509
Professional fees 30,086
Printing and shareholder reports 23,580
Directors' fees and expenses 20,752
Amortization of organization expenses (Note 1e) 17,409
Custodian fees 13,294
Insurance 3,549
Pricing services 2,314
Registration fees 129
Other 21,960
------------
Total expenses 1,209,544
------------
Investment income--net 6,984,309
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency
Transactions--Net (Notes 1b, 1c & 3):
Realized gain from:
Investments--net 4,205,036
Foreign currency transactions--net 503 4,205,539
------------
Change in unrealized appreciation/depreciation on:
Investments--net (24,023,558)
Foreign currency transactions--net 2,055 (24,021,503)
------------ ------------
Net realized and unrealized loss on investments and foreign currency transactions (19,815,964)
------------
Net Decrease in Net Assets Resulting from Operations $(12,831,655)
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Statements of Changes in Net Assets
<CAPTION>
For the Six For the Year
Months Ended Ended
June 30, 1994 Dec. 31, 1993
Increase (Decrease) in Net Assets:
<S> <C> <C>
Operations:
Investment income--net $ 6,984,309 $ 15,198,414
Realized gain on investments--net 4,205,539 24,991,231
Income taxes on realized gain on investments -- (3,781,304)
Change in unrealized appreciation/depreciation on investments--net (24,021,503) (2,746,628)
------------ ------------
Net increase (decrease) in net assets resulting from operations (12,831,655) 33,661,713
------------ ------------
Dividends & Distributions to Shareholders (Notes 1 & 4):
Investment income--net (3,660,858) (15,200,892)
Realized gain on investments--net (94,645) (14,276,142)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (3,755,503) (29,477,034)
------------ ------------
Capital Share Transactions (Note 5):
Income shares (3,494,010) (7,765,500)
Capital shares (4,355,776) (10,786,117)
------------ ------------
Net decrease in net assets resulting from treasury stock transactions (7,849,786) (18,551,617)
------------ ------------
Net Assets:
Total decrease in net assets (24,436,944) (14,366,938)
Beginning of period 274,999,299 289,366,237
------------ ------------
End of period* $250,562,355 $274,999,299
============ ============
*Undistributed investment income--net $ 3,375,005 $ 51,554
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Financial Highlights
<CAPTION>
For the Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended
June 30, For the Year Ended December 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Income Shares:
Per Share Operating Performance:
Net asset value, beginning of period $ 9.30 $ 9.30 $ 9.31 $ 9.30 $ 9.30
--------- --------- --------- --------- ---------
Investment income--net .59 1.20 1.35 1.41 1.38
Dividends of investment income--net (.30) (1.20) (1.36) (1.40) (1.38)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.59 $ 9.30 $ 9.30 $ 9.31 $ 9.30
========= ========= ========= ========= =========
Market price per share, end of period $ 10.75 $ 10.625 $ 11.25 $ 12.625 $ 10.875
========= ========= ========= ========= =========
Total Investment Return:**
Based on market value per share 4.45%++ 7.20% 2.74% 34.37% 9.23%
========= ========= ========= ========= =========
Based on net asset value per share 6.45%++ 13.50% 15.17% 15.87% 15.50%
========= ========= ========= ========= =========
Capital Shares:
Per Share Operating Performance:
Net asset value, beginning of period $ 13.21 $ 12.87 $ 10.91 $ 7.67 $ 10.12
--------- --------- --------- --------- ---------
Realized and unrealized gain (loss) on
investments--net (1.67) 1.43 2.03 3.24 (2.45)
Distributions of realized gain--net (.01) (1.17) (.12) -- --
Effect of repurchase of Treasury Stock .05 .08 .05 -- --
--------- --------- --------- --------- ---------
Net asset value, end of period $ 11.58 $ 13.21 $ 12.87 $ 10.91 $ 7.67
========= ========= ========= ========= =========
Market value per share, end of period $ 9.00 $ 10.875 $ 9.375 $ 6.875 $ 4.25
========= ========= ========= ========= =========
Total Investment Return:**
Based on market value per share (17.17%)++ 28.77% 38.11% 61.76% (22.73%)
========= ========= ========= ========= =========
Based on net asset value per share (12.27%)++ 13.94% 19.48% 42.24% (24.21%)
========= ========= ========= ========= =========
<PAGE>
Total Fund:
Ratios to Average Net Assets:
Total expenses*** .90%* .80% .80% .83% .86%
========= ========= ========= ========= =========
Investment income--net 5.20%* 5.10% 6.34% 7.24% 7.39%
========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in thousands) $ 250,562 $ 274,999 $ 289,366 $ 275,045 $ 230,851
========= ========= ========= ========= =========
Portfolio turnover 36.75% 116.03% 76.54% 54.90% 40.28%
========= ========= ========= ========= =========
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value,
result in substantially different returns. Total investment returns
exclude the effects of sales loads.
***Excluding taxes on undistributed net realized long-term capital
gains (Note 1b).
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Convertible Holdings, Inc.
Notes to Financial Statements
1. Significant Accounting Policies:
Convertible Holdings, Inc. (the "Company") is a diversified,
closed-end, "dual purpose" investment company. The following is a
summary of significant accounting policies followed by the Company.
(a)Valuation of investments--Portfolio securities which are traded
only on stock exchanges are valued at the last sale price as of the
close of business on the day the securities are being valued, or
lacking any sales, at the mean between closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the
most recent bid prices as obtained from one or more dealers that
make markets in these securities. Portfolio securities which are
traded both in the over-the-counter markets and on a stock exchange
are valued according to the broadest and most representative market.
Securities and assets for which market quotations are not readily
available and securities subject to restrictions on resale are
valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company. Short-term
securities are valued at amortized cost which approximates market.
<PAGE>
(b)Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) such transactions expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c)Income taxes--It is the Company's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable net
investment income and net realized short-term capital gains. The
Company intends to retain net realized long-term capital gains, if
any, and pay taxes on such gains at the Federal tax rates applicable
to corporations.
(d)Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date. Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e)Deferred organization expenses--Deferred organization expenses
are charged to expense on a straight-line basis over a twelve-year
period ending on July 31, 1997, the redemption date for the Income
Shares.
(f)Dividends and distributions--Dividends and distributions paid by
the Company are recorded on the ex-dividend dates.
(g)Short sales--When the Company engages in a short sale, an amount
equal to the proceeds received by the Company is reflected as an
asset and equivalent liability. The amount of the liability is
subsequently marked to market to reflect the market value of the
short sale. The Company maintains a segregated account of securities
and cash as collateral for the short sales. The Company owns
convertible bonds or stock of the same issuer which covers the short
sale. The Company is exposed to market risk based on the amount, if
any, that the market value of the stock exceeds the market value of
the securities in the segregated account. Securities have been
borrowed from Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"),
an affiliate of MLIM, to execute short sales.
<PAGE>
2. Investment Advisory Agreement and Transactions with Affiliates:
The Company has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective January 1,
1994, the investment advisory business of MLAM was reorganized from
a corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of MLAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of MLAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary of ML
& Co. The Company has also entered into a Distribution Agreement and
a Distribution Plan with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill
Lynch Investment Management, Inc. ("MLIM").
Convertible Holdings, Inc.
Notes to Financial Statements (continued)
MLAM is responsible for the management of the Company's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Company.
For such services, the Company pays MLAM a quarterly fee at the
annual rate of 0.60% of the Company's average weekly net assets.
The investment advisory fee is reduced by 25% for any quarter in
which the Company fails to meet the Minimum Income Rate Objective
("Objective") at the close of any fiscal quarter. The Objective is to
obtain a minimum annualized rate of income return equal to 85% of
the yield of the Value Line Convertible Index.
Accounting services are provided to the Company by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or
directors of MLIM, MLPF&S and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1994 were $93,346,108 and
$152,832,810, respectively.
<PAGE>
Net realized and unrealized gains (losses) as of June 30, 1994 were
as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 9,422,425 $ (425,732)
Short sales (5,217,389) 183,132
Foreign currency
transactions 503 2,055
----------- ------------
Total $ 4,205,539 $ (240,545)
=========== ============
As of June 30, 1994, net unrealized depreciation for Federal income
tax purposes aggregated $242,600, of which $15,303,529 related to
appreciated securities and $15,546,129 related to depreciated
securities. The aggregate cost of investments at June 30, 1994 for
Federal income tax purposes was $250,626,780.
4. Distributions:
The Company distributes its net investment income quarterly to
holders of Income Shares. Income Shares are entitled to cumulative
dividends in an amount equivalent to net investment income, with a
minimum annual rate of $1.00 per share. To the extent that any such
cumulative dividend cannot be satisfied from net investment income,
it will be paid from any net realized short-term or long-term
capital gains. Capital Shares will not be entitled to receive
distributions from net investment income until 1997.
To the extent not needed to pay the Income Shares' minimum
cumulative dividends, distributions from net realized short-term
capital gains, if any, may be paid to holders of the Capital Shares
in the succeeding year. The Company will not distribute net realized
long-term capital gains except to the limited extent described
above.
<PAGE>
5. Share Transactions:
At June 30, 1994, there were 15,000,000 shares of $.10 par value
authorized for each class. During the period ended June 30, 1994,
the Company repurchased 375,700 Income Shares and 375,700 Capital
Shares, all of which have been retired.
As long as any Income Shares are outstanding, the Company will not
issue any additional Capital Shares or Income Shares.
The Company intends to redeem all Income Shares in 1997 for $9.30
per share plus accumulated and unpaid dividends ("liquidation value").
As a result of this liquidation preference, the per share capital of
the Income Shares is maintained at the liquidation value plus any
unpaid income dividends. The capital of the Capital Shares reflects
a reduction of $647,584 for the difference between the cost of the
Income Shares repurchased during the period ended June 30, 1994 and
the $9.30 per share liquidation value for Income Shares. After
July 31, 1997, Capital Shares will then be the sole remaining
class of shares of the Company outstanding, and the Board of
Directors will decide whether to liquidate the Company or to submit
to the holders of Capital Shares a proposal to change the Company to
an open-end investment company.
Convertible Holdings, Inc.
Notes to Financial Statements (concluded)
<TABLE>
Quarterly Data
<CAPTION>
Income Shares Capital Shares Total Fund
------------------------------------ -------------------------- --------------------------
Net Realized and Net Increase (Decrease)
Net Investment Unrealized Gains (Losses) in Net Assets
Investment Income on Investments* Resulting from Operations
For the Quarter Income Amount Per Share Amount Per Share Amount Per Share
<S> <C> <C> <C> <C> <C> <C> <C>
July 1, 1992 to Sept. 30, 1992 $4,657,464 $4,077,975 $.30 $ 7,828,627 $ .58 $11,906,602 $ .88
Oct. 1, 1992 to Dec. 31, 1992 4,842,561 4,286,659 .32 14,584,178 1.11 18,870,837 1.43
Jan. 1, 1993 to March 31, 1993 4,735,144 4,147,554 .32 11,466,527 .89 15,614,081 1.21
April 1, 1993 to June 30, 1993 3,914,812 3,305,219 .26 296,973 .02 3,602,192 .28
July 1, 1993 to Sept. 30, 1993 4,251,430 3,657,430 .29 7,628,097 .60 11,285,525 .89
Oct. 1, 1993 to Dec. 31, 1993 4,694,134 4,088,211 .33 (928,296) (.08) 3,159,915 .25
Jan. 1, 1994 to March 31, 1994 4,248,767 3,609,304 .30 (8,363,718) (.70) (4,754,917) (.40)
April 1, 1994 to June 30, 1994 3,945,086 3,375,005 .29 (11,452,246) (.97) (8,076,738) (.68)
<FN>
*Net of tax on undistributed net realized long-term capital gains (Note 1b).
</TABLE>
<PAGE>
Convertible Holdings, Inc.
Stockholder Information
<TABLE>
Consolidated Transaction Reporting System Prices
<CAPTION>
Income Shares Capital Shares
Net Asset Value Market Price* Net Asset Value Market Price*
For the Quarter High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
July 1, 1992 to Sept. 30, 1992 $9.67 $9.32 $12 1/2 $12 5/8 $11.96 $11.42 $ 7 1/2 $ 7 7/8
Oct. 1, 1992 to Dec. 31, 1992 9.59 9.28 12 3/8 11 5/8 12.87 11.69 9 3/8 7 7/8
Jan. 1, 1993 to March 31, 1993 9.63 9.34 11 3/4 11 1/4 13.76 12.84 10 7/8 9 3/8
April 1, 1993 to June 30, 1993 9.64 9.34 11 7/8 11 1/2 13.94 13.52 10 5/8 10 1/4
July 1, 1993 to Sept. 30, 1993 9.59 9.33 11 3/4 10 1/2 14.42 13.70 11 10 3/8
Oct. 1, 1993 to Dec. 31, 1993 9.63 9.30 11 1/4 10 5/8 14.69 13.21 11 1/2 10 7/8
Jan. 1, 1994 to March 31, 1994 9.60 9.33 11 3/8 10 5/8 13.63 12.52 10 7/8 9 3/8
April 1, 1994 to June 30, 1994 9.62 9.34 11 1/8 10 5/8 12.57 11.58 10 5/8 9
<FN>
*As reported in the consolidated transaction reporting system.
</TABLE>
About Convertible Holdings, Inc.
A closed-end "dual purpose" investment company, Convertible
Holdings, Inc. invests primarily in convertible bonds and
convertible preferred stock. The Company has two classes of shares:
Capital Shares (NYSE symbol CNV) for those seeking long-term growth
of capital; and Income Shares (NYSE symbol CNV Pr) for those seeking
current and long-term growth of income.
Both classes of shares represent "leveraged" investments. This is
because Capital Share investors initially provided only 42.5% of the
Company's capital at inception in 1985, yet will receive all of the
portfolio's capital appreciation. Income Share investors, on the
other hand, initially provided 57.5% of the Company's capital, but
will receive all of the portfolio's income. In other words,
investors in either class of shares have more assets working for
their respective investment goals than they have contributed.
In 1997, Income Shares will be redeemed at $9.30 per share, plus
accumulated and unpaid dividends. (Should assets be insufficient to
redeem the Income Shares at such amount, total net assets of the
Company would be distributed to Income Shareholders on a pro-rata
basis.) After redemption of the Income Shares, Capital Shareholders
will own all remaining assets. Thereafter, the Company will either
liquidate or submit to the Capital Shareholders a proposal to
continue as an open-end investment company (i.e., a mutual fund).
<PAGE>
Share Comparison
The following is a brief summary of certain rights of each class of
shares of the Company.
Capital Shares Income Shares
Entitled to all the port- Entitled to all the port-
folio's appreciation. folio's net income, paid
quarterly.
No distributions from net Minimum cumulative
income received as long dividend of $1.00
as Income Shares are annually.
outstanding.
Bear none of the Com- Pay all of the Company's
pany's expenses. expenses.
Potential for capital Potential for growing
appreciation with poten- income stream if portfolio
tial lower downside risk appreciates over time.
than a leveraged com-
mon stock portfolio.
NYSE symbol CNV NYSE symbol CNV Pr
Convertible Holdings, Inc.
Glossary
Break-Even Time
This calculation, based on a dollar-for-dollar basis, shows the
number of years over which the dollar conversion premium may be
recovered by the increased dollar income of the convertible over
that of the underlying common stock, assuming no change in the
dividend on the underlying stock. (Also called the premium recovery
period.)
Call Protection
Nearly all the convertibles have call provisions which give the
issuers the right to buy back the issue at a premium over the price
at which it was issued. A company may wish to reduce its bond
interest expense or preferred dividend requirements, replacing them
with a lower-yielding common stock. To protect the security-holder,
some issues are not subject to redemption for a stated period of
time, thus ensuring their income requirements during that period.
There are no provisional terms under which a security with hard
(absolute) call protection may be called.
<PAGE>
Conversion Value
A convertible security is entitled to a fixed number of common
shares upon conversion. For bonds, it is typically the number of
shares per $1,000 principal amount. For preferreds, the number of
shares multiplied by the market value per common share is the
preferred's conversion value.
Net Income
Net income includes all dividends, interest and other income (but
not realized or unrealized gains, stock dividends, and other capital
items) earned by the Company on its portfolio holdings, net of the
Company's expenses. For purposes of determining Net Income, expenses
do not include taxes on undistributed net long-term capital gains
paid by the Company.
Percent Premium
The percentage over conversion value at which the convertible
security trades. If a convertible bond is selling at 120 and its
conversion value is 105, then the conversion premium is 15 points
($150), or 14.3%.
