Convertible
Holdings,
Inc.
FUND LOGO
Annual Report
December 31, 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
Robert R. Martin--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
The Chase Manhattan Bank, N.A.
Global Securities Services
Chase MetroTech Center
Brooklyn, New York 11245
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 December 31, 1994, Convertible
Holdings, Inc. Capital Shares had a total investment return of
- -3.89%, based on a change in per share net asset value from $11.58
to $11.13. During the same period, total investment return on Income
Shares was +6.41%, based on a change in per share net asset value
from $9.59 to $9.30, and assuming reinvestment of $0.884 per share
income dividends.
For the year ended December 31, 1994, per share net asset value for
Convertible Holdings, Inc. Capital Shares decreased from $13.21 to
$11.13. Total investment return was -15.68%, assuming reinvestment
of $0.008 per share short-term capital gains. During the same
period, total return for Income Shares was +13.28%, based on an
unchanged per share net asset value of $9.30, and assuming
reinvestment of $1.187 per share income dividends.
<PAGE>
The Environment
The stock market started out strongly in 1994, with investors
encouraged by improving economic figures and strong corporate
earnings reports. This changed on February 4, 1994 when the Federal
Reserve Board made the first of six interest rate hikes during 1994
in an effort to stave off inflation. The major markets dropped
sharply and spent the rest of the year struggling to recover. The
Dow Jones Industrial Average ended the year with a gain of 2.1%,
while the Standard & Poor's 500 Index (S&P 500) had a modest loss of
1.5%. However, the major stock indexes masked how poorly most stocks
performed. About 56% of a universe of 6,000 actively traded stocks
suffered losses of 20% or more, and 20% of all stocks suffered
losses of 40% or more from the highs they registered in 1994. In
this environment, the Merrill Lynch All Convertible Index declined
7.1%.
What caused this generally poor performance in 1994? Investors do
not like uncertainty. Rising interest rates and fear of inflation in
an improving economy have hurt financial and other interest rate-
sensitive stocks. At the same time, higher interest rates and the
probability of further Federal Reserve Board tightening have caused
many to fear that the economy will slow down materially, with
resulting shortfalls in 1995 earnings and the possibility that
cyclical stocks may be close to reaching earnings peaks for this
cycle. Drugs and household products rose in relative terms in 1994.
These sectors perform well in an uncertain earnings environment
because of the predictability of their earnings. Sectors strongly
linked to the economic cycle, such as basic industries, performed
poorly.
Although earnings are likely to be downgraded in 1995, we believe
the market will be more influenced by expectations that interest
rates are at or near a peak. Furthermore, stocks are much more
reasonably valued. Driven by sharply lower interest rates, stock
prices were taken to levels that were excessive by any historical
standard. In 1993, the S&P 500 was selling at a price/earnings
ratio of 20.1 compared to a mean of 14.6 from 1982--1993. Price/cash
flow was 9.5 compared to a mean of 7.1. Dividend yield was 2.8%
compared to 3.9%. Based on 1995 earnings estimates, the
price/earnings ratio is 13.9, price/cash flow is 7.5 and dividend
yield is 3.1%. With large cap stocks at more reasonable levels and
small cap stocks having underperformed in 1994, we believe that
convertible securities currently are attractive investments.
Investment Activities
We increased our defensive position in the past six months with our
holdings of commercial paper rising to 14.85% of net assets at the
end of 1994, up from 12.50% at mid-year. We have a diversified
portfolio, with our largest position in banking and finance, which
represents 14.3% of our holdings. While this group is being hurt by
rising interest rates and narrowing interest margins, further
downside risk is limited by low price/earnings ratios and high, well-
protected common stock yields. Since any real strengthening in the
stock market awaits some sign of a positive turn in interest rates,
we believe these convertibles have excellent upside potential with
limited downside risk.
<PAGE>
As mentioned, large cap stocks are selling at more reasonable
valuation measures, with the S&P 500 selling at 13.9 times estimated
1995 earnings. We did a study that shows for 164 liquid stocks
underlying convertible securities, the average price to 1995
consensus earnings is 14 times and the median expected earnings gain
is 24%. Furthermore, the average convertible security participated
substantially in the decline in its underlying stock from early
February 1994 highs. Therefore, we believe that small cap stocks and
convertible securities have the potential to do well in 1995.
In the past six months we purchased shares in AK Steel Holding
Corp., Airborne Freight Corp., Alexander & Alexander Services, Inc.,
CareLine, Inc., Cemex, Chubb Capital Corp., Citicorp, EMC Corp., FHP
International Corp., First Financial Management Corp., Guilford
Mills, Inc., HEALTHSOUTH Rehab, Lafarge Corp., MagneTek Inc.,
Pacific Dunlop, Pacific Physician Services, Inc., Paul Y-ITC
Construction Holdings, Inc., Pennzoil Co. (convertible into Chevron
Corp.), Polyphase Corp., Regency Health Services, Inc., Republic of
New York Corp., Seagate Technology Inc., Telekom Malaysia, Thomas
Nelson Inc. and WHX Corp.
Also, we completely eliminated our positions in Albany
International, Champion International, Flagstar Corp., Genesis
Health Ventures Inc., Genzyme Corp., Gerrity Oil & Gas Corp., Giant
Group, Ltd., Hanson Trust PLC, IDB Communications Group, Inc., IVAX
Corp., Kroger Co., Leucadia National Corp., Masco Corp., Mobile
Telecommunications Technologies Corporation, National City Corp.,
Pier 1 Imports, Pope & Talbot Inc., Re Capital Corp., Recognition
Equipment, Inc., USA Waste Services, Inc., USX-Corp., The Western
Co. of North America and Willcox & Gibbs, Inc.
In Conclusion
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
February 6, 1995
<PAGE>
Convertible Holdings, Inc.
Stockholder Information (unaudited)
<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>
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 9.29 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
July 1, 1994 to Sept. 30, 1994 9.61 9.34 11 10 1/8 12.49 11.59 9 5/8 8 7/8
Oct. 1, 1994 to Dec. 31, 1994 9.61 9.30 10 1/2 9 7/8 12.00 10.85 9 5/8 8 7/8
<FN>
*As reported in the consolidated transaction reporting system.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1994
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Air Freight--1.1% BBB Ba1 $3,000,000 Airborne Freight Corp., 6.75% due 8/15/2001 $ 3,000,625 $ 2,718,750
Air Transport-- BB- Ba1 1,000,000 AMR Corp., 6.125% due 11/01/2024 813,945 805,000
0.3%
Automobile BB+ Ba3 2,000,000 Arvin Industries, Inc., 7.50% due 9/30/2014 2,012,965 1,995,000
Parts--0.8%
Banking & BB+ NR* 1,000,000 Mark Twain Bancshares, Inc., 7.00% due
Finance--1.4% 6/01/1999 1,129,755 1,699,190
NR* NR* 2,500,000 Peregrine Investment Holdings, 4.50% due
12/01/2000++ 2,500,000 1,706,250
------------- -------------
3,629,755 3,405,440
Broadcasting/ NR* NR* 1,606,837 Intelcom Group Inc., 7.00% due 10/30/1998 (a)++ 1,601,464 1,290,723
Communic- BBB+ Baa3 500,000 Omnicom Group, Inc., 4.50% due 9/01/1996 (b)++ 500,000 510,000
ations--3.3% A Baa3 2,188,000 Park Communications Inc., 6.875% due 3/15/2011 2,683,100 3,128,840
A+ A2 1,000,000 Telekom Malaysia, 4.00% due 10/03/2004++ 1,000,000 882,500
BB+ Ba3 2,236,000 Time Warner, Inc., 8.75% due 1/10/2015 2,377,773 2,107,430
------------- -------------
8,162,337 7,919,493
<PAGE>
Building/Building NR* NR* 3,000,000 Kumagai Gumi Ltd., 4.875% due 12/08/1998++ 2,925,000 2,302,500
Supplies--2.8% Owens-Corning Fiberglass Corporation:
NR* Ba1 500,000 8.00% due 12/30/2005 521,450 548,750
NR* NR* 2,500,000 8.00% due 12/30/2005*** 2,607,250 2,743,750
NR* NR* 1,500,000 Paul Y-ITC Construction Holdings, Inc., 5.00%
due 2/03/2001 1,220,000 1,055,625
------------- -------------
7,273,700 6,650,625
Cement--3.2% NR* NR* 2,000,000 Cemex, S.A., 4.25% due 11/01/1997++ 2,000,000 1,600,000
BBB+ Baa2 3,590,000 Lafarge Corp., 7.00% due 7/01/2013 3,708,350 3,554,100
B+ B1 2,500,000 Medusa Corp., 6.00% due 11/15/2003 2,479,375 2,300,000
------------- -------------
8,187,725 7,454,100
Computer/ B B2 2,320,000 Conner Peripherals, Inc.., 6.50% due
Business 3/01/2002*** 2,078,835 1,612,400
Equipment-- B Ba3 500,000 EMC Corporation, 4.25% due 1/01/2001 505,000 590,000
2.3% B+ B2 2,751,000 Storage Technology Corp., 8.00% due
5/31/2015*** 2,752,913 2,682,225
B- B2 400,000 Systems and Computer Technology Corp.,
6.25% due 9/01/2003 534,000 552,000
------------- -------------
5,870,748 5,436,625
Conglomer- NR* NR* 2,290,000 Pacific Dunlop Ltd., 6.75% due 7/02/1997 2,354,550 2,244,200
ates--2.3% NR* NR* 2,000,000 Polyphase Corporation, 12.00% due 7/01/1999++ 2,000,000 1,620,000
NR* NR* 1,739,000 Quixote Corp., 8.00% due 4/15/2011 1,910,643 1,652,050
------------- -------------
6,265,193 5,516,250
Disk Drive--0.4% B+ B2 1,000,000 Seagate Technology Inc., 6.75% due 5/01/2012 852,500 830,000
Drugs--1.5% B B2 3,052,000 Big B Inc., 6.50% due 3/15/2003*** 3,371,023 3,509,800
Electronics-- BB+ Baa3 1,500,000 Arrow Electronics, Inc., 5.75% due 10/15/2002 1,500,000 1,710,000
3.0% A+ NR* 3,500,000 Avnet, Inc., 6.00% due 4/15/2012 3,692,500 3,500,000
B B2 2,000,000 MagneTek, Inc., 8.00% due 9/15/2001 2,036,250 1,980,000
------------- -------------
7,228,750 7,190,000
Energy--0.2% B B2 500,000 Cross Timbers Oil Co., 5.25% due 11/01/2003 500,000 397,500
Financial A Baa2 1,000,000 First Financial Management Corp., 5.00% due
Services--2.0% 12/15/1999 1,000,000 1,032,500
NR* NR* 4,000,000 Pioneer Financial Services Inc., 8.00% due
7/15/2000 4,028,750 3,720,000
------------- -------------
5,028,750 4,752,500
Funeral BBB+ Baa1 1,175,000 Service Corporation International, 6.50% due
Services--0.7% 9/01/2001 1,298,563 1,586,250
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 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>
Gaming--0.4% B- B3 $1,000,000 Argosy Gaming Company, 12.00% due 6/01/2001 $ 1,000,000 $ 940,000
Health Care-- B- B3 2,250,000 CareLine, Inc., 8.00% due 5/01/2001++ 1,783,750 1,774,687
5.9% B B3 1,849,000 GranCare Inc., 6.50% due 1/15/2003 1,768,051 1,516,180
B B1 1,000,000 HEALTHSOUTH Rehab, 5.00% due 4/01/2001 1,032,500 1,010,000
B- B2 500,000 Integrated Health Services, Inc., 6.00% due
1/01/2003 525,000 612,500
B- B2 3,000,000 Mediplex Group, Inc., 6.50% due 8/01/2003*** 3,430,820 4,230,000
B- NR* 1,300,000 Pacific Physician Services, Inc., 5.50% due
12/15/2003 928,250 1,001,000
NR* NR* 2,300,000 Pharmaceutical Marketing Services, Inc.,
6.25% due 2/01/2003*** 1,781,450 1,483,500
NR* NR* 1,500,000 Regency Health Services, Inc., 6.50% due
7/15/2003 1,618,750 1,582,500
B- B2 700,000 Summit Health Ltd., 7.50% due 4/01/2003*** 841,750 923,608
------------- -------------
13,710,321 14,133,975
Home Building-- NR* B3 3,730,000 Continental Homes Holding Corp., 6.875% due
5.2% 3/15/2002 3,636,114 2,946,700
NR* NR* 2,850,000 Engle Homes, Inc., 7.00% due 3/01/2003 2,574,975 2,180,250
B+ Ba3 3,950,000 Interface Flooring Systems, Inc., 8.00% due
9/15/2013 3,972,750 3,564,875
B+ Ba3 2,251,000 Toll Brothers Inc., 4.75% due 1/15/2004 2,049,620 1,530,680
B- B2 3,450,000 US Home Corp., 4.875% due 11/01/2005 3,255,625 2,216,625
------------- -------------
15,489,084 12,439,130
Insurance--0.4% AA Aa3 1,000,000 Chubb Capital Corp., 6.00% due 5/15/1998 1,015,000 1,011,250
Medical BB- Ba3 1,200,000 Bindley Western Industries, Inc., 6.50%
Supplies--0.5% due 10/01/2002*** 1,109,700 1,137,000
Oil & Gas--0.9% BBB Baa2 2,000,000 Pennzoil Company, 6.50% due 1/15/2003 2,232,500 2,230,000
Oil Services-- B B3 3,560,000 SEACOR Holdings, Inc., 6.00% due
1.4% 7/01/2003++ 3,773,275 3,297,450
Printing--0.5% B+ B1 1,000,000 Thomas Nelson, Inc., 5.75% due 11/30/1999++ 1,078,125 1,175,000
Retail Stores-- NR* NR* 1,244,000 Ben Franklin Retail Stores Inc., 7.50% due
2.0% 6/01/2003*** 1,249,077 920,560
B+ Ba3 3,888,000 Ingles Markets, Inc., 10.00% due 10/15/2008 4,179,046 3,965,760
------------- -------------
5,428,123 4,886,320
<PAGE>
Retailing--0.2% NR* NR* 545,000 CML Group, Inc., 5.50% due 1/15/2003 487,131 397,850
Semiconduc- B- NR* 3,000,000 Kulicke & Soffa Industries Inc., 8.00% due
tors--1.3% 3/01/2008 3,052,125 3,210,000
Textiles--0.7% BBB- Ba1 2,000,000 Guilford Mills, Inc., 6.00% due 9/15/2012 1,755,000 1,730,000
Transportation/ B+ B1 3,000,000 Varlen Corp., 6.50% due 6/01/2003 3,046,250 3,120,000
Railroads--1.3%
Waste Manage- NR* NR* 1,000,000 Phillips Environmental, Inc., 6.00% due
ment--0.9% 10/15/2000++ 1,000,000 1,010,000
B+ B2 1,117,000 Sanifill Inc., 7.50% due 6/01/2006*** 1,123,951 1,066,735
------------- -------------
2,123,951 2,076,735
Total Convertible Debentures-- 46.9% 118,797,164 111,952,043
<CAPTION>
Shares
Held Convertible Preferred Stocks
<S> <S> <S> <C> <S> <C> <C>
Air Transport-- B+ B 25,000 Delta Air Lines, Inc., $3.50 Series C 1,250,000 1,093,750
0.8% B+ Ba3 10,000 UAL Corp., $6.25 Series A++ 1,008,750 830,000
------------- -------------
2,258,750 1,923,750
Automobile BB- B1 200,000 Masco Tech, Inc. 3,033,875 2,750,000
Parts--1.2%
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1994 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Preferred Stocks Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Banking & BBB- Baa2 40,000 Ahmanson Bank, $3.00, Series D $ 2,000,000 $ 1,610,000
Finance--8.4% A A- 38,400 Banc One Corporation, $3.50 Series C 2,509,288 1,905,600
BBB A2 105,000 Citicorp. Pfd. 'P' 2,066,925 2,008,125
BBB- NR* 90,200 Fourth Financial Corporation, $1.75, Class A 2,491,925 2,536,875
NR* NR* 32,500 Olympic Financial, Ltd., $2.00 812,500 966,875
NR* NR* 138,200 ONBANCorp. Inc., $1.6875 Series B 4,169,801 2,867,650
A+ A1 44,000 Republic of NY Corp., Pfd $3.375 2,320,640 2,222,000
BB+ Baa 135,900 Southern National Corp., $1.6875, Series A 3,780,234 3,958,087
BB NR* 69,400 Union Planters Corp., $2.00 Series E 2,104,225 1,925,850
------------- -------------
22,255,538 20,001,062
<PAGE>
Broadcasting/ B B3 40,000 AMC Entertainment, Inc., $1.75 1,000,000 925,000
Communic-
ations--0.4%
Cement--0.1% B B3 9,100 Southdown, Inc., $2.875, Series D 455,000 293,475
Healthcare BB NR* 40,000 FHP International Corp., Series A 1,022,000 975,000
Services--0.4%
Insurance-- BB- Ba3 35,000 Alexander & Alexander Services, Inc.,
1.4% Series A++ 1,499,375 1,391,250
NR* NR* 2,000 Westbridge Capital Corporation++ 2,000,000 2,030,000
------------- -------------
3,499,375 3,421,250
Machinery--2.1% B B2 84,000 AGCO Corp., $1.625 2,119,000 5,040,000
Metal Fabri- BB+ B1 16,000 Magma Copper Company, $2.812 Series D 992,960 988,000
cating--1.6% B+ B3 57,500 WHX Corporation, Series A 3,544,985 2,731,250
------------- -------------
4,537,945 3,719,250
Minerals--0.4% BB+ Ba3 20,000 Pittston MineraIs Group, $3.125++ 1,000,000 880,000
Oil & Gas--0.9% B+ B2 112,000 Snyder Oil Corporation, $6.00 3,057,390 2,254,000
Paper--1.3% BB- Ba2 50,000 Boise Cascade Corp. $1.79 Series E 1,134,250 1,331,250
BB+ Ba2 83,400 James River Corporation Virginia, $8.25
Series P 1,438,650 1,688,850
------------- -------------
2,572,900 3,020,100
Real Estate BBB- Baa3 40,000 Merry Land & Investment Services, Inc., $1.75 1,000,000 1,180,000
Investment BBB+ Baa3 80,000 Property Trust of America, $1.75, Series A 2,000,000 1,760,000
Trust--2.3% NR* Ba 100,000 Storage Equities Inc., $2.062 2,518,600 2,475,000
------------- -------------
5,518,600 5,415,000
Steel--0.4% B- B3 32,000 AK Steel Holding Corp. 984,000 976,000
Tobacco--0.4% BB+ Ba3 150,000 RJR Nabisco Holdings, Inc. 975,000 900,000
Transportation/ BBB- Ba3 30,500 Arkansas Best Corporation, $2.875 Series A 1,536,975 1,242,875
Railroads--1.2% BBB- Baa2 30,000 Burlington Northern Inc., $3.125 Series A 1,665,900 1,597,500
------------- -------------
3,202,875 2,840,375
Waste Manage- NR* NR* 1,509 Allied Waste Industries, Inc., $3.75++ 1,509,180 1,468,182
ment--0.6%
<PAGE>
Total Convertible Preferred Stocks--23.9% 59,001,428 56,802,444
<CAPTION>
Common Stocks
<S> <C> <S> <C> <C>
Automobile 20,445 Magna International, Inc., Class A 455,258 784,577
Parts--0.3%
Banking & 155,211 BB&T Financial Corp. 3,245,163 4,345,908
Finance--4.4% 59,000 Deposit Guaranty Corp. 891,024 1,740,500
96,848 First America Bank Corp. 2,969,412 2,905,440
22,500 Mellon Bank Corp. 495,270 689,062
53,761 Washington Mutual Savings Bank 592,119 893,777
------------- -------------
8,192,988 10,574,687
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1994 (concluded)
<CAPTION>
Shares Value
Held Common Stocks Cost (Note 1a)
<S> <C> <S> <C> <C>
Computer/Business Equipment--0.0% 658 Computervision Corp. $ 7,978 $ 2,550
Drugs--1.0% 100,000 Bristol-Myers Squibb Co. 4,985,776 5,787,500
Food Processing--2.6% 247,416 Hudson Foods, Inc.--Class A 4,389,831 6,216,327
Hospital Supplies--1.7% 140,584 Baxter International, Inc. 2,230,959 3,971,498
Metal Fabricating--1.7% 128,479 Trinity Industries Leasing Co. 2,974,237 4,047,088
Medical Supplies--2.4% 153,715 Bindley Western Industries, Inc. 2,150,910 2,324,939
Retail Stores--0.0% 7,400 Ben Franklin Retail Stores Inc. 42,700 33,300
Total Common Stocks--14.1% 25,430,637 33,742,466
<CAPTION>
Face
Amount Short-Term Securities
<S> <C> <S> <C> <C>
Commercial $ 5,000,000 ANZ (Delaware), Inc., 5.97% due 1/31/1995 4,973,467 4,973,467
Paper**--14.9% 7,000,000 Ciesco L.P., 5.85% due 2/03/1995 6,960,188 6,960,188
5,000,000 CXC Inc., 5.92% due 1/23/1995 4,980,267 4,980,267
8,575,000 General Electric Capital Corp.,
5.80% due 1/03/1995 8,569,474 8,569,474
10,000,000 Xerox Credit Corp., 6.05% due 2/14/1995 9,922,694 9,922,694
<PAGE>
35,406,090 35,406,090
Total Short-Term Securities--14.9% 35,406,090 35,406,090
Total Investments--99.8% $238,635,319 237,903,043
============
Short Sales--(proceeds--$8,331,232) (3.5%)*** (8,335,082)
Other Assets Less Liabilities--3.7% 8,897,766
------------
Net Assets--100.0% $238,465,727
============
<FN>
(a)Represents a pay-in-kind security.
(b)Represents a step bond; the interest rate shown is the effective
yield at the time of purchase.
*Not Rated.
**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 December 31, 1994 are as
follows:
Value
Shares Issue (Note 1a)
124,062 Ben Franklin Retail Stores Inc. $(589,295)
52,700 Big B, Inc. (724,625)
24,200 Bindley Western Industries, Inc. (375,100)
46,400 Conner Peripherals, Inc. (440,800)
65,500 Owens Corning Fiberglass
Corporation (2,096,000)
74,700 Pharmaceutical Marketing
Services Inc. (672,300)
13,400 Sanifill Inc. (335,000)
46,900 Storage Technology Corp. (1,360,100)
40,000 Summit Health Ltd. (770,000)
38,300 Sun Healthcare Group+++ (971,862)
Total (proceeds--$8,331,232) $(8,335,082)
===========
+++Sun Healthcare Group hedges the Mediplex Group, Inc. convertible
debentures as a result of a recent merger.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
++Restricted securities as to resale. The value of the Company's
investment in restricted securities was approximately $23,769,000,
representing 10% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Alexander & Alexander Services, Inc. 9/23/94 $ 1,499,375 $ 1,391,250
Allied Waste Industries, Inc., $3.75 9/23/93 1,509,180 1,468,182
CareLine, Inc., 8.00% due 5/01/2001 11/09/94 1,783,750 1,774,687
Cemex, S.A., 4.25% due 11/01/1997 9/28/94 2,000,000 1,600,000
Intelcom Group Inc., 7.00% due
10/30/1998 10/26/93 1,601,464 1,290,723
Kumagai Gumi Ltd., 4.875% due
12/08/1998 12/01/93 2,925,000 2,302,500
Omnicom Group, Inc., 4.50% due
9/01/1996 8/18/93 500,000 510,000
Peregrine Investment Holdings,
4.50% due 12/01/2000 1/25/94 2,500,000 1,706,250
Phillips Environmental, Inc., 6.00%
due 10/15/2000 10/13/93 1,000,000 1,010,000
Pittston Minerals Group, $3.125 1/11/94 1,000,000 880,000
Polyphase Corporation, 12.00% due
7/05/1999 7/05/94 2,000,000 1,620,000
SEACOR Holdings, Inc., 6.00% due
7/01/2003 2/03/94 3,773,275 3,297,450
Telekom Malaysia, 4.00% due
10/03/2004 9/22/94 1,000,000 882,500
Thomas Nelson, Inc., 5.75% due
11/30/1999 11/02/94 1,078,125 1,175,000
UAL Corp., $6.25 Series A 2/05/93 1,008,750 830,000
Westbridge Capital Corporation 4/12/94 2,000,000 2,030,000
----------- -----------
Total $27,178,919 $23,768,542
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Statement of Assets, Liabilities and Capital as of December 31, 1994
<S> <C> <C>
Assets:
Investments, at value (identified cost--$238,635,319) (Note 1a) $237,903,043
Cash 60,234
Receivables:
Short sales (Note 1g) $ 8,013,256
Interest 2,515,576
Securities sold 952,779
Dividends 620,008 12,101,619
------------
Deposits for securities sold short 894,822
Deferred organization expenses (Note 1e) 98,576
Prepaid expenses and other assets 7,273
------------
Total assets 251,065,567
------------
<PAGE>
Liabilities:
Common stocks, sold short, at market value (proceeds--$8,331,232) (Note 1g) 8,335,082
Payables:
Dividends to shareholders 3,598,805
Investment adviser (Note 2) 366,921
Other 48,767
Capital shares repurchased 46,488
Dividends for short-sales 7,624 4,068,605
------------
Accrued expenses and other liabilities 196,153
------------
Total liabilities 12,599,840
------------
Net Assets $238,465,727
============
Capital (Note 5):
Income Shares:
Par value $.10 per share; 15,000,000 shares authorized; 11,674,400 shares issued $ 1,167,440
Liquidation capital in excess of par 107,404,480
------------
108,571,920
Undistributed investment income--net 6,950
------------
Net asset value, equivalent to $9.30 per share based on 11,674,400 shares outstanding
(market price--$10.00) $108,578,870
Capital Shares:
Par value $.10 per share; 15,000,000 shares authorized; 11,674,400 shares issued 1,167,440
Paid-in capital in excess of par 130,215,981
------------
Total 131,383,421
------------
Undistributed realized gain on investments--net* (760,438)
Unrealized depreciation on investments--net (736,126)
------------
Total (1,496,564)
------------
Net asset value, equivalent to $11.13 per share based on 11,674,400 shares
outstanding (market price--$9.00) 129,886,857
------------
Net Assets $238,465,727
============
<FN>
*Net of taxes on undistributed net realized long-term capital gains (Note 1c).
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Statement of Operations for the Year Ended December 31, 1994
<CAPTION>
Investment Income (Note 1d):
<S> <C> <C>
Interest and discount earned $ 11,466,683
Dividends (net of $3,131 foreign withholding tax) 4,795,276
------------
Total income $ 16,261,959
Expenses:
Investment advisory fees (Note 2) 1,546,374
Transfer agent fees 147,019
Accounting services (Note 2) 102,153
Interest on securities sold short 88,312
Dividends on securities sold short 77,544
Professional fees 57,382
Printing and shareholder reports 52,212
Directors' fees and expenses 45,517
Amortization of organization expenses (Note 1e) 38,159
Custodian fees 25,657
Insurance 6,651
Pricing services 3,119
Registration fees 500
Other 48,943
------------
Total expenses 2,239,542
------------
Investment income--net 14,022,417
------------
Realized & Unrealized Loss on Investments & Foreign Currency Transactions--Net
(Notes 1b, 1d & 3):
Realized loss from:
Investments--net (680,920)
Foreign currency transactions--net (6,949) (687,869)
------------
Change in unrealized appreciation/depreciation on:
Investments--net (24,517,084)
Foreign currency transactions--net -- (24,517,084)
------------ ------------
Net realized and unrealized loss on investments and foreign currency transactions (25,204,953)
------------
Net Decrease in Net Assets Resulting from Operations $(11,182,536)
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended December 31,
1994 1993
Increase (Decrease) in Net Assets:
<S> <C> <C>
Operations:
Investment income--net $ 14,022,417 $ 15,198,414
Realized gain (loss) on investments and foreign currency transactions--net (687,869) 24,991,231
Income taxes on realized gain on investments -- (3,781,304)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net (24,517,084) (2,746,628)
------------ ------------
Net increase (decrease) in net assets resulting from operations (11,182,536) 33,661,713
------------ ------------
Dividends & Distributions to Shareholders (Notes 1f & 4):
Investment income--net (14,067,021) (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 (14,161,666) (29,477,034)
------------ ------------
Capital Share Transactions (Note 5):
Income shares (5,036,880) (7,765,500)
Capital shares (6,152,490) (10,786,117)
------------ ------------
Net decrease in net assets resulting from treasury stock transactions (11,189,370) (18,551,617)
------------ ------------
Net Assets:
Total decrease in net assets (36,533,572) (14,366,938)
Beginning of year 274,999,299 289,366,237
------------ ------------
End of year* $238,465,727 $274,999,299
============ ============
<FN>
*Undistributed investment income--net $ 6,950 $ 51,554
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Financial Highlights
<PAGE>
The following per share data and ratios have been derived For the Year Ended December 31,
from information provided in the financial statements. 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Income Shares:
Per Share Operating Performance:
Net asset value, beginning of year $ 9.30 $ 9.30 $ 9.31 $ 9.30 $ 9.30
--------- --------- --------- --------- ---------
Investment income--net 1.19 1.20 1.35 1.41 1.38
Dividends of investment income--net (1.19) (1.20) (1.36) (1.40) (1.38)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.30 $ 9.30 $ 9.30 $ 9.31 $ 9.30
========= ========= ========= ========= =========
Market price per share, end of year $ 10.00 $ 10.625 $ 11.25 $ 12.625 $ 10.875
========= ========= ========= ========= =========
Total Investment Return:*
Based on market price per share 6.61% 7.20% 2.74% 34.37% 9.23%
========= ========= ========= ========= =========
Based on net asset value per share 13.28% 13.50% 15.17% 15.87% 15.50%
========= ========= ========= ========= =========
Capital Shares:
Per Share Operating Performance:
Net asset value, beginning of year $ 13.21 $ 12.87 $ 10.91 $ 7.67 $ 10.12
========= ========= ========= ========= =========
Realized and unrealized gain (loss) on investments--net (2.12) 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 year $ 11.13 $ 13.21 $ 12.87 $ 10.91 $ 7.67
========= ========= ========= ========= =========
Market price per share, end of year $ 9.00 $ 10.875 $ 9.375 $ 6.875 $ 4.25
========= ========= ========= ========= =========
Total Investment Return:*
Based on market price per share (17.17%) 28.77% 38.11% 61.76% (22.73%)
========= ========= ========= ========= =========
Based on net asset value per share (15.68%) 13.94% 19.48% 42.24% (24.21%)
========= ========= ========= ========= =========
Total Fund:
Ratios to Average Net Assets:
Total expenses** .87% .80% .80% .83% .86%
========= ========= ========= ========= =========
Investment income--net 5.43% 5.10% 6.34% 7.24% 7.39%
========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of year (in thousands) $ 238,466 $ 274,999 $ 289,366 $ 275,045 $ 230,851
========= ========= ========= ========= =========
Portfolio turnover 69.37% 116.03% 76.54% 54.90% 40.28%
========= ========= ========= ========= =========
<PAGE>
<FN>
*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 1c).
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.
(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 currency
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.
<PAGE>
(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 proceeds
received. Securities have been borrowed from Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of Merrill Lynch & Co.,
Inc. ("ML&Co."), to execute short sales.
Convertible Holdings, Inc.
Notes to Financial Statements (continued)
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"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of ML & Co., which is the limited partner.
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.
<PAGE>
Accounting services are provided to the Company by MLAM at cost.
During the period June 20, 1994 to December 31, 1994, the Company
paid Merrill Lynch Security Pricing Service, an affiliate of MLPF&S,
$282 for security price quotations to compute net asset value of the
Company.
Certain officers and/or directors of the Company are officers and/or
directors of MLAM, PSI, MLPF&S and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1994, were $164,678,592 and
$235,498,105, respectively.
Net realized and unrealized gains (losses) as of December 31, 1994
were as follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $ 4,749,598 $ (732,276)
Short sales (5,430,518) (3,850)
Foreign currency
transactions (6,949) --
----------- -----------
Total $ (687,869) $ (736,126)
=========== ===========
As of December 31, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $1,059,276, of which $15,714,036
related to appreciated securities and $16,773,312 related to
depreciated securities. The aggregate cost of investments at
December 31, 1994 for Federal income tax purposes was $238,962,319.
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>
Convertible Holdings
Notes to Financial Statments (concluded)
5. Share Transactions:
At December 31, 1994, there were 15,000,000 shares of $.10 par value
authorized for each class. During the year ended December 31, 1994,
the Company repurchased 541,600 Income Shares and 541,600 Capital
Shares, at an average market price of $10.96 and $9.70,
respectively, 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 deduction of $899,481 for the difference between the cost
of the Income Shares repurchased during the year ended December 31,
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.
6. Capital Loss Carryforward:
At December 31, 1994, the Company had a net capital loss
carryforward of approximately $439,000, all of which expires in
2002. This amount will be available to offset like amounts of any
future taxable gains.
<TABLE>
Quarterly Data (unaudited)
<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>
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 4,248,768 3,609,304 .30 (8,363,718) (.69) (4,754,917) (.40)
April 1, 1994 to June 30, 1994 3,945,086 3,375,005 .29 (11,452,246) (.98) (8,076,738) (.68)
July 1, 1994 to Sept. 30, 1994 3,953,484 3,403,083 .29 6,647,525 .63 10,043,155 .86
Oct. 1, 1994 to Dec. 31, 1994 4,114,621 3,635,025 .31 (12,036,514) (1.03) (8,401,489) (.72)
<PAGE>
<FN>
*Net of tax on undistributed net realized long-term capital gains (Note 1c).
</TABLE>
<AUDIT-REPORT>
Convertible Holdings, Inc.
Independent Auditors' Report
The Board of Directors and Shareholders,
Convertible Holdings, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Convertible
Holdings, Inc. as of December 31, 1994, the related statements of
operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period
then ended. These financial statements and the financial highlights
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
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 and the financial highlights 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 at December
31, 1994 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Convertible Holdings, Inc. as of December 31, 1994, the results of
its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 6, 1995
</AUDIT-REPORT>
<PAGE>
Convertible Holdings, Inc.
Important Tax Information (unaudited)
Of the ordinary income distributions paid quarterly by Convertible
Holdings, Inc. during its taxable year ended December 31, 1994,
33.89% qualifies for the dividends-received deduction for
corporations. Additionally, there were no undistributed long-term
capital gains allocable to capital shareholders during the year.
Please retain this information for your records.
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).
Share Comparison
The following is a brief summary of certain rights of each class of
shares of the Company.
<PAGE>
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 common
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.
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.
<PAGE>
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%.
