Convertible
Holdings,
Inc.
FUND LOGO
Semi-Annual Report
June 30, 1996
Convertible Holdings, Inc.
Officers and Directors
Arthur Zeikel--President and Director
Terry K. Glenn--Executive Vice President
and Director
James H. Bodurtha--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
Donald C. Burke--Vice President
Daniel A. Luchansky--Vice President and
Portfolio Manager
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, NY 11245
Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 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. Statements and other
information herein are as dated and are subject to change.
Convertible Holdings, Inc.
Box 9011
Princeton, NJ 08543-9011
Dear Shareholders:
For the six-month period ended June 30, 1996, Convertible Holdings,
Inc. Capital Shares had a total investment return of +7.45%, based
on a change in per share net asset value from $13.43 to $14.43.
During the same period, total investment return on Income Shares was
+6.42%, based on a change in per share net asset value from $9.32 to
$9.59, and assuming reinvestment of $0.320 per share income
dividends.
<PAGE>
The Environment
As 1996 began, the consensus of 64 economists participating in The
Wall Street Journal's semi-annual survey was that further easing of
interest rates by the Federal Reserve Board and a budget deficit
accord between Congress and President Clinton would cause interest
rates on three-month Treasury bills to slip by mid-year to the 4.9%
level while yields on 30-year Treasury bonds would stay around the
then-current level of 6.0%. On this bullish assessment, the stock
market rose strongly from mid-January to early February. However, as
interest rates actually rose and no Federal budget accord is in
sight, the market traded in a narrow range before moving sharply
higher in May as it became apparent that the economy was still on a
steady course without significant inflation, and earnings reports
were still generally healthy. As of June 30, 1996, the unmanaged
Standard & Poor's 500 Index (S&P 500) total return was +10.04%, and
the Dow Jones Industrial Average (DJIA) was +11.74%. Convertible
bonds, as measured by the unmanaged Merrill Lynch All Traditional
Convertibles Index, were up 8.65% for the first six months of 1996.
However, on a total return basis, the convertible market
outperformed all of the major fixed-income benchmarks, except
emerging market debt, and many equity benchmarks.
The best-performing sectors of the convertible market on a total
return basis were lodging, retail and leisure. Another strong sector
was energy, aided by strong natural gas and oil prices. Conversely,
the worst-performing sectors were consumer staples, credit cyclicals
and basic industries including aluminum, chemical, paper and steel
sectors.
Because of the strength in stock prices, convertible securities have
become increasingly equity sensitive while becoming relatively
insensitive to the rise in interest rates. As the month of July
began, convertible securities were yielding 5.34% with a premium
over conversion value of 23.2%, 3.0 years of break-even time and 2.0
years of call protection. (See the "Glossary" on page 6 of this
report to shareholders for an explanation of terms used.) The
convertible market's premium over investment value continued to
widen to 47.4% at the end of June, up from 44.6% at the beginning of
the year.
The stock market's technical and fundamental underpinnings were
quite healthy during the advance from late last year until mid-May
1996. The relative strength of the NASDAQ versus the S&P 500
improved dramatically and market breadth as measured by the daily
and weekly advance/decline lines confirmed new highs in the stock
indexes. Volume was very heavy during the advance, which we viewed
as positive. Recently, however, the breadth statistics of the market
have weakened as the market corrects its overbought condition. The
advance/decline lines have made minor lower lows recently breaking
their uptrends, but it remains to be seen whether this represents an
intermediate correction or a long-term reversal toward lower stock
prices. While the daily advance/decline has peaked coincidentally
with prices during at least one market cycle over the past 50 years,
breadth usually peaks first with an average lead time of about one
year. This leads us to believe that even if this recent market
weakness is indeed the beginning of a market reversal into a
downtrend as opposed to a pullback in an extended advance, there
should be an upward bias to stock prices for some time, especially
given the strong momentum of this advance.
<PAGE>
One area we are watching closely is the Dow Jones Utility Average
which has declined since the start of the year as other indexes have
rallied. This was in response to the rise in interest rates since
utilities are interest rate-sensitive stocks. This index has
stabilized of late, and we are hopeful this sector will recover
soon. We may become more concerned about the prospects for stocks if
this average declines again and substantially undercuts its lows at
around the 205 level, since in the past the utility average has been
a good early-warning indicator of impending market weakness. If
utilities recover and breadth and volume continue strong, it
reinforces our bullish position on stocks. If the utilities and
breadth statistics fade and the economic fundamentals deteriorate,
we will become more defensive.
The market's price/earnings ratio is still only about 16 times
earnings even though the DJIA has advanced several hundred points
since year-end because earnings growth has about matched the
market's rise. We still believe the market is relatively inexpensive
given the current levels of inflation and interest rates and the
generally positive economic environment. Therefore, while we
recognize the mild deterioration in the market's internal condition,
we remain cautiously optimistic about the market's prospect over the
next several months.
Investment Activities
In mid-January we did a study of eight semiconductor companies--
Altera Corp., Cypress Semiconductor Corporation, Integrated Device
Technology Inc., LSI Logic Corp., National Semiconductor Corp.,
Texas Instruments Inc., VLSI Technology Inc., and Xilinx. With the
average discount from previous 12 months high stock prices at 51%,
we felt the group was at a bottom. However, since we realized that
earnings estimates for these companies were unrealistically high (in
view of generally deteriorating fundamentals), and in some cases
still are, a cautious approach was warranted. While Altera and
Xilinx appeared to be the strongest companies on a fundamental
basis, we concluded that Integrated Device Technology and Cypress
Semiconductor offered the greatest appreciation potential. We took
positions in Integrated Device and Cypress Semiconductor, which is
in line with our goal of establishing greater exposure to the
technology sector over time.
We also examined the severely depressed semiconductor capital
equipment companies such as Applied Materials Inc., Kulicke and
Soffa Industries Inc., Lam Research Corp., Novellus Systems Inc.,
and Teredyne Inc. We concluded that Novellus Systems was
fundamentally the strongest and one of the better values. Thus, in
line with our goal of increasing our position in the technology
group, we took an initial position in Novellus Systems.
<PAGE>
Another sector which was decimated in the stock market were the long-
term care providers such as GranCare Inc., Integrated Health
Services, Inc., Sun Healthcare Group Inc. and Regency Health
Services, Inc. We concluded that Integrated Health and Sun
Healthcare offered the best price appreciation potential and
increased our positions accordingly.
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
(Daniel A. Luchansky)
Daniel A. Luchansky
Vice President and Portfolio Manager
July 31, 1996
We are pleased to announce that Daniel A. Luchansky is responsible
for the day-to-day management of Convertible Holdings, Inc. Mr.
Luchansky has been employed by Merrill Lynch Asset Management, L.P.
(an affiliate of the Fund's investment adviser) since 1991 as Vice
President. Prior thereto he was involved in high-yield analysis as
well as convertible bond portfolio management and analysis from 1986
through 1991.
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1996
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Airlines--1.3% B B $ 3,940,000 Air Wis Services, Inc.,
7.75% due 6/15/2010 $ 3,586,109 $ 3,649,425
Automotive A- Baa3 2,850,000 Magna International Inc., 7.25% due
Parts--0.9% 7/05/2005 2,459,841 2,463,375
Building/ BBB+ Baa1 2,565,000 Hechinger Company, 5.50% due 4/01/2012 1,665,075 1,205,550
Building
Supplies--0.4%
Cement--2.3% BBB+ Baa2 3,590,000 Lafarge Corp., 7% due 7/01/2013 3,708,350 3,787,450
B+ B1 2,500,000 Medusa Corp., 6% due 11/15/2003 2,479,375 2,593,750
------------ ------------
6,187,725 6,381,200
Chemicals--0.8% B- B2 3,000,000 Park Electrochemical Corporation,
5.50% due 3/01/2006 2,983,500 2,385,000
Communica- NR* NR* 3,100,000 Intelcom Group Inc., 7% due
tions--1.5% 10/30/1998***++ (a) 2,874,426 4,266,269
Computer/ B Ba3 1,500,000 EMC Corporation, 4.25%
Business due 1/01/2001 1,590,000 1,601,250
Equipment-- B Ba3 2,000,000 Storage Technology Corp.,
2.0% 8% due 5/31/2015 2,068,750 2,365,000
B- B2 1,500,000 Systems and Computer Technology Corp.,
6.25% due 9/01/2003 1,931,000 1,582,500
------------ ------------
5,589,750 5,548,750
Conglomerates-- BBB+ A3 2,500,000 Cooper Industries, Inc.,
3.2% 7.05% due 1/01/2015 2,560,000 2,662,500
Polyphase Corporation++:
NR* NR* 1,000,000 12% due 12/01/1997 1,000,000 925,000
NR* NR* 2,000,000 12% due 7/01/1999 2,000,000 1,670,000
A- Ba2 3,000,000 Thermo Electron Corporation, 4.25% due
1/01/2003 3,770,370 3,708,750
------------ ------------
9,330,370 8,966,250
Defense--0.5% NR* Caa 1,000,000 Diagnostic/Retrieval Systems, Inc.,
9% due 10/01/2003*** 1,000,000 1,310,000
<PAGE>
Energy--2.0% BB+ NR* 6,000,000 USX Corp., 7% due 6/15/2017 5,320,000 5,565,000
Entertainment-- B B2 2,021,000 Savoy Pictures Entertainment Inc.,
0.6% 7% due 7/01/2003 1,630,751 1,556,170
Environmental-- BBB+ Baa2 2,000,000 Laidlaw Inc., 6% due 1/15/1999 2,526,260 2,490,000
2.5% NR* NR* 1,000,000 Phillips Environmental, Inc., 6% due
10/15/2000++ 1,000,000 1,280,000
BBB+ Ba2 3,187,000 Thermo TerraTech, Inc., 4.625% due
5/01/2003++ 3,342,206 3,187,000
------------ ------------
6,868,466 6,957,000
Financial NR* NR* 2,500,000 Pioneer Financial Services, Inc.,
Services--0.9% 6.50% due 4/01/2003 2,500,000 2,525,000
Foreign*--0.9% NR* A1 2,500,000 Republic of Italy, 5%
due 6/28/2001 2,500,000 2,500,000
Gaming--0.7% B- B3 2,000,000 Argosy Gaming Company, 12% due
6/01/2001 2,030,000 1,845,000
Geothermal B B1 2,500,000 California Energy Company, Inc.,
Energy--1.0% 5% due 7/31/2000++ 2,336,875 2,840,625
Health Care-- B B3 1,849,000 GranCare Inc., 6.50% due 1/15/2003 1,768,051 1,747,305
5.1% B B2 5,950,000 Integrated Health Services Inc., due
5.75% 1/01/2001 6,318,520 5,890,500
B+ B2 3,472,000 Quantum Health Resources, Inc.,
4.75% due 10/01/2000 2,952,197 3,142,160
NR* NR* 3,860,000 Sun Healthcare Group Inc., 6%
due 3/01/2004 3,397,920 3,512,600
------------ ------------
14,436,688 14,292,565
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1996 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Home Building-- CCC+ B2 $ 2,200,000 Continental Homes Holding Corp.,
2.4% 6.875% due 11/01/2002 $ 2,200,000 $ 2,431,000
B B2 2,678,000 Schuler Homes Inc., 6.50%
due 1/15/2003 2,114,371 2,152,443
BB- Ba3 751,000 Toll Brothers Inc., 4.75%
due 1/15/2004 627,190 720,960
B- B2 1,500,000 US Home Corp., 4.875% due 11/01/2005 1,316,875 1,329,375
------------ ------------
6,258,436 6,633,778
<PAGE>
Insurance--1.4% BBB- NR* 2,450,000 American Travellers Corp., 6.50%
due 10/01/2005*** 2,633,125 3,837,313
Machinery-- B+ B1 2,700,000 Varlen Corp., 6.50% due 6/01/2003 2,746,250 2,916,000
1.0%
Medical American Medical Response Inc.:
Services--2.0% NR* NR* 1,250,000 5.25% due 2/01/2001 1,391,625 1,356,250
NR* NR* 1,750,000 5.25% due 2/01/2001++ 1,750,000 1,907,500
NR* NR* 1,500,000 US Diagnostic Labs, Inc., 9% due
3/31/2003++ 1,500,000 2,197,500
------------ ------------
4,641,625 5,461,250
Medical BB- Ba3 2,700,000 Bindley Western Industries, Inc.,
Supplies--1.3% 6.50% due 10/01/2002 2,632,200 2,727,000
NR* NR* 1,000,000 Phoenix Shannon PLC, 9.50%
due 11/01/2000++ 1,000,000 960,000
------------ ------------
3,632,200 3,687,000
Mining--1.3% NR* NR* 3,750,000 Samancor Ltd., 7% due 6/30/2004 3,605,623 3,656,250
Oil Services-- NR* NR* 3,000,000 Key Energy Group Inc., 7%
1.5% due 7/01/2003 3,000,000 3,000,000
BBB- Ba2 1,000,000 Nabors Industries, Inc., 5%
due 5/15/2006 1,000,000 1,115,000
------------ ------------
4,000,000 4,115,000
Paper--2.8% NR* NR* 11,270,000 Kymmene Corporation, 8.25%
due 11/18/2043 2,867,286 2,695,301
NR* NR* 3,500,000 Repap Enterprises Inc., 8.50%
due 8/01/1997 3,665,899 3,381,875
NR* NR* 2,000,000 Sappi Ltd., 7.50% due 8/01/2002++ 2,034,000 1,855,000
------------ ------------
8,567,185 7,932,176
Pharma- NR* NR* 2,000,000 IVAX Corporation, 6.50%
ceuticals-- due 11/15/2001 1,877,270 1,790,000
0.6%
Precious B2 B2 2,500,000 Coeur d'Alene Mines Corp.,
Metals-- 6.375% due 1/31/2004*** 2,316,000 2,431,250
0.9%
Printing-- NR* B1 3,240,000 Graphic Industries, Inc., 7%
1.0% due 5/15/2006 2,895,000 2,916,000
<PAGE>
Real Estate NR* B3 1,500,000 Capstone Capital Trust, Inc.,
Investment 10.50% due 4/01/2002 1,631,250 1,905,000
Trusts--1.5% B NR* 2,323,000 Pacific Gulf Properties, Inc.,
8.375% due 2/15/2001 2,066,522 2,323,000
------------ ------------
3,697,772 4,228,000
Restaurants-- B- B3 1,000,000 Hometown Buffet Inc., 7% due
0.4% 12/01/2002 1,000,000 1,215,000
Retail Stores-- B+ B2 2,700,000 Baker (J.) Inc., 7% due 6/01/2002 2,680,188 2,173,500
2.7% B+ B1 3,700,000 Michaels Stores, Inc., 6.75%
due 1/15/2003 3,778,250 3,145,000
B- B2 3,250,000 Sports & Recreation, Inc., 4.25% due
11/01/2000 2,416,500 2,275,000
------------ ------------
8,874,938 7,593,500
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1996 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Technology-- NR* NR* $ 2,500,000 Broadband Technologies, Inc., 5% due
2.0% 5/15/2001++ $ 2,500,000 $ 2,456,250
NR* NR* 2,000,000 Cyrix Corporation, 5.50% due
6/01/2001++ 2,000,000 1,495,000
B- B3 1,250,000 Safeguard Scientifics, Inc., 6% due
2/01/2006 1,740,625 1,696,875
------------ ------------
6,240,625 5,648,125
Textiles--1.8% B+ B3 3,806,000 Fieldcrest Cannon, Inc., 6%
due 3/15/2012 2,889,280 3,016,255
BBB- Ba1 2,000,000 Guilford Mills, Inc., 6% due
9/15/2012 1,755,000 1,960,000
------------ ------------
4,644,280 4,976,255
Total Convertible Debentures--51.2% 140,929,905 143,294,076
Shares
Held Convertible Preferred Stocks
<PAGE>
Automobile BB- Ba3 25,200 Federal-Mogul Corp., $3.875,
Parts--1.6% Series D++ 1,428,675 1,436,400
BB- B1 200,000 Masco Tech, Inc., $1.20 3,033,875 3,000,000
------------ ------------
4,462,550 4,436,400
Banking & A Aa3 38,400 Banc One Corporation, $3.50,
Finance--4.4% Series C 2,509,287 2,524,800
BBB+ A2 60,200 Boatmen's Bancshares, Inc., $1.75 1,667,550 2,076,900
NR* A1 10,000 Jefferson Pilot Corp. (ACES) 725,000 815,000
NR* NR* 138,200 ONBANCorp. Inc., $1.6875,
Series B 4,169,801 3,593,200
BB+ NR* 89,400 Union Planters Corp., $2.00,
Series E 2,818,585 3,397,200
------------ ------------
11,890,223 12,407,100
Broadcasting-- B- Caa 37,500 SFX Broadcasting Inc.,
1.1% Series D++ 1,875,000 1,950,000
NR* NR* 145,000 Triathlon Broadcasting Co. 1,522,500 1,141,875
------------ ------------
3,397,500 3,091,875
Cement--1.6% B+ B2 120,000 Southdown, Inc. 1,348,000 1,410,000
B+ B2 52,000 Southdown, Inc., 3.75%, Series B 2,144,455 3,081,000
------------ ------------
3,492,455 4,491,000
Chemicals-- A A2 80,000 Atlantic Richfield Company
0.7% (ARCO) (b) 1,988,520 1,950,000
Entertainment-- NR* B3 25,000 Time Warner Financial, $1.24 775,000 900,000
0.3%
Funeral--0.9% BBB Baa3 25,000 SCI Finance, $3.125, Series A 1,520,250 2,415,625
Insurance-- A+ A1 53,500 American General Delaware L.L.C.,
1.7% Series A 2,754,735 2,808,750
NR* NR* 2,000 Westbridge Capital Corporation,
Series A 2,000,000 1,850,000
------------ ------------
4,754,735 4,658,750
Minerals--0.8% NR* Ba1 43,150 Cyprus Amax Minerals Co., $4.00,
Series A 2,551,244 2,330,100
Oil & Gas NR* NR* 20,000 Callon Petroleum Co., $2.125,
Producers-- Series A 500,000 635,000
0.2%
<PAGE>
Paper--3.0% BB+ Ba2 30,000 Boise Cascade Corporation 923,160 915,000
BBB+ Baa1 85,000 International Paper Co., 5.25% 4,037,500 3,718,750
BB+ Ba2 9,400 James River Corp. of Virginia,
$3.50, Series L 444,514 440,625
BB+ Ba2 85,000 James River Corp. of Virginia,
Series P 1,992,600 2,146,250
BB+ Ba2 23,800 James River Corp. of Virginia,
$3.375, Series K 1,092,551 1,088,850
------------ ------------
8,490,325 8,309,475
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1996 (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>
Precious NR* B2 70,000 Coeur d'Alene Mines Corporation $ 1,487,500 $ 1,382,500
Metals--0.5%
Real Estate BBB Baa3 80,000 Merry Land & Investment Co., Inc.,
Investment $2.15, Series C 2,000,000 2,140,000
Trust--3.1% BBB Baa3 40,000 Merry Land & Investment Services,
Inc., $1.75, Series A 1,000,000 1,125,000
NR* NR* 100,000 Public Storage Inc., $2.062 2,518,600 3,475,000
BBB+ Baa3 80,000 Security Capital Pacific Trust 2,000,000 2,100,000
------------ ------------
7,518,600 8,840,000
Steel--1.9% B+ B1 52,000 AK Steel Holding Corp. 1,348,342 1,911,000
B B3 82,500 WHX Corporation, Series A 4,571,485 3,444,375
------------ ------------
5,919,827 5,355,375
Tobacco--1.4% NR* Ba3 600,000 RJR Nabisco Holdings, Inc., Series C 3,965,332 3,900,000
Toys--1.0% B- B3 500,000 Tyco Toys, Inc., Series C 2,500,000 2,812,500
Utilities--1.1% AA Aa3 64,000 Citizens Utilities Company 3,200,000 3,088,000
Waste NR* NR* 1,509 Allied Waste Industries, Inc.,
Management-- $3.75***++ 1,509,180 2,701,110
2.2% A A1 85,000 Browning-Ferris Industries, Inc. 3,028,125 2,698,750
B B3 41,300 International Technologies Inc. 779,215 774,375
------------ ------------
5,316,520 6,174,235
Total Convertible Preferred
Stocks--27.6% 73,730,581 77,177,935
<PAGE>
<CAPTION>
Common Stocks
<S> <C> <S> <C> <C>
Automobile Parts--0.3% 20,445 Magna International Inc., Class A 455,258 940,470
Banking & Finance--2.3% 26,300 Deposit Guaranty Corp. 397,185 1,157,200
120,000 Southern National Corporation 2,290,868 3,810,000
53,761 Washington Mutual Savings Bank 592,119 1,606,110
------------ ------------
3,280,172 6,573,310
Computer Equipment--1.2% 187,000 EMC Corporation 3,256,155 3,482,875
Drugs--1.2% 35,000 Bristol-Myers Squibb Co. 1,698,350 3,150,000
Electrical Equipment--0.7% 132,400 Rexel SA 1,441,717 1,870,150
Electronics--1.9% 45,283 Arrow Electronics, Inc. 1,500,943 1,952,829
81,395 Avnet, Inc. 3,769,959 3,428,764
------------ ------------
5,270,902 5,381,593
Food Processing--1.9% 371,124 Hudson Foods, Inc., Class A 4,389,831 5,195,736
Health Services--1.2% 302,500 Regency Health Services Inc. 3,704,882 3,440,938
Hospital Supplies--1.3% 75,000 Baxter International, Inc. 1,190,192 3,543,750
Metal Fabricating--1.6% 128,479 Trinity Industries Leasing Co. 2,974,237 4,368,286
Paper/Machine--1.4% 172,300 Albany International Corp., Class A 3,298,417 3,898,287
Paper--0.1% 10,600 Boise Cascade Corporation 478,325 388,225
Semiconductors--1.5% 168,000 Cypress Semiconductor Corporation 2,321,220 2,016,000
200,000 Integrated Device Technology, Inc. 2,542,863 2,125,000
------------ ------------
4,864,083 4,141,000
Semiconductor 40,000 Novellus Systems Inc. 2,176,376 1,440,000
Capital Equipment--0.5%
Temporary Business 75,431 Olsten Corporation (The) 1,854,123 2,215,786
Services--0.8%
Utilities--0.0% 4,064 Citizens Utilities Company 44,000 46,736
Total Common Stocks--17.9% 40,377,020 50,077,142
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1996 (concluded)
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <S> <C> <C>
Commercial Paper**--3.0% $ 8,440,000 General Electric Capital Corp.,
5.56% due 7/01/1996 $ 8,436,089 $ 8,436,089
Total Short-Term Securities--3.0% 8,436,089 8,436,089
Total Investments--99.7% $263,473,596 278,985,242
============
Short Sales (Proceeds--$10,001,617)--(4.0%) (11,096,025)
Other Assets Less Liabilities--4.3% 12,046,748
------------
Net Assets--100.0% $279,935,965
============
<FN>
(a)Represents a pay-in-kind security.
(b)Convertible into Lyondell Petrochemical Co.
*Not Rated.
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the
Company.
***Covered Short Sales entered into as of June 30, 1996 were as
follows:
Value
Shares Issue (Notes 1a & 1g)
243,800 Allied Waste Industries, Inc. $ (2,163,725)
145,050 American Travellers Corp. (3,336,150)
26,000 Couer d'Alene Mines Corp. (477,750)
73,900 Diagnostic/Retrieval Systems, Inc. (812,900)
172,220 Intelcom Group Inc. (4,305,500)
Total (proceeds--$10,001,617) $(11,096,025)
============
++Restricted securities as to resale. The value of the Company's
investment in restricted securities was approximately $31,128,000,
representing 11.1% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Allied Waste Industries, Inc., $3.75 9/23/1993 $ 1,509,180 $ 2,701,110
American Medical Response,
5.25% due 2/01/2001 1/03/1996 1,750,000 1,907,500
Broadband Technologies Inc.,5/17/1996-
5% due 5/15/2001 5/30/1996 2,500,000 2,456,250
California Energy Company, Inc.,
5% due 7/31/2000 5/30/1995 2,336,875 2,840,625
Cyrix Corporation,
5.50% due 6/01/2001 5/22/1996 2,000,000 1,495,000
Federal-Mogul Corp., 3.875%, Series D 6/12/1995 1,428,675 1,436,400
Intelcom Group Inc., 10/26/1993-
7% due 10/30/1998 4/15/1996 2,874,426 4,266,269
Phillips Environmental, Inc.
6% due 10/15/2000 10/13/1993 1,000,000 1,280,000
Phoenix Shannon,
9.50% due 11/01/2000 11/21/1995 1,000,000 960,000
Polyphase Corporation:
12% due 12/01/1997 12/05/1995 1,000,000 925,000
12% due 7/01/1999 7/05/1994 2,000,000 1,670,000
Sappi Ltd., 7.50% due 8/01/2002 7/19/1995 2,034,000 1,855,000
SFX Broadcasting Inc. 5/22/1996 1,875,000 1,950,000
Thermo TerraTech, Inc., 4/25/1996-
4.625% due 5/01/2003 4/26/1996 3,342,206 3,187,000
US Diagnostic Labs, Inc.,
9% due 3/31/2003 3/29/1996 1,500,000 2,197,500
Total $28,150,362 $31,127,654
=========== ===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Statement of Assets, Liabilities and Capital as of June 30, 1996
<S> <C> <C>
Assets:
Investments, at value (identified cost--$263,473,596) (Note 1a) $278,985,242
Cash 505
Receivables:
Short sales (Note 1g) $ 10,001,617
Interest 2,634,892
Securities sold 1,923,830
Dividends 699,729 15,260,068
------------
Deposits for securities sold short 1,199,151
Deferred organization expenses (Note 1e) 60,418
Prepaid expenses and other assets 20,812
------------
Total assets 295,526,196
------------
Liabilities:
Common stocks, sold short, at market value (proceeds--$10,001,617) (Notes 1a & 1g) 11,096,025
Payables:
Securities purchased 3,890,986
Investment adviser (Note 2) 418,704 4,309,690
------------
Accrued expenses and other liabilities 184,516
------------
Total liabilities 15,590,231
------------
Net Assets $279,935,965
============
Capital (Note 5):
Income Shares:
Par value $.10 per share; 15,000,000 shares authorized; shares issued 11,653,700 $ 1,165,370
Liquidation capital in excess of par 107,214,040
------------
108,379,410
Undistributed investment income--net 3,430,477
------------
Net asset value, equivalent to $9.59 per share based on 11,653,700 shares outstanding
(market value--$9.875) $111,809,887
Capital Shares:
Par value $.10 per share; 15,000,000 shares authorized; 11,653,700 shares issued 1,165,370
Paid-in capital in excess of par 136,698,988
------------
Total 137,864,358
------------
Undistributed realized gain on investments--net* 15,843,937
Unrealized appreciation on investments--net 14,417,783
------------
Total 30,261,720
------------
Net asset value, equivalent to $14.43 per share based on 11,653,700 shares outstanding
(market value--$13.25) 168,126,078
------------
Net Assets $279,935,965
============
<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, 1996
<S> <C> <C>
Investment Income (Notes 1c & 1d):
Interest and discount earned $ 4,982,426
Dividends (net of $1,216 foreign withholding tax) 3,047,514
------------
Total income $ 8,029,940
Expenses:
Investment advisory fees (Note 2) 824,067
Transfer agent fees 53,105
Professional fees 38,538
Accounting services (Note 2) 31,532
Printing and shareholder reports 29,116
Interest on securities sold short 28,541
Directors' fees and expenses 24,747
Amortization of organization expenses (Note 1e) 20,730
Custodian fees 13,055
Dividends on securities sold short 3,900
Insurance 2,706
Pricing services 1,834
Listing fees 136
Other 21,688
------------
Total expenses 1,093,695
------------
Investment income--net 6,936,245
------------
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency
Transactions--Net (Notes 1b, 1c, 1d & 3):
Realized gain from investments--net 15,782,248
Change in unrealized appreciation/depreciation on:
Investments--net (4,181,104)
Foreign currency transactions 762 (4,180,342)
------------ ------------
Net realized and unrealized gain on investments and foreign currency transactions 11,601,906
------------
Net Increase in Net Assets Resulting from Operations $ 18,538,151
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
June 30, 1996 Dec. 31, 1995
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Investment income--net $ 6,936,245 $ 14,296,369
Realized gain on investments and foreign currency transactions--net 15,782,248 15,446,497
Income taxes on realized gain on investments -- (3,631,624)
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net (4,180,342) 19,334,251
------------ ------------
Net increase in net assets resulting from operations 18,538,151 45,445,493
------------ ------------
Dividends & Distributions to Shareholders (Notes 1f & 4):
Investment income--net (3,729,184) (14,117,464)
Realized gain on investments--net -- (4,235,374)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to shareholders (3,729,184) (18,352,838)
------------ ------------
Capital Share Transactions (Note 5):
Income shares -- (192,510)
Capital shares -- (238,873)
------------ ------------
Net decrease in net assets resulting from Treasury stock transactions -- (431,383)
------------ ------------
Net Assets:
Total increase in net assets 14,808,967 26,661,271
Beginning of period 265,126,998 238,465,727
------------ ------------
End of period* $279,935,965 $265,126,998
============ ============
<FN>
*Undistributed investment income--net $ 3,430,477 $ 223,416
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Financial Highlights
<CAPTION>
For the
Six Months
The following per share data and ratios have been derived Ended June 30, For the Year Ended December 31,
from information provided in the financial statements. 1996++++ 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Income Shares:
Per Share Operating Performance:
Net asset value, beginning of period $ 9.32 $ 9.30 $ 9.30 $ 9.30 $ 9.31
-------- -------- -------- -------- --------
Investment income--net .59 1.23 1.19 1.20 1.35
Dividends of investment income--net (.32) (1.21) (1.19) (1.20) (1.36)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.59 $ 9.32 $ 9.30 $ 9.30 $ 9.30
======== ======== ======== ======== ========
Market price per share, end of period $ 9.875 $ 10.00 $ 10.00 $ 10.625 $ 11.25
======== ======== ======== ======== ========
Total Investment Return:**
Based on market value per share 2.13%+++ 13.58% 6.61% 7.20% 2.74%
======== ======== ======== ======== ========
Based on net asset value per share 6.42%+++ 13.82% 13.28% 13.50% 15.17%
======== ======== ======== ======== ========
Capital Shares:
Per Share Operating Performance:
Net asset value, beginning of period $ 13.43 $ 11.13 $ 13.21 $ 12.87 $ 10.91
-------- -------- -------- -------- --------
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.00 2.66 (2.12) 1.43 2.03
Distributions of realized gain on investments--net -- (.36) (.01) (1.17) (.12)
Effect of repurchase of Treasury Stock -- --++ .05 .08 .05
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.43 $ 13.43 $ 11.13 $ 13.21 $ 12.87
======== ======== ======== ======== ========
Market value per share, end of period $ 13.25 $ 11.625 $ 9.00 $ 10.875 $ 9.375
======== ======== ======== ======== ========
Total Investment Return:**
Based on market value per share 13.98%+++ 33.20% (17.17%) 28.77% 38.11%
======== ======== ======== ======== ========
Based on net asset value per share 7.45%+++ 24.44% (15.68%) 13.94% 19.48%
======== ======== ======== ======== ========
Total Fund:
Ratios to Average Net Assets:
Total expenses*** .79%* .79% .87% .80% .80%
======== ======== ======== ======== ========
Investment income--net 5.04%* 5.40% 5.43% 5.10% 6.34%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands) $279,936 $265,127 $238,466 $274,999 $289,366
======== ======== ======== ======== ========
Portfolio turnover 40.59% 87.69% 69.37% 116.03% 76.54%
======== ======== ======== ======== ========
Average commission rate paid+++++ $ .0329 -- -- -- --
======== ======== ======== ======== ========
<PAGE>
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value,
may 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).
++Amount is less than $.01 per capital share.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
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. These unaudited financial
statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal
recurring nature. 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 last available bid price. 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. Short-term
securities are valued at amortized cost, which approximates market
value. 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.
(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) assets or liabilities 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. Under the applicable foreign tax law,
a withholding tax may be imposed on dividends, interest, and
capital gains at various rates.
(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 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.
Accounting services are provided to the Company by MLAM at cost.
During the six months ended June 30, 1996, the Company paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $473 for
security price quotations to compute the 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 six months ended June 30, 1996 were $110,522,950 and
$113,042,408, respectively.
Net realized and unrealized gains (losses) as of June 30, 1996 were
as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $16,381,509 $15,511,646
Short-term investments 58 --
Short sales (599,319) (1,094,408)
Foreign currency
transactions -- 545
----------- -----------
Total $15,782,248 $14,417,783
=========== ===========
<PAGE>
As of June 30, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $14,417,239, of which $26,750,994 related to
appreciated securities and $12,333,755 related to depreciated
securities. The aggregate cost of investments at June 30, 1996 for
Federal income tax purposes was $263,473,596.
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.
Convertible Holdings, Inc.
Notes to Financial Statements (concluded)
5. Share Transactions:
At June 30, 1996, there were 15,000,000 shares of $.10 par value
authorized for each class. During the six months ended June 30,
1996, the Company's Income Shares and Capital Shares outstanding
remained constant at 11,653,700 and 11,653,700, respectively.
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. 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.
<PAGE>
Convertible Holdings, Inc.
Ten Largest Holdings
Integrated Health Services Inc., 5.75% due 1/01/2001
USX Corp., 7% due 6/15/2017
Hudson Foods, Inc., Class A
Trinity Industries Leasing Co.
Intelcom Group Inc., 7% due 10/30/1998
RJR Nabisco Holdings, Inc.
Albany International Corp., Class A
American Travellers Corp., 6.50% due 10/01/2005
Southern National Corporation
Lafarge Corp., 7% due 7/01/2013
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 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%.
