Convertible
Holdings,
Inc.
Annual Report
December 31, 1995
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
<PAGE>
Dear Shareholders:
For the six-month period ended December 31, 1995, Convertible
Holdings, Inc. Capital Shares had a total investment return of
+5.56%, based on a change in per share net asset value from $13.12
to $13.43, and assuming reinvestment of $0.363 per share short-term
capital gains. During the same period, total investment return on
Income Shares was +6.95%, based on a change in per share net asset
value from $9.61 to $9.32, and assuming reinvestment of $0.931 per
share income dividends.
For the year ended December 31, 1995, per share net asset value for
Convertible Holdings, Inc. Capital Shares increased from $11.13 to
$13.43. Total investment return was +24.44%, assuming reinvestment
of $0.363 per share short-term capital gains. During the same
period, total return for Income Shares was +13.82%, based on a
change in per share net asset value from $9.30 to $9.32, and
assuming reinvestment of $1.211 per share income dividends.
The Environment
In last year's annual report to shareholders, we expressed our
opinion that small cap stocks and convertible securities had the
potential to do well in 1995. Our reasoning was that stocks were
much more reasonably valued and that 1995 would be influenced by
expectations that interest rates were at or near a peak. We, along
with most economists and market strategists, turned out to be much
too conservative in our expectations. At the beginning of the year,
a Business Week survey of 50 economists predicted the long-term
Treasury bond would finish 1995 at 7.86%, a shade off from where
bonds were trading at the time. In fact, bonds staged one of the
greatest rallies ever, with yields plunging to about 6%. Stock
market analysts did little better with their more bullish forecast
of a stock market total return significantly below what
materialized. The Dow Jones Industrial Average (DJIA) skyrocketed
almost 34%, passing two thousand point milestones (4,000 and 5,000)
in the same year for the first time ever. The DJIA was buoyed by the
strength in long-established growth stocks. The Standard & Poor's
500 Index (S&P 500) also advanced about 34%, as the blue-chip stocks
that make up the Index outperformed smaller shares.
<PAGE>
The strongest-performing sectors of the stock market were financial,
consumer non-cyclical and technology, with biotechnology, oil
drilling, medical devices, aerospace and defense, banking and
semiconductors being particularly strong sub-sectors. Medical
devices and biotechnology stocks were helped by the expedited
approval process of The Food and Drug Administration. Aerospace and
defense issues benefited from an industry consolidation reflecting
the end of the Cold War and new fiscal budgetary constraints.
"Merger mania" associated with a proposed Boeing Co.--McDonnell-
Douglas Corp. combination, Lockheed Corp. with Martin Marietta
Corp., as well as many smaller combinations, high-lighted this trend
toward consolidation. Lower interest rates helped banking stocks as
did the continued speculation regarding who the next acquisition
candidate might be. Semiconductors, the top-performing stock market
industry sector in the first three quarters of 1995, finished last
in the fourthquarter amid fears that growth might be peaking and
margins squeezed by intense competition and future global capacity
expansion. Although they were up significantly, the worst-performing
sectors were basic materials and consumer cyclicals. Only four sub-
sectors--trucking, steel, transportation equipment and specialty
retailers--showed stock declines during the year.
It should be noted that the 50 biggest contributors to the S&P 500
accounted for about half of that Index's total return, and that big
blue-chip stocks, including many of the Dow 30, figured prominently
among those 50. However, what stood out the most during 1995 was the
increasingly frequent and rapid group rotation within the market,
which carried various sectors into and out of favor yet left the
averages virtually unscathed. The reason for this was the vast pool
of liquidity available.
Convertible securities also turned in a very fine performance, aided
by a booming stock market and sharply declining interest rates. The
Merrill Lynch All Convertible Index advanced by 24.69% during the
year. Convertibles performed as well as could be expected given the
favorable conditions of a strong market and sharply lower interest
rates. However, the stocks of companies with convertibles
outstanding lagged the market averages. Banking and finance was by
far the strongest-performing convertible sector during 1995, with
consumer cyclicals the weakest. New issuance of convertible debt is
likely to exceed $17 billion in 1995, up from the $10.5 billion in
1994, but well behind the $25.8 billion issued in 1993. However,
$18.6 billion of convertibles were called and/or redeemed in 1995.
<PAGE>
The new-issue market for convertible securities differed markedly
based on credit quality. Investors were unwilling to buy lower
credit quality issues at the original "price talk" indications,
requiring higher yields on these lower-quality issues to entice them
to invest in this sector of the convertible new-issue market.
Investment-grade new issues were relatively few in number, and
investors were willing to "pay up" for these issues, accepting lower
yields in exchange for the scarcity value of investment-grade
convertible issues. In addition, many of the existing investment-
grade securities were called in 1995 as declining interest rates and
expiring call protection influenced the corporate financing
decisions of these corporations. For companies below investment
grade, investors are beginning to demand higher coupons and lower
premiums as insurance against the possible recurrence of the
substantial bond premium contractions in 1994 in which new issues
from the fourth quarter of 1993 were decimated as interest rates
rose sharply. Since we think that sharply higher interest rates are
unlikely in 1996, the higher-than-necessary coupons on these new
issues enhance their already defensive characteristics as compared
to the underlying common stocks.
Convertible securities have a total market value of about $104
billion with 49% non-investment grade, 44% investment grade and 7%
unrated. The average current yield was 6.3%, down from 7.1% in 1994,
and the average conversion premium was 30.0%, down from 31.2%. The
average break-even time was 4.0 years, up from 3.8 years, and the
average investment premium was 28.3%, down from 33.7%.
Investment Activities
We substantially reduced our defensive position in the past year
with our holdings of commercial paper declining to 6.7% of net
assets at the end of 1995 from 14.9% a year ago. We have a
diversified portfolio, with our largest position in banking and
finance, which represents 10.2% of our holdings. As these individual
banks reach our price targets, based on the fundamental analysis, we
would consider reducing some of these holdings unless we believe
they have significant further upside potential as possible
acquisition candidates.
Technology and healthcare are industries that we find interesting at
this time. The stocks of nursing home subacute care companies have
been battered by the changing regulatory environment, particularly
as it relates to Medicare and Medicaid. However, we believe that
investors are failing to differentiate between individual companies
while ignoring positive demographics.
While technology has had exceptional performance over the past three
years, the recent sharp sell-off of many of these stocks creates
opportunities as lower relative valuations understate the long-term
fundamentals of this group. We expect to increase our participation
in this sector in 1996.
<PAGE>
The stock market is at extreme valuation levels based on dividend
yields and price/book valuation measures. These two valuation
measures may have lesser significance now than in the past since
they may reflect structural changes rather than a cyclical peak in
equity prices. Structural changes in the tax code have shifted
investor preferences away from dividends in favor of capital gains.
This may continue if the capital gain tax debate resurfaces in the
future. Changes in accounting standards have encouraged write offs
at corporations which lower book values, thereby increasing
price/book ratios. Notwithstanding seemingly high price/dividend and
price/book value ratios, we expect the stock market to do well in
1996. In spite of the unusually strong stock market in 1995, strong
earnings growth has left valuations, based on earnings, at still-
reasonable levels with the S&P 500 selling at less than 14 times
estimated 1996 earnings as compared to a historical average of about
17 times. We believe that valuation measures based on earnings are
more important than those based on book values or dividends at the
present time. As previously mentioned, many recently issued
convertible securities were issued with coupons that are higher than
would appear necessary in the current interest rate environment.
Importantly, we expect the market to narrow as it advances.
Therefore, selectivity will become increasingly important going
forward. As such, we will endeavor to narrow the focus of the fund,
concentrating on those convertible issues and sectors which offer
the best relative value.
In the past several months, major purchases were Browning-Ferris
Industries, Inc., Continental Homes Holding Corp., Cooper
Industries, Inc., Cyprus Amax Minerals Co., International Paper Co.,
IVAX Corporation, Samancor Ltd., Thermo Electron Corporation and
Time Warner Financial.
During the 12-month period ended December 31, 1995, we eliminated
our holdings in Arvin Industries, Inc., Delta Air Lines, Inc., Engle
Homes, Inc. Federated Department Stores, MagneTek, Inc., Mark Twain
Bancshares, Inc., and TheraTex 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
<PAGE>
January 30, 1996
<TABLE>
Convertible Holdings, Inc.
Proxy Results
<CAPTION>
During the six-month period ended December 31, 1995, Convertible
Holdings, Inc. Capital and Income shareholders voted on the
following proposals. The proposals were approved at a special
shareholders' meeting on September 8, 1995. The description of each
proposal and number of shares voted are as follows:
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Company's Board of Directors--Capital Shares: James H Bodurtha 10,476,387 271,261
Herbert I. London 10,476,637 271,011
Robert R. Martin 10,476,657 270,991
Joseph L. May 10,481,187 266,461
Arthur Zeikel 10,473,387 274,261
2. To elect the Company's Board of Directors--Income Shares: James H. Bodurtha 11,010,056 301,521
Herbert I. London 11,014,276 297,301
Robert R. Martin 11,009,681 301,896
Joseph L. May 11,027,123 284,454
Arthur Zeikel 11,013,131 298,446
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
3. To ratify the selection of Deloitte & Touche LLP as the Company's
independent auditors for the current fiscal year. 21,532,839 221,055 305,331
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1995
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Airlines-- Alaska Air Group Inc.:
5.8% B Ba3 $ 500,000 6.50% due 6/15/2005 $ 500,000 $ 496,250
B Ba3 1,360,000 7.75% due 6/15/2010 1,239,400 1,237,600
B Ba3 800,000 6.875% due 6/15/2014 664,000 684,000
BB- Ba1 5,000,000 AMR Corp., 6.125% due 11/01/2024*** 4,944,392 5,187,500
B+ Ba3 7,000,000 UAL Corp., 6.375% due 2/01/2025*** 7,158,690 7,857,500
------------ ------------
14,506,482 15,462,850
Automobile A- Baa3 1,850,000 Magna International Inc., 7.25%
Parts--0.6% due 7/05/2005 1,601,654 1,539,068
Broad- NR* NR* 3,003,750 Intelcom Group Inc., 7% due
casting/ 10/30/1998(a)++ 2,765,182 2,526,228
Communica- BB+ Ba3 1,224,250 Time Warner, Inc., 8.75% due 1/10/2015 1,301,531 1,270,159
tions--1.4% ------------ ------------
4,066,713 3,796,387
Building/ B Ba3 2,565,000 Hechinger Company, 5.50% due 4/01/2012 1,665,075 1,192,725
Building
Supplies--0.4%
Cement--2.3% BBB+ Baa2 3,590,000 Lafarge Corp., 7% due 7/01/2013 3,708,350 3,639,363
B+ B1 2,500,000 Medusa Corp., 6% due 11/15/2003 2,479,375 2,425,000
------------ ------------
6,187,725 6,064,363
Computer/ B+ Ba3 1,500,000 EMC Corporation, 4.25% due 1/01/2001 1,590,000 1,507,500
Business B B2 2,000,000 Storage Technology Corp., 8% due
Equipment-- 5/31/2015 2,068,750 1,940,000
2.1% B- B2 1,500,000 Systems and Computer Technology Corp.,
6.25% due 9/01/2003 1,931,000 2,025,000
------------ ------------
5,589,750 5,472,500
Conglo- BBB+ A3 2,500,000 Cooper Industries, Inc., 7.05%
merates-- due 1/01/2015 2,560,000 2,575,000
3.2% Polyphase Corporation:
NR* NR* 1,000,000 12% due 12/01/1997++ 1,000,000 952,500
NR* NR* 2,000,000 12% due 7/01/1999++ 2,000,000 1,615,000
A Ba1 3,000,000 Thermo Electron Corporation, 4.25% due
1/01/2003++ 3,000,000 3,247,500
------------ ------------
8,560,000 8,390,000
Defense-- NR* Caa 1,000,000 Diagnostic/Retrieval Systems, Inc., 9%
0.4% due 10/01/2003++ 1,000,000 1,007,500
Drugstores B B2 2,102,000 Big B Inc., 6.50% due 3/15/2003 2,372,522 2,133,530
- --0.8%
<PAGE>
Entertain- B B2 1,700,000 Savoy Pictures Entertainment
ment--0.5% Inc., 7% due 7/01/2003 1,377,000 1,360,000
Environ- NR* NR* 1,000,000 Phillips Environmental, Inc., 6% due
mental--0.4% 10/15/2000++ 1,000,000 1,080,000
Food & B- B1 1,000,000 Starbucks Corp., 4.25% due 11/01/2002 1,000,000 1,060,000
Beverage--
0.4%
Gaming--0.7% B- B3 2,000,000 Argosy Gaming Company, 12% due 6/01/2001 2,030,000 1,810,000
Geothermal B B1 2,500,000 California Energy Company, Inc., 5% due
Energy--0.9% 7/31/2000++ 2,336,875 2,506,250
Health Care-- B B3 1,849,000 GranCare Inc., 6.50% due 1/15/2003 1,768,051 1,590,140
4.7% B B2 3,830,000 Integrated Health Services, Inc., 5.75%
due 1/01/2001 4,168,700 3,810,850
B+ B2 1,935,000 Quantum Health Resources Inc., 4.75% due
10/01/2000 1,554,688 1,528,650
NR* B3 3,076,000 Regency Health Services, Inc., 6.50% due
7/15/2003 3,307,705 3,045,240
NR* NR* 2,860,000 Sun Healthcare Group Inc., 6% due
3/01/2004 2,510,420 2,488,200
------------ ------------
13,309,564 12,463,080
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1995 (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 CCC+ B2 $ 2,200,000 Continental Homes Holding Corp.,
Building-- 6.875% due 11/01/2002 $ 2,200,000 $ 2,332,000
2.5% B B2 2,678,000 Schuler Homes Inc., 6.50% due
1/15/2003 2,114,371 2,162,485
BB- Ba3 751,000 Toll Brothers Inc., 4.75% due
1/15/2004 627,190 781,040
BB- B2 1,500,000 US Home Corp., 4.875% due 11/01/2005 1,316,875 1,425,000
------------ ------------
6,258,436 6,700,525
Insurance-- BB- NR* 2,750,000 American Travellers Corp.,
1.4% 6.50% due 10/01/2005*** 2,933,125 3,767,500
<PAGE>
Machinery-- BB- B1 300,000 AGCO Corp., 6.50% due 6/01/2008 319,000 1,185,000
2.3% B B3 1,600,000 Raymond Corporation (The), 6.50% due
12/15/2003*** 2,019,324 2,208,000
B+ B1 2,700,000 Varlen Corp., 6.50% due 6/01/2003 2,746,250 2,700,000
------------ ------------
5,084,574 6,093,000
Medical NR* NR* 750,000 Pharmaceutical Marketing Services,
Marketing Inc., 6.25% due 2/01/2003***++ 588,719 669,375
Services--
0.2%
Medical BB- Ba3 2,700,000 Bindley Western Industries, Inc.,
Supplies-- 6.50% due 10/01/2002 2,632,200 2,781,000
1.4% NR* NR* 1,000,000 Phoenix Shannon, 9.50% due 11/01/2000++ 1,000,000 1,000,000
------------ ------------
3,632,200 3,781,000
Mining--1.1% NR* NR* 3,000,000 Samancor Ltd., 7% due 6/30/2004 2,858,750 2,895,000
Oil--1.1% BB+ NR* 3,000,000 USX Corp., 7% due 6/15/2017 2,522,500 2,857,500
Paper--2.1% NR* NR* 4,670,000 Kymmene Corporation, 8.75% due
11/18/2043 1,235,668 1,119,001
NR* NR* 2,500,000 Repap Enterprises Inc., 8.50%
due 8/01/1997*** 2,654,649 2,484,375
NR* NR* 2,000,000 Sappi Ltd., 7.50% due 8/01/2002++ 2,034,000 1,870,000
------------ ------------
5,924,317 5,473,376
Pharmaceuti- B- B3 1,000,000 ICN Pharmaceuticals, Inc., 8.50% due
cals--1.2% 11/15/1999 1,005,000 1,090,000
NR* NR* 2,000,000 IVAX Corporation, 6.50% due 11/15/2001 1,989,310 2,100,000
------------ ------------
2,994,310 3,190,000
Precious B- B2 2,500,000 Coeur d'Alene Mines Corp., 6.375%
Metals-- due 1/31/2004 2,316,000 2,325,000
0.9%
Printing-- NR* B1 3,240,000 Graphic Industries, Inc., 7%
1.1% due 5/15/2006*** 2,895,000 2,964,600
Real Estate NR* B3 1,500,000 Capstone Capital Trust, Inc., 10.50% due
Investment 4/01/2002 1,631,250 1,687,500
Trusts--1.4% B NR* 2,323,000 Pacific Gulf Properties, Inc., 8.375% due
2/15/2001 2,066,523 2,148,775
------------ ------------
3,697,773 3,836,275
<PAGE>
Restaurants-- B- B3 1,000,000 Hometown Buffet Inc., 7% due 12/01/2002 1,000,000 996,250
0.4%
Retail B+ B2 2,700,000 Baker (J.) Inc., 7% due 6/01/2002 2,680,188 1,849,500
Stores-- B+ Ba3 3,888,000 Ingles Markets, Inc., 10% due
4.6% 10/15/2008 4,179,046 4,101,840
B+ Ba3 3,700,000 Michaels Stores, Inc., 4.75% due
1/15/2003(b) 3,778,250 2,978,500
B- B2 3,250,000 Sports & Recreation, Inc., 4.25%
due 11/01/2000 2,416,500 2,210,000
BB- Ba3 1,000,000 Waban Inc., 6.50% due 7/01/2002 927,500 990,000
------------ ------------
13,981,484 12,129,840
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1995 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Temporary BBB Ba1 $ 1,750,000 Olsten Corporation (The), 4.875% due
Help 5/15/2003 $ 1,852,500 $ 2,021,250
Services--
0.8%
Textiles-- B- B2 3,806,000 Fieldcrest Cannon, Inc., 6% due 3/15/2012 2,889,280 2,588,080
1.7% BBB- Ba1 2,000,000 Guilford Mills, Inc., 6% due 9/15/2012 1,755,000 1,880,000
------------ ------------
4,644,280 4,468,080
Water B+ B2 1,000,000 US Filter Corp., 6% due 9/15/2005++ 1,000,000 1,138,750
Filtration--
0.4%
Total Convertible Debentures--49.2% 130,787,328 130,645,574
Shares
Held Convertible Preferred Stock
Automobile BB+ Ba2 25,200 Federal-Mogul Corp., $3.875, Series D++ 1,428,675 1,524,600
Parts--1.5% BB- B1 200,000 Masco Tech, Inc., $1.20 3,033,875 2,500,000
------------ ------------
4,462,550 4,024,600
<PAGE>
Banking & A Aa3 38,400 Banc One Corporation, $3.50 Series C 2,509,288 2,520,000
Finance-- BBB- NR* 60,200 Fourth Financial Corporation,
7.6% $1.75, Class A 1,667,550 2,099,475
CCC+ Caa 45,000 Glendale Federal Savings Bank
(8.75% Convertible, Series E)*** 1,940,823 2,036,250
AA A1 10,000 Jefferson Pilot Corp. (ACES) 725,000 731,250
NR* NR* 138,200 ONBANCorp. Inc., $1.6875, Series B 4,169,801 3,852,325
BBB A2 135,900 Southern National Corp., $1.6875,
Series A 3,780,234 5,266,125
BB+ NR* 89,400 Union Planters Corp., $2.00, Series E 2,818,585 3,531,300
------------ ------------
17,611,281 20,036,725
Cement--1.5% NR* NR* 80,000 Southdown, Inc. 868,000 840,000
B B2 60,000 Southdown, Inc., 3.75%, Series B 2,460,055 3,090,000
------------ ------------
3,328,055 3,930,000
Chemicals-- A NR* 80,000 Atlantic Richfield Company (ARCO) 1,988,520 1,880,000
0.7%
Entertain- NR* Ba3 70,000 Time Warner Financial 2,170,000 2,187,500
ment--0.8%
Fertilizers-- NR* NR* 171,000 Arcadian Corp., Series A 3,089,637 3,078,000
1.2%
Financial BB Ba2 25,000 Advanta Corp. 925,000 959,375
Services--
0.4%
Funeral BBB Baa3 25,000 SCI Finance, $3.125, Series A 1,520,250 1,850,000
Services--
0.7%
Insurance-- A+ A1 53,500 American General Delaware 2,754,735 2,802,063
2.8% BB+ Ba3 10,000 INTEGONCorporation, Pfd. $3.875 488,100 600,000
BB- Baa3 30,000 Kemper Corp., 5.75%, Series E++ 1,503,900 1,575,000
BB B1 10,000 Penncorp Financial Group Inc. 500,000 713,750
NR* NR* 2,000 Westbridge Capital Corporation++ 2,000,000 1,760,000
------------ ------------
7,246,735 7,450,813
Minerals-- BB+ Ba1 43,150 Cyprus Amax Minerals Co., $4.00, Series A 2,551,244 2,519,097
2.4% BB+ B1 33,000 Magma Copper Company, $2.812, Series D 2,007,605 3,172,125
BB+ Ba2 20,000 Pittston Minerals Group, $3.125 1,000,000 760,000
------------ ------------
5,558,849 6,451,222
Oil & Gas NR* NR* 40,000 Callon Petroleum Co. 1,000,000 1,080,000
Producers-- BBB Baa2 46,000 Enron Corp. 1,000,500 1,104,000
1.6% NR* NR* 70,000 Lomak Petroleum Inc., 8.125% 1,750,000 1,977,500
------------ ------------
3,750,500 4,161,500
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1995 (continued)
<CAPTION>
S&P Moody's Shares Value
Industry Rating Rating Held Convertible Preferred Stock Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Paper--2.2% BB+ Ba2 30,000 Boise Cascade Corporation $ 923,160 $ 858,750
BBB+ Baa1 85,000 International Paper Co., 5.25%++ 4,037,500 3,782,500
BB+ Ba2 15,000 James River Corp. of Virginia 711,795 695,625
BB+ Ba2 14,000 James River Corp. of Virginia,
$3.375, Series K 630,165 640,500
------------ ------------
6,302,620 5,977,375
Real Estate BBB Baa3 80,000 Merry Land & Investment Co., Inc.,
Investment $2.15,Series C 2,000,000 2,300,000
Trusts--3.3% BBB Baa3 40,000 Merry Land & Investment Services, ,
Inc., $1.75 Series A 1,000,000 1,280,000
BBB Baa3 100,000 Public Storage Inc., $2.062 2,518,600 3,250,000
BBB Baa3 80,000 Security Capital Pacific Trust 2,000,000 1,960,000
------------ ------------
7,518,600 8,790,000
Steel--2.5% B B2 92,000 AK Steel Holding Corp. 2,528,670 3,082,000
B B3 82,500 WHX Corporation, Series A 4,571,485 3,630,000
------------ ------------
7,100,155 6,712,000
Telecommuni- BBB Baa3 31,300 Sprint Corp., Pfd. $8.25 1,001,216 1,189,400
cations-- A+ A2 65,000 US West, Inc. 1,560,000 1,706,250
1.1% ------------ ------------
2,561,216 2,895,650
Tobacco-- NR* Ba3 365,500 RJR Nabisco Holdings, Inc. 2,391,326 2,330,062
0.9%
Waste NR* NR* 1,509 Allied Waste Industries, Inc., $3.75++*** 1,509,180 2,157,870
Management-- A A1 85,000 Browning-Ferris Industries, Inc. 3,028,125 2,666,875
2.9% B B3 91,300 International Technologies Inc. 1,729,069 1,609,162
BBB+ Baa2 47,000 Laidlaw One Inc. 998,750 1,216,125
------------ ------------
7,265,124 7,650,032
Total Convertible Preferred Stocks--34.1% 84,790,418 90,364,854
Common Stocks
<PAGE>
Automobile Parts--0.3% 20,445 Magna International Inc., Class A 455,258 884,246
Banking & Finance--2.6% 59,000 Deposit Guaranty Corp. 891,024 2,625,500
11,000 Mellon Bank Corp. 242,132 591,250
76,000 Southern National Corporation 1,095,876 1,995,000
53,761 Washington Mutual Savings Bank 592,119 1,538,909
------------ ------------
2,821,151 6,750,659
Drugs--2.4% 75,000 Bristol-Myers Squibb Co. 3,714,103 6,440,625
Electrical Equipment--0.4% 78,500 Rexel SA 779,897 1,059,750
Electronics--2.1% 45,283 Arrow Electronics, Inc. 1,500,943 1,952,829
81,395 Avnet, Inc. 3,769,959 3,642,426
------------ ------------
5,270,902 5,595,255
Food Processing--2.4% 371,124 Hudson Foods, Inc., Class A 4,389,831 6,401,889
Hospital Supplies--1.2% 75,000 Baxter International, Inc. 1,190,192 3,140,625
Insurance--1.4% 199,340 Pioneer Financial Services, Inc. 2,370,895 3,687,790
Medical Supplies--0.3% 50,800 Bindley Western Industries, Inc. 710,836 863,600
Metal Fabricating--1.5% 128,479 Trinity Industries Leasing Co. 2,974,237 4,047,088
Paper--0.2% 10,600 Boise Cascade Corporation 478,325 367,025
Waste Management--0.3% 38,490 USA Waste Services Inc. 539,022 726,499
Total Common Stocks--15.1% 25,694,649 39,965,051
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1995 (concluded))
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <S> <C> <C>
Commercial Paper**--6.7% $ 5,000,000 Dean Witter, Discover & Co., 5.77%
due 1/08/1996 $ 4,991,986 $ 4,991,986
12,809,000 General Electric Capital Corp., 5.90%
due 1/02/1996 12,800,603 12,800,603
Total Short-Term Securities--6.7% 17,792,589 17,792,589
Total Investments--105.1% $259,064,984 278,768,068
============
Short Sales--(proceeds--$12,720,922) (5.2%)*** (13,825,663)
Other Assets Less Liabilities--0.1% 184,593
------------
Net Assets--100.0% $265,126,998
============
<FN>
(a)Represents a pay-in-kind security.
(b)Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase by the Company.
*Not Rated.
**Commercial Paper is traded on a discount basis; 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, 1995 were as
follows:
Value
Shares Issue (Notes 1a & 1g)
38,000 AMR Corp. $ (2,821,500)
9,600 Allied Waste Industries, Inc. (68,400)
93,700 American Travellers Corp. (2,635,313)
89,700 Glendale Federal Savings Bank (1,569,750)
12,000 Graphic Industries, Inc. (147,000)
24,100 Pharmaceutical Marketing
Services, Inc. (364,513)
75,800 Raymond Corporation (The) (1,762,350)
119,400 Repap Enterprises Inc. (529,837)
22,000 UAL Corp. (3,927,000)
Total (proceeds--$12,720,922) $(13,825,663)
============
++Restricted securities as to resale. The value of the Company's
investment in restricted securities was approximately
$29,173,000, representing 11.0% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
Allied Waste Industries, Inc., $3.75 9/23/1993 $ 1,509,180 $ 2,157,870
California Energy Company, Inc., 5%
due 7/31/2000 5/30/1995 2,336,875 2,506,250
Diagnostic/Retrieval Systems, Inc.,
9% due 10/01/2003 9/22/1995 1,000,000 1,007,500
Federal-Mogul Corp., $3.875, Series D 6/12/1995 1,428,675 1,524,600
Intelcom Group Inc., 7% due 10/30/1998 10/26/1993-
10/30/1995 2,765,182 2,526,228
International Paper Co.
(5.25% Convertible Pfd.) 8/16/1995 4,037,500 3,782,500
Kemper Corp., 5.75%, Series E 4/05/1995 1,503,900 1,575,000
Pharmaceutical Marketing Services, Inc.,
6.25% due 2/01/2003 9/08/1995 588,719 669,375
Phillips Environmental, Inc., 6%
due 10/15/2000 10/13/1993 1,000,000 1,080,000
Phoenix Shannon, 9.50% due 11/01/2000 11/21/1995 1,000,000 1,000,000
Pittston Minerals Group, $3.125 1/11/1994 1,000,000 760,000
Polyphase Corporation:
12% due 12/01/1997 12/05/1995 1,000,000 952,500
12% due 7/01/1999 7/05/1994 2,000,000 1,615,000
Sappi Ltd., 7.50% due 8/01/2002 7/19/1995 2,034,000 1,870,000
Thermo Electron Corporation,
4.25% due 1/01/2003 11/28/1995 3,000,000 3,247,500
US Filter Corp., 6% due 9/15/2005 9/13/1995 1,000,000 1,138,750
Westbridge Capital Corporation 4/12/1994 2,000,000 1,760,000
Total $29,204,031 $29,173,073
=========== ===========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Statement of Assets, Liabilities and Capital as of December 31, 1995
<S> <C> <C>
Assets:
Investments, at value (identified cost--$259,064,984) (Note 1a) $278,768,068
Cash 230,039
Receivables:
Short sales (Note 1g) $ 13,154,419
Interest 2,323,545
Dividends 693,281 16,171,245
------------
Deposits for securities sold short 1,218,421
Deferred organization expenses (Note 1e) 60,418
Prepaid expenses and other assets 20,812
------------
Total assets 296,469,003
------------
Liabilities:
Common stocks, sold short, at market value (proceeds--$12,720,922) (Notes 1a & 1g) 13,825,663
Payables:
Dividends to shareholders 7,855,992
Securities purchased 5,499,540
Income taxes (Note 1c) 3,631,624
Investment adviser (Note 2) 408,669
Dividends for short sales 2,855 17,398,680
------------
Accrued expenses and other liabilities 117,662
------------
Total liabilities 31,342,005
------------
Net Assets $265,126,998
============
Capital (Note 5):
Income Shares:
Par value $.10 per share; 15,000,000 shares authorized; 11,653,700 shares issued $ 1,165,370
Liquidation capital in excess of par 107,214,040
------------
108,379,410
Undistributed investment income--net 223,416
------------
Net asset value, equivalent to $9.32 per share based on 11,653,700 shares outstanding
(market value--$10.00) $108,602,826
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* 61,689
Unrealized appreciation on investments and foreign currency transactions--net 18,598,125
------------
Total 18,659,814
------------
Net asset value, equivalent to $13.43 per share based on 11,653,700 shares outstanding
(market value--$11.625) 156,524,172
------------
Net Assets $265,126,998
============
<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 Year Ended December 31, 1995
<S> <C> <C>
Investment Income (Notes 1c & 1d):
Interest and discount earned $ 10,832,899
Dividends (net of $2,419 foreign withholding tax) 5,554,665
------------
Total income $ 16,387,564
Expenses:
Investment advisory fees (Note 2) 1,570,010
Accounting services (Note 2) 110,397
Transfer agent fees 91,288
Professional fees 75,638
Printing and shareholder reports 71,315
Directors' fees and expenses 41,796
Amortization of organization expenses (Note 1e) 38,159
Custodian fees 20,057
Dividends on securities sold short 19,730
Insurance 4,926
Interest on securities sold short 4,487
Pricing services 3,493
Listing fees 375
Other 39,524
------------
Total expenses 2,091,195
------------
Investment income--net 14,296,369
------------
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency
Transactions--Net (Notes 1b, 1c, 1d & 3):
Realized gain from:
Investments--net 15,444,671
Income taxes on realized gain on investments (3,631,624)
Foreign currency transactions 1,826 11,814,873
------------
Change in unrealized appreciation/depreciation on:
Investments--net 19,334,469
Foreign currency transactions (218) 19,334,251
------------ ------------
Net realized and unrealized gain on investments and foreign currency transactions 31,149,124
------------
Net Increase in Net Assets Resulting from Operations $ 45,445,493
============
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
For the Year Ended
Convertible Holdings, Inc. December 31,
Statements of Changes in Net Assets 1995 1994
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Investment income--net $ 14,296,369 $ 14,022,417
Realized gain (loss) on investments and foreign currency transactions--net 15,446,497 (687,869)
Income taxes on realized gain on investments (3,631,624) --
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net 19,334,251 (24,517,084)
------------ ------------
Net increase (decrease) in net assets resulting from operations 45,445,493 (11,182,536)
------------ ------------
Dividends & Distributions to Shareholders (Notes 1f & 4):
Investment income--net (14,117,464) (14,067,021)
Realized gain on investments--net (4,235,374) (94,645)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to shareholders (18,352,838) (14,161,666)
------------ ------------
Capital Share Transactions (Note 5):
Income shares (192,510) (5,036,880)
Capital shares (238,873) (6,152,490)
------------ ------------
Net decrease in net assets resulting from Treasury stock transactions (431,383) (11,189,370)
------------ ------------
Net Assets:
Total increase (decrease) in net assets 26,661,271 (36,533,572)
Beginning of year 238,465,727 274,999,299
------------ ------------
End of year* $265,126,998 $238,465,727
============ ============
<FN>
*Undistributed investment income--net (Note 1h) $ 223,416 $ 6,950
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived For the Year Ended December 31,
from information provided in the financial statements. 1995 1994 1993 1992 1991
<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 $ 9.30 $ 9.31 $ 9.30
-------- -------- -------- -------- --------
Investment income--net 1.23 1.19 1.20 1.35 1.41
Dividends of investment income--net (1.21) (1.19) (1.20) (1.36) (1.40)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.32 $ 9.30 $ 9.30 $ 9.30 $ 9.31
======== ======== ======== ======== ========
Market price per share, end of year $ 10.00 $ 10.00 $ 10.625 $ 11.25 $ 12.625
======== ======== ======== ======== ========
Total Investment Return:*
Based on market value per share 13.58% 6.61% 7.20% 2.74% 34.37%
======== ======== ======== ======== ========
Based on net asset value per share 13.82% 13.28% 13.50% 15.17% 15.87%
======== ======== ======== ======== ========
Capital Shares:
Per Share Operating Performance:
Net asset value, beginning of year $ 11.13 $ 13.21 $ 12.87 $ 10.91 $ 7.67
-------- -------- -------- -------- --------
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net 2.66 (2.12) 1.43 2.03 3.24
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 year $ 13.43 $ 11.13 $ 13.21 $ 12.87 $ 10.91
======== ======== ======== ======== ========
Market value per share, end of year $ 11.625 $ 9.00 $ 10.875 $ 9.375 $ 6.875
======== ======== ======== ======== ========
Total Investment Return:*
Based on market value per share 33.20% (17.17%) 28.77% 38.11% 61.76%
======== ======== ======== ======== ========
Based on net asset value per share 24.44% (15.68%) 13.94% 19.48% 42.24%
======== ======== ======== ======== ========
Total Fund:
Ratios to Average Net Assets:
Total expenses** .79% .87% .80% .80% .83%
======== ======== ======== ======== ========
Investment income--net 5.40% 5.43% 5.10% 6.34% 7.24%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $265,127 $238,466 $274,999 $289,366 $275,045
======== ======== ======== ======== ========
Portfolio turnover 87.69% 69.37% 116.03% 76.54% 54.90%
======== ======== ======== ======== ========
<PAGE>
<FN>
*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.
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 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) 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.
<PAGE>
(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.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $37,561 and $6,719,810 have been reclassified to undistributed
net investment income and paid-in capital in excess of par,
respectively, from undistributed realized capital gains. These
reclassifications have no effect on net assets or net asset values
per share.
Convertible Holdings, Inc.
Notes to Financial Statements (continued)
<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"). 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 year ended December 31, 1995, the Company paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $2,290 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 year ended December 31, 1995 were $230,061,091 and
$206,443,474, respectively.
Net realized and unrealized gains (losses) as of
December 31, 1995 were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $15,444,926 $19,703,084
Short-term investments (255) --
Short sales -- (1,104,741)
Foreign currency
transactions 1,826 (218)
----------- -----------
Total $15,446,497 $18,598,125
=========== ===========
<PAGE>
As of December 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $19,612,024, of which $28,929,742
related to appreciated securities and $9,317,718 related to
depreciated securities. The aggregate cost of investments at
December 31, 1995 for Federal income tax purposes was $259,156,044.
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 December 31, 1995, there were 15,000,000 shares of $.10 par value
authorized for each class. During the year ended December 31, 1995,
the Company repurchased 20,700 Income Shares and 20,700 Capital
Shares, at an average market price of $10.20 and $10.64,
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 $18,545 for the difference between the cost
of the Income Shares repurchased during the year ended December 31,
1995 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.
<PAGE>
<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, 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)
Jan. 1, 1995 to March 31, 1995 3,802,213 3,312,277 .28 10,895,458 .93 14,207,734 1.22
April 1, 1995 to June 30, 1995 4,084,050 3,571,779 .31 12,337,222 1.06 15,909,002 1.36
July 1, 1995 to Sept. 30, 1995 4,121,412 3,577,346 .31 11,588,235 .99 15,165,581 1.30
Oct. 1, 1995 to Dec. 31, 1995 4,379,890 3,834,967 .33 (3,671,791) (.32) 163,176 .01
<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, 1995, 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.
<PAGE>
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, 1995 by correspondence with the custodian and brokers. 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, 1995, 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 1, 1996
</AUDIT-REPORT>
Convertible Holdings, Inc.
Important Tax Information (unaudited)
Of the ordinary income distributions paid quarterly to the income
shareholders by Convertible Holdings, Inc. during its taxable year
ended December 31, 1995, 38.78% qualifies for the dividends received
deduction for corporations.
Additionally, the Company distributed short-term capital gains of
$0.363436 per share to capital shareholders of record on December
29, 1995.
Finally, capital shareholders of record on December 31, 1995 were
deemed to receive undistributed long-term capital gains of $0.890367
per share and were allocated Federal income taxes which have been
paid by the Company on the shareholders' behalf of $0.311628 per
share.
The undistributed capital gains allocated to you and the Federal
income taxes paid by the Company on the shareholders' behalf will be
reported to you on Form 2439, Notice to Shareholder of Undistributed
Long-Term Capital Gains, along with information on how to report
these amounts on your Federal Form 1040. In addition, you should
increase the cost basis of your shares by $0.578739 per share, which
represents the excess of the undistributed long-term capital gains
over the taxes paid.
<PAGE>
You should consult your tax adviser for additional information
regarding the appropriate treatment of undistributed long-term
capital gains.
Please retain this information for your records.
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, 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
Jan. 1, 1995 to March 31, 1995 9.58 9.32 10 3/8 10 12.06 11.25 10 1/8 9
April 1, 1995 to June 30, 1995 9.61 9.35 10 1/2 9 7/8 13.24 12.13 11 1/8 9 7/8
July 1, 1995 to Sept. 30, 1995 10.25 9.35 10 1/2 10 14.38 13.54 12 1/8 11
Oct. 1, 1995 to Dec. 31, 1995 9.64 9.35 10 3/8 9 7/8 14.25 13.43 12 1/8 11 1/2
<FN>
*As reported in the consolidated transaction reporting system.
</TABLE>
Convertible Holdings, Inc.
Ten Largest Holdings
UAL Corp., 6.375% due 2/01/2025
Bristol-Myers Squibb Co.
Hudson Foods, Inc., Class A
Southern National Corp., $1.6875, Series A
AMR Corp., 6.125% due 11/01/2024
Ingles Markets, Inc., 10% due 10/15/2008
Trinity Industries Leasing Co.
ONBANCorp. Inc., $1.6875, Series B
Integrated Health Services, Inc., 5.75% due 1/01/2001
International Paper Co., 5.25%
<PAGE>
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.
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.
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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.
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.
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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%.
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 and
Portfolio Manager
Donald C. Burke--Vice President
Barton A. Vogel--Vice President
Gerald M. Richard--Treasurer
Mark B. Goldfus--Secretary
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
