Convertible
Holdings,
Inc.
FUND LOGO
Semi-Annual Report
June 30, 1997
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.
<PAGE>
Convertible Holdings, Inc.
Box 9011
Princeton, NJ 08543-9011
Printed on post-consumer recycled paper
Dear Shareholders:
For the six-month period ended June 30, 1997, Convertible Holdings,
Inc. Capital Shares had a total investment return of +4.95%, based
on a change in per share net asset value from $15.57 to $16.34.
During the same period, total investment return on Income Shares was
+6.65%, based on a change in per share net asset value from $9.31 to
$9.63, and assuming reinvestment of $0.290 per share income
dividends.
The Environment
Year-to-date, the stock market has displayed a noticeable increase
in volatility. After reaching new highs in March 1997, the Dow Jones
Industrial Average (DJIA) fell 11.8% from its intraday high of
7,158, then rallied 24.3% to a new intraday high of over 7,800. The
National Association of Securities Dealers Automated Quotations
(NASDAQ) Composite Index declined more sharply, falling 17.9% from
its intraday high reached in late January, then rallied more weakly,
rising 22.4% from its low. While the NASDAQ's relative strength
index has improved recently, it remains near its low. However, its
price index is at a new high. This divergence is a worrisome sign.
The internal breadth of the market, as measured by the daily and
weekly advance/decline lines, has been quite strong while having
recently made new highs coincident with price. It is also a positive
sign that the DJIA and Dow Jones Transportation Average recently
reached new highs for this market cycle (a condition known as a "Dow
Theory buy signal"). However, recent changes in the composition of
the DJIA make this otherwise reliable buy signal somewhat suspect.
<PAGE>
The stock market's valuations based on book values and dividend
yields are at extreme highs, and even the price/earnings ratio which
had been fairly valued as recently as year-end 1996 is reaching the
overvalued zone. This increases the price risk in equities. If the
economy is more robust than expected, corporate earnings might be
surprising. This could bring the price/earnings ratio back down into
fair value range, allowing for further upward potential for stocks.
However, an economy strong enough to accelerate earnings this much
would probably force the Federal Reserve Board to raise interest
rates, compressing valuation multiples. Therefore, we are cautious
toward the stock market, notwithstanding positive economic
fundamentals such as low interest rates, low inflation and solid
economic growth.
Investment Activities
As we announced in our annual shareholder letter, on February 13,
1997 Capital Shareholders approved a proposal to convert the Company
to an open-end investment company from a closed-end investment
company. Investment objectives and policies will be modified, and
the fund's name will be changed to Merrill Lynch Convertible Fund,
Inc. We believe the new fund will possess attractive investment
merits and hope to retain a significant percentage of Capital
Shareholders in the new fund.
As a result of this conversion, the Company's Income Shares will be
redeemed on July 31, 1997. Because certain convertible bonds that we
hold are illiquid, we decided to prepare for the redemption well
before August 1, 1997, the date the fund is to become open ended. As
a result, 50% of the fund's assets is in cash. This cash position
affected the fund's performance for the six months ended June 30,
1997.
During the past three months, we continued to consolidate the
portfolio and position it for a smooth transition from a closed-end
to an open-end structure. We reduced the number of companies in the
portfolio from 122 at year-end 1995 to 67 as of June 30, 1997. We
now have sufficient liquid assets to redeem all Income Shares as
well as additional liquid assets to accommodate Capital Shareholders
who wish to reallocate their resources as we transition.
<PAGE>
During the six-month period ended June 30, 1997, we established
positions in Boston Chicken Inc., CalEnergy Capital Trust II,
Capstone Capital Trust, Inc., Data General Corporation, Engle Homes,
Inc., Healthsource, Inc.,Taiwan Semiconductor Manufacturing Co.,
Thermo Cardiosystems, Inc., Thermo Ecotek Corp., Thermo Optek Corp.,
US Office Products Co. and USA Waste Services, Inc. We also added to
our position in Lyondell Petrochemical Company. On the sell side, we
took profits in Cypress Semiconductor Corporation, Diagnostic
Retrieval Systems, Inc., Diamond Offshore Drilling, Inc. (bought and
sold in the same period), Federal Mogul Corp., J. Baker Inc., Medusa
Corp., Merry Land & Investment Services, Inc., Onbancorp Inc.,
Philip Environmental Inc., Pier 1 Imports, Inc. and US Diagnostic
Labs, Inc. We also sold Browning-Ferris Industries, Inc., IVAX
Corp., Park Electrochemical Corporation and Sports & Recreation,
Inc. in response to negative changes in their fundamentals.
In Conclusion
Given the fund's recent and past successes, we are excited about our
prospects going forward and enthusiastically encourage your
continued investment.
We thank you for your support of Convertible Holdings, Inc., and we
look forward to serving your investment needs as Merrill Lynch
Convertible Fund, Inc. in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Daniel A. Luchansky)
Daniel A. Luchansky
Vice President and Portfolio Manager
July 28, 1997
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1997
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Automotive NR* Baa1 $ 900,000 Magna International Inc., 7.25% due
Parts--0.3% 7/05/2005 $ 772,368 $ 932,947
Conglomerates-- Polyphase Corporation++:
1.2% NR* NR* 1,000,000 12% due 12/01/1997 (c) 1,000,000 165,000
NR* NR* 2,000,000 12% due 7/01/1999++++ 2,000,000 300,000
A- Ba3 3,000,000 Thermo Electron Corporation, 4.25% due
1/01/2003 3,465,000 3,255,000
------------ ------------
6,465,000 3,720,000
Environmental-- A- NR* 2,250,000 Thermo Ecotek Corp., 4.875% due 4/15/2004 (c) 2,251,563 2,345,625
2.0% A- Baa3 3,187,000 Thermo TerraTech, Inc., 4.625% due
5/01/2003 (c) 2,891,246 3,015,699
BBB- Ba2 500,000 USA Waste Services, Inc., 4% due 2/01/2002 500,000 538,125
------------ ------------
5,642,809 5,899,449
Financial NR* NR* 2,750,000 Nal Acceptance Corp., 10% due 9/12/1998++++ 2,750,000 2,255,000
Services--0.7%
Healthcare Healthsource, Inc.:
Services--6.9% B+ B1 3,350,000 5% due 3/01/2003 (c) 3,326,550 3,345,813
B+ B1 6,650,000 5% due 3/01/2003 6,631,555 6,641,688
B B2 6,000,000 Integrated Health Services Inc., 6% due
1/01/2003 5,640,000 7,140,000
BBB+ Ba1 4,122,000 Quantum Health Resources, Inc., 4.75% due
10/01/2000 3,547,597 3,812,850
------------ ------------
19,145,702 20,940,351
Home Building B- B2 2,200,000 Continental Homes Holding Corp., 6.875% due
- --2.0% 11/01/2002 2,200,000 2,147,750
NR* B3 2,000,000 Engle Homes, Inc., 7% due 3/01/2003++ 1,820,000 1,840,000
BB+ Ba3 751,000 Toll Brothers Inc., 4.75% due 1/15/2004 627,190 769,775
B+ B1 1,500,000 US Home Corp., 4.875% due 11/01/2005 1,316,875 1,417,500
------------ ------------
5,964,065 6,175,025
Insurance--0.6% NR* NR* 1,831,000 Statesman Group, Inc. (The), 6.25%
due 5/01/2003 1,920,886 1,881,353
Medical NR* NR* 550,000 Phoenix Shannon PLC, 9.50% due
Supplies--0.1% 11/01/2000 (c)(d) 550,000 165,000
<PAGE>
Metals & BBB- Baa2 1,000,000 Inco, Limited, 5.75% due 7/01/2004 1,190,000 1,195,000
Mining--0.4%
Oil Services-- NR* NR* 1,455,000 Key Energy Group Inc., 7.50% due
0.9% 7/01/2003 (c) 2,295,263 2,760,862
Paper--0.9% NR* NR* 11,270,000 Kymmene Corporation, 8.25% due 11/18/2043 2,867,286 2,716,762
Real Estate NR* B3 1,500,000 Capstone Capital Trust, Inc., 6.55% due
Investment 3/14/2002 1,361,386 1,445,625
Trust--0.5%
Restaurants-- B- B2 2,000,000 Boston Chicken, Inc., 7.75% due 5/01/2004 1,832,500 1,795,000
0.9% B B3 1,000,000 Hometown Buffet Inc., 7% due 12/01/2002 1,000,000 997,500
------------ ------------
2,832,500 2,792,500
Retail-- US Office Products Co.:
Office B- B3 1,500,000 5.50% due 5/15/2003 (c) 1,413,750 1,327,500
Products--1.4% B- B3 2,000,000 5.50% due 5/15/2003 1,741,250 1,840,000
B- B3 1,000,000 5.50% due 5/15/2003 842,500 920,000
------------ ------------
3,997,500 4,087,500
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1997 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Retail Stores-- A+ A1 $ 4,000,000 Home Depot, Inc. (The), 3.25% due 10/01/2001 $ 4,000,000 $ 4,580,000
1.5%
Scientific A- NR* 2,000,000 Thermo Cardiosystems, Inc., 4.75% due
Equipment-- 5/15/2004 (c) 2,000,000 2,082,500
2.8% A Baa2 4,750,000 Thermo Instrument Systems Inc., 4.50% due
10/15/2003 (c) 4,780,000 4,750,000
Thermo Optek Corp. (c):
A- Baa3 500,000 5% due 10/15/2000 517,500 510,000
A- Baa3 1,000,000 5% due 10/15/2000 1,035,000 1,016,250
------------ ------------
8,332,500 8,358,750
Semiconductor NR* NR* 1,000,000 Taiwan Semiconductor Manufacturing Co.,
- --0.3% 6.379% due 7/03/2002 (c) (e) 1,000,000 1,030,000
<PAGE>
Technology-- Apple Computer, Inc.:
2.6% CCC+ Caa 3,500,000 6% due 6/01/2001 3,326,250 2,861,250
CCC+ Caa 1,750,000 6% due 6/01/2001 1,753,125 1,478,750
NR* NR* 1,000,000 Broadband Technologies, Inc., 5% due
5/15/2001 813,750 741,250
B- B3 1,500,000 Data General Corporation, 6% due
5/15/2004 (c) 1,500,000 1,841,250
NR* NR* 1,000,000 Premiere Technologies, Inc., 5.75% due
7/01/2004 (c) 1,000,000 1,035,000
------------ ------------
8,393,125 7,957,500
Textiles--0.3% B+ B1 1,100,000 Fieldcrest Cannon, Inc., 6% due 3/15/2012 753,500 863,500
Water Treatment BB+ B2 3,000,000 US Filter Corporation, 4.50% due 12/15/2001 3,000,000 2,917,500
Systems--1.0%
Total Convertible Debentures--27.3% 83,233,890 82,674,624
Shares
Held Convertible Preferred Stocks
Banking & A Aa3 38,400 Banc One Corporation, $3.50, Series C 2,509,287 3,571,200
Finance--1.5% NR* A1 10,000 Jefferson Pilot Corp. (ACES)
(into Nations Bank Corp.) 725,000 1,147,500
------------ ------------
3,234,287 4,718,700
Chemicals-- A A2 335,800 Atlantic Richfield Company (ARCO) (a) 7,478,031 7,219,700
2.4%
Energy--0.7% BB- Ba3 40,000 CalEnergy Capital Trust II, 6.25% (c) 2,000,000 2,230,000
Insurance-- BBB+ A1 50,000 Kemper Corp., Series E 2,621,000 2,618,750
1.6% NR* NR* 2,000 Westbridge Capital Corporation, Series A++ 2,000,000 2,240,000
------------ ------------
4,621,000 4,858,750
Minerals--0.8% NR* Ba1 43,150 Cyprus Amax Minerals Co., $4.00, Series A 2,312,840 2,340,887
Paper--2.5% BBB+ Baa1 85,000 International Paper Co., $5.25 4,041,750 4,483,750
BB+ Ba2 85,000 James River Corp. of Virginia, Series P 1,992,600 2,932,500
------------ ------------
6,034,350 7,416,250
Precious NR* B2 180,900 Coeur d'Alene Mines Corporation 3,177,874 3,030,075
Metals--1.0%
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1997 (continued)
<CAPTION>
S&P Moody's Shares Value
Industry Rating Rating Held Convertible Preferred Stocks Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Real Estate BBB Baa3 30,000 Public Storage Inc., $2.062 $ 759,300 $ 1,470,000
Investment
Trust--0.5%
Restaurants-- BBB Baa2 35,000 Wendy's International, Inc., Series A 1,750,000 2,051,875
0.7%
Steel--2.2% B B1 52,000 AK Steel Holding Corp. 1,348,342 2,002,000
B B3 83,500 WHX Corporation, Series A 3,320,878 3,136,469
A- A3 103,610 Worthington Industries, Inc. 1,751,527 1,631,857
------------ ------------
6,420,747 6,770,326
Transportation BBB- Ba2 10,000 CNF Transportation Inc., Series A 500,000 560,000
- --0.2%
Total Convertible Preferred Stocks--14.1% 38,288,429 42,666,563
Common Stocks
Drug Distribution 27,400 Bindley Western Industries Inc. 526,144 628,487
- --0.2%
Electronics-- 64,000 Avnet, Inc. 2,956,790 3,680,000
1.2%
Financial Services 34,375 Nal Acceptance Corp. (Warrants) (b)++++ 0 6,445
- --0.0%
Food & Beverage--1.6% 149,600 RJR Nabisco, Inc. 4,918,100 4,936,800
Funeral Services-- 83,056 Service Corporation International 1,520,250 2,730,466
0.9%
Health Services-- 15,000 Allegiance Corporation 91,946 408,750
0.6% 81,500 Regency Health Services Inc. (d) 927,702 1,253,062
------------ ------------
1,019,648 1,661,812
Hospital Supplies-- 7,000 Baxter International, Inc. 102,503 365,750
0.1%
Metal Fabricating-- 128,479 Trinity Industries Leasing Co. 2,438,512 4,079,208
1.4%
<PAGE>
Paper--0.4% 34,700 Boise Cascade Corporation 1,147,182 1,225,344
Paper/Machine--1.4% 193,800 Albany International Corp., Class A 3,777,519 4,360,500
Semiconductors-- 249,800 Cypress Semiconductor Corporation (d) 2,994,388 3,622,100
1.9% 200,000 Integrated Device Technology, Inc. (d) 2,542,863 2,100,000
------------ ------------
5,537,251 5,722,100
Steel--0.1% 25,200 WHX Corporation (d) 219,832 192,150
Technology--0.0% 18,000 BroadBand Technologies, Inc. (d) 373,500 144,000
Temporary Business 188,200 Olsten Corporation (The) 3,078,413 3,658,137
Services--1.2%
Utilities--0.2% 76,248 Citizens Utilities Company, Class A 893,115 714,823
Waste Management-- 16,918 Allied Waste Industries, Inc. (d) 80,883 287,606
0.1%
Total Common Stocks--11.3% 28,589,642 34,393,628
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of June 30, 1997 (concluded)
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <S> <C> <C>
Commercial Paper** $ 1,000,000 Associates Corp. of North America, 5.40%
- --46.0% due 7/03/1997 $ 999,550 $ 999,550
13,000,000 CSW Credit, Inc., 5.55% due 7/23/1997 12,953,904 12,953,904
15,000,000 Ciesco L.P., 5.53% due 7/21/1997 14,951,613 14,951,613
15,000,000 Corporate Asset Funding Co., 5.55% due
7/14/1997 14,967,625 14,967,625
15,000,000 Countrywide Home Loans, Inc., 5.56% due
7/29/1997 14,932,817 14,932,817
5,000,000 Eureka Securitization, Inc., 5.60% due
7/01/1997 4,999,222 4,999,222
15,000,000 GTE Corp., 5.55% due 7/18/1997 14,958,375 14,958,375
14,000,000 General Electric Co., 5.55% due 7/31/1997 13,933,092 13,933,092
6,440,000 General Motors Acceptance Corp., 6.25% due
7/01/1997 6,438,882 6,438,882
15,000,000 Goldman Sachs Group, L.P., 5.55% due
7/31/1997 14,928,313 14,928,313
14,000,000 Lehman Brothers Holdings, Inc., 5.58% due
7/25/1997 13,945,750 13,945,750
Preferred Receivable Funding Corp.:
2,000,000 5.58% due 7/29/1997 1,991,010 1,991,010
9,180,000 5.58% due 7/30/1997 9,137,313 9,137,313
<PAGE>
Total Short-Term Securities--46.0% 139,137,466 139,137,466
Total Investments--98.7% $289,249,427 298,872,281
============
Short Sales (Proceeds--$5,363,638)--(1.7%) (5,281,863)
Other Assets Less Liabilities--3.0% 8,979,486
------------
Net Assets--100.0% $302,569,904
============
<FN>
(a)Convertible into Lyondell Petrochemical Co.
(b)Warrants entitle the Company to purchase a predetermined number
of shares of Common Stock. The purchase price and number of shares
are subject to adjustment under certain conditions until the
expiration date.
(c)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(d)Non-income producing security.
(e)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 June 30, 1997 were as
follows:
Value
Shares Issue (Notes 1a & 1g)
70,700 Engle Homes, Inc. $ (707,000)
150,200 Lyondell Petrochemical Co. (3,276,238)
5,500 Polyphase Corporation (8,250)
133,200 Westbridge Capital Corporation (1,290,375)
------------
Total (Proceeds--$5,363,638) $ (5,281,863)
============
++++Restricted securities as to resale. The value of the Company's
investment in restricted securities was approximately $2,561,000,
representing 0.8% of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
<PAGE>
Nal Acceptance Corp.,
10% due 9/12/1998 9/12/1996 $2,750,000 $2,255,000
Nal Acceptance Corp. (Warrants) 9/12/1996 0 6,445
Polyphase Corporation,
12% due 7/01/1999 7/05/1994 2,000,000 300,000
Total $4,750,000 $2,561,445
========== ==========
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Statement of Assets, Liabilities and Capital as of June 30, 1997
<S> <C> <C>
Assets:
Investments, at value (identified cost--$289,249,427) (Note 1a) $298,872,281
Cash 1,591,576
Deposit on short sales (Note 1g) 5,877,506
Receivables:
Securities sold $ 5,825,353
Interest 1,130,296
Dividends 313,647 7,269,296
------------
Deferred organization expenses (Note 1e) 22,259
Prepaid expenses and other assets 221,461
------------
Total assets 313,854,379
------------
Liabilities:
Common stocks, sold short, at market value (proceeds--$5,363,638) (Notes 1a & 1g) 5,281,863
Payables:
Securities purchased 5,509,652
Investment adviser (Note 2) 442,973
Dividends on short sales 36,623 5,989,248
------------
Accrued expenses and other liabilities 13,364
------------
Total liabilities 11,284,475
------------
Net Assets $302,569,904
============
<PAGE>
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 3,797,222
------------
Net asset value, equivalent to $9.63 per share based on 11,653,700 shares
outstanding (market value--$9.5625) $112,176,632
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 145,690,000
------------
Total 146,855,370
------------
Undistributed realized gain on investments--net 33,833,438
Unrealized appreciation on investments--net 9,704,464
------------
Total 43,537,902
------------
Net asset value, equivalent to $16.34 per share based on 11,653,700 shares
outstanding (market value--$16.00) 190,393,272
------------
Net Assets $302,569,904
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Statement of Operations for the Six Months Ended June 30, 1997
<CAPTION>
<S> <C> <C>
Investment Income (Notes 1c & 1d):
Interest and discount earned $ 6,023,857
Dividends 2,350,483
------------
Total income $ 8,374,340
<PAGE>
Expenses:
Investment advisory fees (Note 2) 880,490
Dividends on securities sold short 190,393
Transfer agent fees 49,518
Accounting services (Note 2) 49,477
Professional fees 34,646
Interest on securities sold short 27,360
Printing and shareholder reports 24,149
Directors' fees and expenses 22,178
Custodian fees 14,048
Amortization of organization expenses (Note 1e) 10,874
Insurance 2,417
Pricing services 1,510
Other 19,481
------------
Total expenses 1,326,541
------------
Investment income--net 7,047,799
------------
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency
Transactions--Net (Notes 1b, 1c, 1d & 3):
Realized gain from:
Investments--net $ 35,188,298
Foreign currency transactions--net 388 35,188,686
------------
Change in unrealized appreciation/depreciation on:
Investments--net (26,280,374)
Foreign currency transactions--net 493 (26,279,881)
------------
Net realized and unrealized gain on investments and foreign currency transactions 8,908,805
------------
Net Increase in Net Assets Resulting from Operations $ 15,956,604
============
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, December 31,
1997 1996
Increase (Decrease) in Net Assets:
<S> <C> <C>
Operations:
Investment income--net $ 7,047,799 $ 14,105,139
Realized gain on investments and foreign currency transactions--net 35,188,686 19,882,034
Income taxes on realized gain on investments -- (4,841,320)
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net (26,279,881) 17,386,219
------------ ------------
Net increase in net assets resulting from operations 15,956,604 46,532,072
------------ ------------
Dividends & Distributions to Shareholders (Notes 1f & 4):
Investment income--net (3,379,573) (14,192,493)
Realized gain on investments--net -- (7,473,704)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to shareholders (3,379,573) (21,666,197)
------------ ------------
Net Assets:
Total increase in net assets 12,577,031 24,865,875
Beginning of period 289,992,873 265,126,998
------------ ------------
End of period* $302,569,904 $289,992,873
============ ============
<FN>
*Undistributed investment income--net $ 3,797,222 $ 128,996
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Financial Highlights
<CAPTION>
For the Six
Months Ended
The following per share data and ratios have been derived June 30, For the Year Ended December 31,
from information provided in the financial statements. 1997++++ 1996++++ 1995 1994 1993
<PAGE>
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Income Shares:
Per Share Operating Performance:
Net asset value, beginning of period $ 9.31 $ 9.32 $ 9.30 $ 9.30 $ 9.30
-------- -------- -------- -------- --------
Investment income--net .61 1.21 1.23 1.19 1.20
Dividends of investment income--net (.29) (1.22) (1.21) (1.19) (1.20)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.63 $ 9.31 $ 9.32 $ 9.30 $ 9.30
======== ======== ======== ======== ========
Market price per share, end of period $ 9.5625 $ 9.625 $ 10.00 $ 10.00 $ 10.625
======== ======== ======== ======== ========
Total Investment Return:**
Based on market value per share 2.43%+++ 9.22% 13.58% 6.61% 7.20%
======== ======== ======== ======== ========
Based on net asset value per share 6.65%+++ 13.35% 13.82% 13.28% 13.50%
======== ======== ======== ======== ========
Capital Shares:
Per Share Operating Performance:
Net asset value, beginning of period $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87
-------- -------- -------- -------- --------
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .77 2.78 2.66 (2.12) 1.43
Distributions of realized gain on investments--net -- (.64) (.36) (.01) (1.17)
Effect of repurchase of Treasury Stock -- -- --++ .05 .08
-------- -------- -------- -------- --------
Net asset value, end of period $ 16.34 $ 15.57 $ 13.43 $ 11.13 $ 13.21
======== ======== ======== ======== ========
Market value per share, end of period $ 16.00 $ 14.625 $ 11.625 $ 9.00 $ 10.875
======== ======== ======== ======== ========
Total Investment Return:**
Based on market value per share 9.40%+++ 30.87% 33.20% (17.17%) 28.77%
======== ======== ======== ======== ========
Based on net asset value per share 4.95%+++ 20.60% 24.44% (15.68%) 13.94%
======== ======== ======== ======== ========
Total Fund:
Ratios to Average Net Assets:
Total expenses*** .90%* .78% .79% .87% .80%
======== ======== ======== ======== ========
Investment income--net 4.81%* 4.98% 5.40% 5.43% 5.10%
======== ======== ======== ======== ========
<PAGE>
Supplemental Data:
Net assets, end of period (in thousands) $302,570 $289,993 $265,127 $238,466 $274,999
======== ======== ======== ======== ========
Portfolio turnover 66.65% 129.06% 87.69% 69.37% 116.03%
======== ======== ======== ======== ========
Average commission rate paid+++++ $ .0530 $ .0447 -- -- --
======== ======== ======== ======== ========
<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).
+++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.
++Amount is less than $.01 per capital share.
++++Based on average shares outstanding during the period.
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
<PAGE>
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) 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 12-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.
<PAGE>
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, 1997, the Company paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $1,456 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, and/or ML & Co.
In addition, MLPF&S received $108,196 in commissions on the
execution of portfolio security transactions for the Company for the
six months ended June 30, 1997.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1997 were $129,495,979 and
$239,258,357, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were
as follows:
Realized Unrealized
Gains Gains (Losses)
<PAGE>
Long-term investments $35,110,188 $ 9,622,854
Short sales 78,110 81,775
Foreign currency transactions 388 (165)
----------- -----------
Total $35,188,686 $ 9,704,464
=========== ===========
As of June 30, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $9,622,854, of which $16,157,832 related to
appreciated securities and $6,534,978 related to depreciated
securities. The aggregate cost of investments at June 30, 1997 for
Federal income tax purposes was $289,249,427.
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, 1997, there were 15,000,000 shares of $.10 par value
authorized for each class. During the six months ended June 30,
1997, 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.
On September 27, 1996, the Board of Directors authorized the
redemption of the Income Shares to take place on July 31, 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.
<PAGE>
6. Subsequent Event:
On July 7, 1997, the Company's Board of Directors declared an
ordinary income dividend to shareholders in the amount of $.327529
payable on July 24, 1997 to shareholders of record as of July 17,
1997.
In addition, on August 1, 1997, the Company coverted to an open-end
investment company and changed its name to Merrill Lynch Convertible
Fund, Inc.
Convertible Holdings, Inc.
Ten Largest Holdings
Altantic Richfield Company (ARCO)
Integrated Health Services Inc., 6% due 1/01/2003
Healthsource, Inc., 5% due 3/01/2003
RJR Nabisco, Inc.
Thermo Instrument Systems, Inc., 4.50% due 10/15/2003
Home Depot, Inc., 3.25% due 10/01/2001
International Paper Co., $5.25
Albany International Corp., Class A
Trinity Industries Leasing Co.
Quantum Health Resources, Inc., 4.75% due 10/01/2000
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.
<PAGE>
On July 31, 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 continue
as an open-end investment company (i.e., a mutual fund) as approved
by Capital Shareholders.
Share Comparison
The following is a brief summary of certain rights of each class of
shares of the Company.
Capital Shares Income Shares
Entitled to all the port- Entitled to all the port-
folio's appreciation. folio's net income, paid
quarterly.
No distributions from net Minimum cumulative
income received as long dividend of $1.00
as Income Shares are annually.
outstanding.
Bear none of the Com- Pay all of the Company's
pany's expenses. expenses.
Potential for capital Potential for growing
appreciation with poten- income stream if portfolio
tial lower downside risk appreciates over time.
than a leveraged com-
mon stock portfolio.
NYSE symbol CNV NYSE symbol CNV Pr
Convertible Holdings, Inc.
Glossary
Break-Even Time
This calculation, based on a dollar-for-dollar basis, shows the
number of years over which the dollar conversion premium may be
recovered by the increased dollar income of the convertible over
that of the underlying common stock, assuming no change in the
dividend on the underlying stock. (Also called the premium recovery
period.)
<PAGE>
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.
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
Joseph T. MonagleJr.--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
Ira P. Shapiro--Secretary
<PAGE>
Custodian
The Chase Manhattan Bank
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