Convertible
Holdings,
Inc.
FUND LOGO
Annual Report
December 31, 1996
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 December 31, 1996, Convertible
Holdings, Inc. Capital Shares had a total investment return of
+12.24%, based on a change in per share net asset value from $14.43
to $15.57, and assuming reinvestment of $0.641 per share short-term
capital gains. During the same period, total investment return on
Income Shares was +6.51%, based on a change in per share net asset
value from $9.59 to $9.31, and assuming reinvestment of $0.898 per
share income dividends.
For the year ended December 31, 1996, per share net asset value for
Convertible Holdings, Inc. Capital Shares increased from $13.43 to
$15.57. Total investment return was +20.60%, assuming reinvestment
of $0.641 per share short-term capital gains. During the same
period, total return for Income Shares was +13.35%, based on a
change in per share net asset value from $9.32 to $9.31, and
assuming reinvestment of $1.218 per share income dividends.
<PAGE>
The Environment
In last year's annual report to shareholders, we predicted that the
stock market would do well in 1996 notwithstanding seemingly extreme
high valuation levels based on book values and dividend yields. We
believed that the strong positive fundamentals which led to the
unusually good returns for stocks in 1995--namely moderate economic
growth, low inflation and relatively low and stable long-term
interest rates--were unlikely to be quickly reversed. In addition,
the stock market was selling at attractive levels of about 14 times
estimated earnings versus a long-term average of about 17 times. In
our view, structural changes in the economy and tax codes made
valuation measures based on book values and dividend yields less
meaningful than those based on earnings. We also expected the stock
market to narrow as it advanced, making selectivity increasingly
important. Our endeavor was to narrow the focus of the fund to
capitalize on this trend.
The stock market performed quite well in 1996. It narrowed as it
advanced, but was stronger than we expected. The Dow Jones
Industrial Average (+29.49%) outperformed all of the unmanaged
broader indexes including the Standard & Poor's 500 (+22.98%),
Russell 1000 (+22.45%), 2000 (+16.49%) and 3000 (+21.82%), the
NASDAQ composite (+22.71%), the New York Stock Exchange composite
(+19.06%), and the Value Line Indexes (both geometric, +13.80% and
arithmetic, +20.30%). The extreme overvaluation of the market based
on dividend yields and book values became even more extreme. For
example, the Dow Jones Industrial Average's already record low
dividend yield declined from 2.3% to a new record of 2.02%, while
the price to book value multiple increased from a record 3.9 times
to a new record of 4.9 times. The S&P 500 also displayed this trend.
The record low dividend yield at year-end 1995 of 2.3% declined to a
new record of 1.98% by year-end 1996. The price/book value multiple
at year-end 1996 expanded to a record 4.3 times versus its previous
record of 3.7 times at 1995 year-end.
Convertible securities did very well in 1996, with the average open-
end mutual fund in the Lipper Analytical Database (Lipper) returning
+14.82% for the year. The average closed-end convertible fund's
total return was +14.74% for 1996. Convertible Holdings, Inc.'s
total return of +17.53% for 1996 compares quite favorably to these
averages. This performance ranks convertibles second after emerging
market debt (+40.7%) in total return out of the 33 fixed-income sub-
categories as delineated by Lipper. Convertible issues continued
their superior long-term historical performance relative to the
fixed-income universe. According to Lipper, they rank first in
cumulative reinvested total return for the 5-year (+77.5%), 10-year
(+162.1%) and 15-year periods (+566.7%) ended December 31, 1996.
Convertible Holdings, Inc. outperformed the unmanaged Merrill Lynch
All Convertible Index (+15.9%), Value Line Convertible Index
(+16.24%) and the geometric Value Line Stock Index. If we were an
open-end fund, our performance would have ranked us 15 out of 43
open-end convertible funds tracked by Lipper, outperforming 65% of
these funds. Compared to all closed-end funds, we ranked third out
of ten. The fund's total return for 1996 (+17.53%) more than tripled
that of the Lipper average of all fixed-income funds total return of
+4.68% and compares quite favorably to the Lipper average total
return for all equity funds of +17.72%.
<PAGE>
The statistical overview of the convertible market at year-end 1996
compared to year-end 1995 shows that current yields, conversion
premiums, premiums over investment value and median prices were
virtually unchanged. This was more of a statistical anomaly than a
true reflection of the convertible market's stability since the
market was volatile between annual statement dates. As bond yields
rose through mid-year, stock prices corrected lower, reaching a low
in July. Thereafter, the bond market stabilized and began to recover
and the bull market in stocks continued. The convertible market
ended 1996 with a current yield of 5.24%, a conversion premium of
21.6%, a premium over investment value of 56% and a median price of
104.87. This compares with a current yield of 5.3%, a conversion
premium of 21.2%, premium over investment value of 58.6% and a
median price of 104.50 for the prior year. The only statistics which
changed meaningfully versus last year were the break-even and call
protection numbers. The break-even of the convertible market
increased 15% from 3.3 years at year-end 1995 to 3.8 years at year-
end 1996. Call protection increased 38% from 1.6 years to 2.2 years
because of the calling for redemption of many older convertibles
outstanding combined with heavy new convertible issuance. We view
the convertible market as statistically more attractive than last
year. Even though break-even time increased, time to call increased
more, in percentage terms. (Refer to the "Glossary" on page 18 of
this report to shareholders for an explanation of the terms used.)
Stock prices increased about 70% in the past two years and 175% in
the past six years since the low in 1990. Historically, years
following large multi-year upward price moves were either flat to
mildly lower consolidation years or alternatively, reversal years
with bona fide bear markets ensuing. While we don't purport to know
when this market upmove will end, this historical precedent tempers
our enthusiasm for the stock market's prospects in 1997.
Investment Activities
In our semi-annual report we discussed our belief that semiconductor
stocks were at a bottom with the average discount of eight stocks
down 51% from the previous 12-month highs. By year-end, semi-
conductor stocks, as measured by the Philadelphia Semiconductor
Index, gained 74% from early July lows. Although fundamental
improvement is definitely in sight, we believe that the rapid turn
around in stock prices has now discounted reasonable earnings
expectations for 1997. Therefore, we intend to focus on other
segments of technology as well as depressed sectors of the
healthcare industry.
<PAGE>
Since year-end 1995, we narrowed the focus of the fund, reducing the
number of companies held from approximately 125 to 88. Over the past
several months, we added to our technology holdings in Apple
Computer Inc., cisco Systems Inc., Cypress Semiconductor Corp., EMC
Corp., Microsoft Corp., and Storage Technology Corp. We also added
to our holdings in Key Energy Group Inc., a small but rapidly
growing oil service company, and invested in Thermo Electron Corp.
and Thermo Instrument Corp. These conglomerates manufacture and sell
monitoring and analysis instruments, papermaking and recycling
equipment, biomedical products, biomass electric power generation,
and other specialized products and technologies. We also purchased
US Filter Corp., one of the largest water treatment companies in the
world; SunAmerica Inc., a financial services company specializing in
retirement products and services; and NAL Acceptance Corp., a
financial company that originates, purchases, remarkets and services
sub-prime auto loans and leases.
Other additions included Wendy's International Inc., the nations
fifth largest fast food chain; Pier 1 Imports Inc., a specialty
retailer of imported decorative home furnishings; and Home Depot
Inc., the nation's largest and one of the most rapidly growing
retail home improvement supply companies, servicing the do-it-
yourself market. We took profits in American Medical Response, Cal
Energy Inc., Hudson Foods Inc., Rexel Inc., Safeguard Scientifics
Inc., Southern National Corp., Washington Mutual Inc., American
General Corp., Deposit Guaranty Corp., Guilford Mills Inc., Pacific
Gulf Properties Inc., Southdown Inc., and Time Warner Inc.
(convertible into Hasbro). We sold Cyrix Corp., Michael Stores Inc.,
Repap Enterprises Inc., Sappi Limited, Savoy Pictures Entertainment
Inc., and Schuler Homes Inc. because of negative changes in their
fundamentals.
The Company's Income Shares will be redeemed on July 31, 1997. On
February 13, 1997, Capital Shareholders approved a proposal to
convert the Company from a closed-end investment company to an open-
end investment company. Investment objectives and policies will also
be modified and the fund's name will be changed to Merrill Lynch
Convertible Fund, Inc. We believe that the new fund will possess
attractive investment merits and hope to retain a significant
percentage of Capital Shareholders in the new fund. Over the period
through July 31, 1997, investment activities will address the need
to redeem Income Shares and the uncertainties associated with re-
demption shares for those Capital Shareholders who do not choose to
remain in the fund. We anticipate rising cash positions and the
liquidation of certain less marketable holdings in preparation for
this transition. Given the fund's recent and past successes and the
fact that Lipper ranked the convertible asset class first of all
fixed-income classes in cumulative reinvested total return for 5-
year, 10-year and 15-year periods, we are excited about our
prospects going forward, and enthusiastically encourage your
continued investment with us.
<PAGE>
In Conclusion
We invite you to come along with us on the next stage of our journey
as we move toward becoming an open-end fund. We thank you for your
continued support of Convertible Holdings, Inc., and we look forward
to serving your investment needs in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Daniel A. Luchansky)
Daniel A. Luchansky
Vice President and Portfolio Manager
February 14, 1997
As of December 31, 1996, N. John Hewitt retired as Senior Vice
President of the Company. His colleagues at Merrill Lynch Asset
Management, L.P. join the Company's Board of Directors in wishing
Mr. Hewitt well in his retirement.
Convertible Holdings, Inc.
Proxy Results
<TABLE>
During the six-month period ended December 31, 1996, Convertible
Holdings, Inc. Capital Shareholders voted on the following
proposals. Proposals 1 and 2 were approved at the annual
shareholders' meeting on December 16, 1996. Proposal 3 was approved
at a shareholders' meeting on February 13, 1997. Proposals 4--7 were
approved at a shareholders' meeting on January 16, 1997. The
description of each proposal and number of shares voted are as
follows:
<PAGE>
<CAPTION>
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 8,417,602 208,222
Herbert I. London 8,419,033 206,791
Robert R. Martin 8,408,708 217,116
Joseph L. May 8,421,782 204,042
Arthur Zeikel 8,404,740 221,084
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP as the independent auditors of the Company
to serve for the current fiscal year. 8,401,730 72,062 152,032
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
3. To consider and act upon a proposal to convert the Company from a
closed-end investment company to an open-end investment company
and approve the Amended and Restated Articles of Incorporation 7,809,740 597,438 235,604
4. To consider and act upon a proposal to change the Company's
investment objective and policies. 6,470,477 672,703 290,352
5. To consider and act upon a proposal to amend the Company's
fundamental investment restrictions. 6,459,339 666,858 307,335
6. To consider and act upon a proposal to approve an Amended
Investment Advisory Agreement between the Company and Merrill
Lynch Asset Management, L.P. ("MLAM") and a Sub-Advisory
between MLAM and Merrill Lynch Asset Management U.K. Limited. 6,424,863 702,127 306,542
7. To consider and act upon a proposal to implement the Merrill Lynch
Select Pricing SM System 6,319,530 712,161 401,841
</TABLE>
<TABLE>
During the six-month period ended December 31, 1996, Convertible
Holdings, Inc. Income Shareholders voted on the following proposals.
The proposals were approved at the annual shareholders' meeting on
December 16, 1996. The description of each proposal and number of
shares voted are as follows:
<PAGE>
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Company's Board of Directors--Income Shares: James H, Bodurtha 7,330,443 164,792
Herbert I. London 7,339,634 155,601
Robert R. Martin 7,332,213 163,022
Joseph L. May 7,338,959 156,276
Arthur Zeikel 7,339,634 155,601
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP as the independent auditors of the Company
to serve for the current fiscal year. 7,336,779 58,118 100,338
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1996
<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* Baa3 $ 1,900,000 Magna International Inc., 7.25% due 7/05/2005 $ 1,640,115 $ 1,906,934
Parts--1.2% BB- B1 2,000,000 Mascotech, Inc., 4.50% due 12/15/2003 1,565,000 1,640,000
------------ ------------
3,205,115 3,546,934
Computer/ Apple Computer, Inc.:
Business NR* NR* 1,750,000 6% due 6/01/2001 (d) 1,753,125 1,717,188
Equipment-- NR* NR* 3,500,000 6% due 6/01/2001 3,326,250 3,430,000
2.3% B- B2 1,500,000 Systems and Computer Technology Corp.,
6.25% due 9/01/2003 1,584,500 1,665,000
------------ ------------
6,663,875 6,812,188
Conglomerates BBB+ A3 2,500,000 Cooper Industries, Inc., 7.05%
- --3.3% due 1/01/2015 2,560,000 2,650,000
Polyphase Corporation++:
NR* NR* 1,000,000 12% due 12/01/1997 1,000,000 1,112,500
NR* NR* 2,000,000 12% due 7/01/1999 2,000,000 2,070,000
A- Ba2 3,000,000 Thermo Electron Corporation, 4.25% due
1/01/2003 3,465,000 3,682,500
------------ ------------
9,025,000 9,515,000
<PAGE>
Defense--0.5% NR* NR* 1,000,000 Diagnostic/Retrieval Systems, Inc., 9% due
10/01/2003*** 1,000,000 1,430,000
Energy--2.4% BB+ NR* 7,000,000 USX Corp., 7% due 6/15/2017 6,250,000 6,973,750
Environmental BBB+ Baa2 3,500,000 Laidlaw Inc., 6% due 1/15/1999 4,550,000 4,672,500
- --2.6% A- NR* 3,187,000 Thermo TerraTech, Inc., 4.625% due
5/01/2003 (d) 2,891,246 2,900,170
------------ ------------
7,441,246 7,572,670
Financial NR* NR* 2,750,000 Nal Acceptance Corp., 10% due 9/12/1998++ 2,750,000 3,437,500
Services-- NR* NR* 2,500,000 Pioneer Financial Services, Inc., 6.50% due
2.4% 4/01/2003 2,500,000 3,462,500
------------ ------------
5,250,000 6,900,000
Gaming--0.1% B- B3 377,000 Argosy Gaming Company, 12% due 6/01/2001 338,885 306,784
Health Care-- B B3 14,254,000 GranCare Inc., 6.50% due 1/15/2003 14,307,675 14,610,350
8.3% B- B2 6,000,000 Integrated Health Services Inc., 6% due
1/01/2003 5,640,000 5,820,000
BBB+ Ba1 4,122,000 Quantum Health Resources, Inc., 4.75% due
10/01/2000 3,547,597 3,709,800
------------ ------------
23,495,272 24,140,150
Home Building B- B2 2,200,000 Continental Homes Holding Corp., 6.875%
- --1.5% due 11/01/2002 2,200,000 2,318,250
BB- Ba3 751,000 Toll Brothers Inc., 4.75% due 1/15/2004 627,190 762,265
B+ B1 1,500,000 US Home Corp., 4.875% due11/01/2005 1,316,875 1,327,500
------------ ------------
4,144,065 4,408,015
Insurance-- NR* NR* 1,831,000 Statesman Group, Inc. (The), 6.25% due
0.7% 5/01/2003 1,920,886 1,927,128
Machinery-- B+ B1 2,700,000 Varlen Corp., 6.50% due 6/01/2003 2,746,250 2,700,000
0.9%
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1996 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Medical NR* NR* $ 1,500,000 US Diagnostic Labs, Inc., 9% due $ 1,500,000 $ 1,852,500
Services--0.6% 3/31/2003 (d)
<PAGE>
Medical NR* Ba3 250,000 Bindley Western Industries, Inc., 6.50% due
Supplies--0.1% 10/01/2002 253,750 270,000
NR* NR* 550,000 Phoenix Shannon PLC, 9.50% due 11/01/2000 (d) 550,000 68,750
------------ ------------
803,750 338,750
Oil Services NR* NR* 6,100,000 Key Energy Group Inc., 7.50% due 7/01/2003 (d) 6,447,063 7,442,000
- --3.0% BBB- Ba2 1,000,000 Nabors Industries, Inc., 5% due 5/15/2006 1,000,000 1,235,000
------------ ------------
7,447,063 8,677,000
Paper--1.0% NR* NR* 11,270,000 Kymmene Corporation, 8.25% due 11/18/2043 2,867,286 2,803,970
Printing--0.6% NR* B1 2,065,000 Graphic Industries, Inc., 7% due 5/15/2006 1,840,438 1,858,500
Real Estate NR* B3 1,500,000 Capstone Capital Trust, Inc., 10.50% due
Investment 4/01/2002 1,631,250 2,068,125
Trust--0.7%
Restaurants-- B- B3 1,000,000 Hometown Buffet Inc., 7% due 12/01/2002 1,000,000 1,027,500
0.4%
Retail Stores B- B3 1,725,000 Baby Superstore Inc., 4.875% due 10/01/2000 1,677,313 1,707,750
- --4.3% B- B3 2,475,000 Baker (J.) Inc., 7% due 6/01/2002 1,936,267 1,980,000
A+ A1 4,000,000 Home Depot, Inc., 3.25% due 10/01/2001 4,000,000 3,900,000
B+ B1 2,500,000 Pier 1 Imports, Inc., 5.75% due 10/01/2003 2,500,000 2,650,000
B- B2 3,250,000 Sports & Recreation, Inc., 4.25% due
11/01/2000 2,442,875 2,380,625
------------ ------------
12,556,455 12,618,375
Scientific NR* NR* 4,750,000 Thermo Instrument Systems Inc., 4.50% due
Equipment--1.7% 10/15/2003 (d) 4,780,000 4,845,000
Semiconductor-- NR* A3 5,250,000 Cypress Semiconductor Corporation, 3.15%
2.0% due 3/15/2001 (d) 4,840,016 5,722,500
Technology-- NR* NR* 1,000,000 Broadband Technologies, Inc., 5% due
0.3% 5/15/2001 813,750 765,000
Textiles-- B+ B1 3,806,000 Fieldcrest Cannon, Inc., 6% due
1.0% 3/15/2012 2,889,280 2,883,045
Water Treatment BB+ B2 3,000,000 US Filter Corp., 4.50% due 12/15/2001 3,000,000 3,052,500
Systems--1.1%
Total Convertible Debentures--43.0% 117,449,882 124,745,384
<PAGE>
Shares
Held Convertible Preferred Stocks
Automotive BB- B1 242,600 Masco Tech, Inc., $1.20 3,643,799 3,820,950
Parts--1.3%
Banking & A Aa3 38,400 Banc One Corporation, $3.50, Series C 2,509,287 3,187,200
Finance--4.1% A- A2 60,200 Boatmen's Bancshares, Inc., $1.75 1,667,550 3,326,050
NR* A1 10,000 Jefferson Pilot Corp. (ACES) (into Nations
Bank Corp.) 725,000 910,000
BB+ NR* 89,400 Union Planters Corp., $2.00, Series E 2,818,585 4,380,600
------------ ------------
7,720,422 11,803,850
Chemicals--0.1% A A2 19,000 Atlantic Richfield Company (ARCO) (b) 473,765 408,500
Computer AA- A1 34,200 Microsoft Corp., Series A 2,731,725 2,736,000
Software--1.0%
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1996 (continued)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Preferred Stocks Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Financial A- Baa1 71,700 SunAmerica Inc. $ 2,688,750 $ 3,029,325
Services--1.0%
Funeral--0.8% BBB Baa3 25,000 SCI Finance, $3.125, Series A 1,520,250 2,353,125
Insurance--0.8% NR* NR* 2,000 Westbridge Capital Corporation, Series A 2,000,000 2,344,000
Minerals--0.9% NR* Ba1 43,150 Cyprus Amax Minerals Co., $4.00, Series A 2,312,840 2,485,440
Paper--1.5% BB+ Ba2 23,800 James River Corp. of Virginia, $3.375,
Series K 1,092,551 1,222,725
BB+ Ba2 9,400 James River Corp. of Virginia $3.50,
Series L 444,514 486,450
BB+ Ba2 85,000 James River Corp. of Virginia, Series P 1,992,600 2,677,500
------------ ------------
3,529,665 4,386,675
Precious NR* B2 217,600 Coeur d'Alene Mines Corporation 3,793,296 3,808,000
Metals--1.3%
<PAGE>
Real Estate BBB Baa3 80,000 Merry Land & Investment Co., Inc., $2.15,
Investment Series C 2,000,000 2,110,000
Trust--3.1% BBB Baa3 40,000 Merry Land & Investment Services, Inc.,
$1.75, Series A 1,000,000 1,145,000
BBB Baa3 60,000 Public Storage Inc., $2.062 1,518,600 3,127,500
BBB+ Baa3 80,000 Security Capital Pacific Trust, Series A 2,000,000 2,450,000
------------ ------------
6,518,600 8,832,500
Restaurants-- BBB Baa2 70,000 Wendy's International, Inc., Series A 3,500,000 3,640,000
1.3%
Steel--0.6% B B1 52,000 AK Steel Holding Corp. 1,348,342 1,833,000
Technology NR* A1 30,000 Morgan Stanley Group, Inc., Series C (into cisco
0.7% Systems, Inc.) 2,006,250 1,987,500
Tobacco--1.7% NR* Ba3 748,000 RJR Nabisco Holdings, Inc., Series C 4,093,744 5,049,000
Toys--1.8% B- B3 500,000 Tyco Toys, Inc., Series C 2,500,000 5,062,500
Waste A A1 85,000 Browning-Ferris Industries, Inc. 2,500,387 2,422,500
Management--
0.8%
Total Convertible Preferred Stocks--22.8% 52,881,835 66,002,865
Common Stocks
Automobile Parts--0.7% 52,800 Federal Mogul Corp. 1,243,968 1,161,600
14,800 Magna International Inc., Class A 329,559 825,100
------------ ------------
1,573,527 1,986,700
Banking & Finance--0.3% 20,000 Washington Mutual Savings Bank 220,278 865,000
Cement--0.9% 79,000 Medusa Corp. 2,666,125 2,715,625
Chemicals--0.3% 40,000 Lyondell Petrochemical Company 942,400 880,000
Computer Equipment--2.9% 254,536 EMC Corporation*** (e) 5,993,635 8,431,505
Computers--0.9% 57,700 Storage Technology Corporation (e) 2,045,431 2,747,963
Electronics--2.5% 30,000 Arrow Electronics, Inc. 994,375 1,605,000
81,395 Avnet, Inc. 3,769,959 4,741,259
64,154 Rexel SA (e) 890,670 1,018,445
------------ ------------
5,655,004 7,364,704
</TABLE>
<PAGE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1996 (continued)
<CAPTION>
Shares Value
Industry Held Common Stocks Cost (Note 1a)
<S> <C> <S> <C> <C>
Drug Distribution--0.3% 48,900 Bindley Western Industries Inc. $ 941,309 $ 947,437
Energy--0.6% 49,000 Calenergy Inc. (e) 1,079,135 1,647,625
Financial Services--0.7% 1 Nal Acceptance Corp. (Warrants) (c)++ 0 206,250
50,000 Onbancorp Inc. 1,737,500 1,856,250
------------ ------------
1,737,500 2,062,500
Food Processing--0.9% 137,800 Hudson Foods, Inc., Class A 2,044,553 2,618,200
Health Services--0.6% 15,000 Allegiance Corporation 91,946 414,375
126,500 Regency Health Services Inc. (e) 1,472,322 1,217,563
------------ ------------
1,564,268 1,631,938
Hospital Supplies--1.1% 75,000 Baxter International, Inc. 1,098,246 3,075,000
Metal Fabricating--1.7% 128,479 Trinity Industries Leasing Co. 2,974,237 4,817,962
Oil Services--0.6% 160,900 Key Energy Group Inc. (e) 1,540,282 1,890,575
Paper--1.0% 34,700 Boise Cascade Corporation 1,147,182 1,101,725
47,200 International Paper Co. 1,843,632 1,905,700
------------ ------------
2,990,814 3,007,425
Paper/Machine--1.5% 182,300 Albany International Corp., Class A (e) 3,504,705 4,215,687
Pharmaceuticals--0.2% 40,000 IVAX Corp. 636,600 410,000
Semiconductor Capital 40,000 Novellus Systems Inc. (e) 2,176,376 2,165,000
Equipment--0.7%
Semiconductors--1.3% 200,000 Integrated Device Technology, Inc. 2,542,863 2,725,000
45,400 Park Electrochemical Corporation 834,092 1,032,850
------------ ------------
3,376,955 3,757,850
Steel--0.6% 197,200 WHX Corp (e) 1,718,699 1,750,150
Technology--0.1% 18,000 BroadBand Technologies, Inc. 373,500 265,500
<PAGE>
Telecommunications--1.1% 173,364 ICG Communications, Inc.*** (e) 2,894,332 3,055,540
Utilities--0.6% 156,286 Citizens Utilities Company (Class A) 1,691,312 1,699,607
Waste Management--1.8% 316,351 Allied Waste Industries, Inc.*** (e) 1,509,180 2,886,703
162,000 Philip Environmental Inc. (ADR) (a) (e) 1,422,146 2,349,000
------------ ------------
2,931,326 5,235,703
Total Common Stocks--23.9% 54,370,549 69,245,196
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Schedule of Investments as of December 31, 1996 (concluded)
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <S> <C> <C>
Commercial Paper**-- $ 4,000,000 Coca-Cola Company (The), 5.80% due
11.3% 1/17/1997 $ 3,989,044 $ 3,989,044
10,000,000 Delaware Funding Corp., 5.50% due 1/10/1997 9,984,722 9,984,722
14,672,000 General Motors Acceptance Corp., 7.50%
due 1/02/1997 14,665,887 14,665,887
4,000,000 International Securitization Corporation,
5.80% due 1/22/1997 3,985,822 3,985,822
------------ ------------
32,625,475 32,625,475
US Government & Agency 10,000,000 Federal National Mortgage Association, 5.30%
Obligations**--3.4% due 1/08/1997 9,988,222 9,988,222
Total Short-Term Securities--14.7% 42,613,697 42,613,697
Total Investments--104.4% $267,315,963 302,607,142
------------
Short Sales (Proceeds--$12,209,627)--(4.0%) (11,515,803)
Liabilities in Excess of Other Assets--(0.4%) (1,098,466)
------------
Net Assets--100.0% $289,992,873
============
<PAGE>
<FN>
(a)American Depositary Receipts (ADR).
(b)Convertible into Lyondell Petrochemical Co.
(c)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.
(d)These securities may be offered and sold to "qualified insti-
tutional buyers" under rule 144A of the Securities Act of 1933.
(e)Non-income producing security.
*Not Rated.
**Commercial Paper and certain US Government & Agency Obligations
are 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, 1996 were as
follows:
<CAPTION>
Value
Shares Issue (Notes 1a & 1g)
<S> <S> <C>
241,100 Allied Waste Industries, Inc. $ (2,230,175)
73,900 Diagnostic/Retrieval Systems, Inc. (923,750)
160,800 EMC Corporation (5,326,500)
172,220 ICG Communications, Inc. (3,035,378)
Total (proceeds--$12,209,627) $(11,515,803)
============
++Restricted securities as to resale. The value of the Company's
investment in restricted securities was approximately $6,826,000,
representing 2.4% of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <S> <C> <C>
Nal Acceptance Corp.,
10% due 9/12/1998 9/12/1996 $2,750,000 $3,437,500
Nal Acceptance Corp. (Warrants) 9/12/1996 0 206,250
Polyphase Corporation:
12% due 12/01/1997 12/05/1996 1,000,000 1,112,500
12% due 7/01/1999 7/05/1994 2,000,000 2,070,000
Total $5,750,000 $6,826,250
========== ==========
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, 1996
<S> <C> <C>
Assets:
Investments, at value (identified cost--$267,315,963) (Note 1a) $302,607,142
Cash 22,969
Deposit on short sales (Note 1g) 11,559,616
Receivables:
Interest $ 2,051,283
Securities sold 1,173,890
Dividends 405,056 3,630,229
------------
Deferred organization expenses (Note 1e) 22,259
Prepaid expenses and other assets 34,191
------------
Total assets 317,876,406
------------
Liabilities:
Common stocks, sold short, at market value (proceeds--$12,209,627) (Notes 1a & 1g) 11,515,803
Payables:
Dividends to shareholders 10,944,793
Income taxes (Note 1c) 4,841,320
Investment adviser (Note 2) 445,812 16,231,925
------------
Accrued expenses and other liabilities 135,805
------------
Total liabilities 27,883,533
------------
Net Assets $289,992,873
============
Capital (Note 5):
Income Shares:
Par value $.10 per share; 15,000,000 shares authorized; shares issued 11,653,700 $ 1,165,370
Liquidation capital in excess of par 107,214,040
------------
108,379,410
Undistributed investment income--net 128,996
------------
Net asset value, equivalent to $9.31 per share based on 11,653,700 shares
outstanding market value--$9.625) $108,508,406
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
------------
Accumulated realized losses on investments--net* (1,355,248)
Unrealized appreciation on investments--net 35,984,345
------------
Total 34,629,097
------------
Net asset value, equivalent to $15.57 per share based on 11,653,700 shares
outstanding (market value--$14.625) 181,484,467
------------
Net Assets $289,992,873
============
<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, 1996
<S> <C> <C>
Investment Income (Notes 1c & 1d):
Interest and discount earned $ 10,364,183
Dividends (net of $2,260 foreign withholding tax) 5,941,459
------------
Total income $ 16,305,642
Expenses:
Investment advisory fees (Note 2) 1,695,738
Accounting services (Note 2) 99,274
Transfer agent fees 87,085
Professional fees 69,955
Printing and shareholder reports 49,591
Directors' fees and expenses 45,322
Amortization of organization expenses (Note 1e) 38,159
Interest on securities sold short 36,292
Custodian fees 26,466
Insurance 4,958
Dividends on securities sold short 4,704
Pricing services 2,983
Listing fees 250
Other 39,726
------------
Total expenses 2,200,503
------------
Investment income--net 14,105,139
------------
<PAGE>
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency
Transactions--Net (Notes 1b, 1c, 1d & 3):
Realized gain (loss) from:
Investments--net $ 19,901,753
Income taxes on realized gain on investments (4,841,320)
Foreign currency transactions (19,719) 15,040,714
------------
Change in unrealized appreciation/depreciation on:
Investments--net 17,386,660
Foreign currency transactions (441) 17,386,219
------------ ------------
Net realized and unrealized gain on investments and foreign currency transactions 32,426,933
------------
Net Increase in Net Assets Resulting from Operations $ 46,532,072
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Statements of Changes in Net Assets
<CAPTION>
For the Year
Ended December 31,
1996 1995
Increase (Decrease) in Net Assets:
<S> <C> <C>
Operations:
Investment income--net $ 14,105,139 $ 14,296,369
Realized gain on investments and foreign currency transactions--net 19,882,034 15,446,497
Income taxes on realized gain on investments (4,841,320) (3,631,624)
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net 17,386,219 19,334,251
------------ ------------
Net increase in net assets resulting from operations 46,532,072 45,445,493
------------ ------------
Dividends & Distributions to Shareholders (Notes 1f & 4):
Investment income--net (14,192,493) (14,117,464)
Realized gain on investments--net (7,473,704) (4,235,374)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to shareholders (21,666,197) (18,352,838)
------------ ------------
<PAGE>
Capital Share Transactions (Note 5):
Income shares -- (192,510)
Capital shares -- (238,874)
------------ ------------
Net decrease in net assets resulting from Treasury stock transactions -- (431,384)
------------ ------------
Net Assets:
Total increase in net assets 24,865,875 26,661,271
Beginning of year 265,126,998 238,465,727
------------ ------------
End of year* $289,992,873 $265,126,998
============ ============
<FN>
*Undistributed investment income--net (Note 1h) $ 128,996 $ 223,416
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Convertible Holdings, Inc.
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended December 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income Shares:
Per Share Operating Performance:
Net asset value, beginning of year $ 9.32 $ 9.30 $ 9.30 $ 9.30 $ 9.31
-------- -------- -------- -------- --------
Investment income--net 1.21 1.23 1.19 1.20 1.35
Dividends of investment income--net (1.22) (1.21) (1.19) (1.20) (1.36)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.31 $ 9.32 $ 9.30 $ 9.30 $ 9.30
======== ======== ======== ======== ========
Market price per share, end of year $ 9.625 $ 10.00 $ 10.00 $ 10.625 $ 11.25
======== ======== ======== ======== ========
<PAGE>
Total Investment Return:*
Based on market value per share 9.22% 13.58% 6.61% 7.20% 2.74%
======== ======== ======== ======== ========
Based on net asset value per share 13.35% 13.82% 13.28% 13.50% 15.17%
======== ======== ======== ======== ========
Capital Shares:
Per Share Operating Performance:
Net asset value, beginning of year $ 13.43 $ 11.13 $ 13.21 $ 12.87 $ 10.91
-------- -------- -------- -------- --------
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 2.78 2.66 (2.12) 1.43 2.03
Distributions of realized gain on investments--net (.64) (.36) (.01) (1.17) (.12)
Effect of repurchase of Treasury Stock -- --++ .05 .08 .05
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87
======== ======== ======== ======== ========
Market value per share, end of year $ 14.625 $ 11.625 $ 9.00 $ 10.875 $ 9.375
======== ======== ======== ======== ========
Total Investment Return:*
Based on market value per share 30.87% 33.20% (17.17%) 28.77% 38.11%
======== ======== ======== ======== ========
Based on net asset value per share 20.60% 24.44% (15.68%) 13.94% 19.48%
======== ======== ======== ======== ========
Total Fund:
Ratios to Average Net Assets:
Total expenses** .78% .79% .87% .80% .80%
======== ======== ======== ======== ========
Investment income--net 4.98% 5.40% 5.43% 5.10% 6.34%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $289,993 $265,127 $238,466 $274,999 $289,366
======== ======== ======== ======== ========
Portfolio turnover 129.06% 87.69% 69.37% 116.03% 76.54%
======== ======== ======== ======== ========
Average commission rate paid+++ $ .0447 -- -- -- --
======== ======== ======== ======== ========
<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).
+++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.
<PAGE>
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) 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.
<PAGE>
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date. Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses--Deferred organization expenses
are charged to expense on a straight-line basis over a twelve-year
period ending on July 31, 1997, the redemption date for the Income
Shares.
(f) Dividends and distributions--Dividends and distributions paid by
the Company are recorded on the ex-dividend dates.
(g) Short sales--When the Company engages in a short sale, an amount
equal to the proceeds received by the Company is reflected as an
asset and equivalent liability. The amount of the liability is
subsequently marked to market to reflect the market value of the
short sale. The Company maintains a segregated account of securities
and cash as collateral for the short sales. The Company owns
convertible bonds or stock of the same issuer which covers the short
sale. The Company is exposed to market risk based on the amount, if
any, that the market value of the stock exceeds 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 adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, $8,991,012 has been reclassified from accumulated net
realized capital losses to paid-in capital for the amount of long-
term capital gains net of taxes paid and $7,066 has been
reclassified from accumulated net realized capital losses to
undistributed net investment income. These reclassifications have no
effect on net assets or net asset values per share.
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.
<PAGE>
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, 1996, the Company paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $1,525 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.
In addition, MLPF&S received $177,752 in commissions on the
execution of portfolio security transactions for the Company for the
year ended December 31, 1996.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1996 were $352,903,170 and
$392,170,625, respectively.
Net realized and unrealized gains (losses) as of December 31, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $22,556,449 $35,291,179
Short-term investments 58 --
Short sales (2,654,754) 693,824
Foreign currency
transactions (19,719) (658)
----------- -----------
Total $19,882,034 $35,984,345
=========== ===========
<PAGE>
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $34,060,027, of which $37,018,635
related to appreciated securities and $2,958,608 related to
depreciated securities. The aggregate cost of investments at
December 31, 1996 for Federal income tax purposes was $268,547,115.
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, 1996, there were 15,000,000 shares of $.10 par value
authorized for each class. During the year ended December 31, 1996,
the Company's Income Shares and Capital Shares outstanding remained
constant at 11,653,700 and 11,653,700, respectively.
As long as any Income Shares are outstanding, the Company will not
issue any additional Capital Shares or Income Shares.
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. On February 13, 1997, the holders of Capital
Shares approved a proposal to convert the Company to an open-end
investment company.
<PAGE>
<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, 1996, the related statements of
operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period
then ended. These financial statements and the financial highlights
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at December
31, 1996 by correspondence with the custodian and broker. 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, 1996, 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 14, 1997
</AUDIT-REPORT>
<PAGE>
Convertible Holdings, Inc.
Important Tax Information (unaudited)
Of the ordinary income distributions paid quarterly to Income
Shareholders by Convertible Holdings, Inc. during its taxable year
ended December 31, 1996, 41.74% qualifies for the dividends received
deduction for corporations.
Additionally, the Company distributed short-term capital gains of
$0.641316 per share to capital shareholders of record on December
31, 1996.
Finally, Capital Shareholders of record on December 31, 1996 were
deemed to receive undistributed long-term capital gains of $1.186948
per share and were allocated Federal income taxes which have been
paid by the Company on the shareholders' behalf of $0.415432 per
share.
The undistributed capital gains allocated to Capital Shareholders
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, the cost basis of shares held by Capital
Shareholders should be increased by $0.771516 per share, which
represents the excess of the undistributed long-term capital gains
over the taxes paid.
Capital Shareholders should consult their 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.
Ten Largest Holdings (unaudited)
GranCare Inc., 6.50% due 1/15/2003
EMC Corporation
Key Energy Group Inc., 7.50% due 7/01/2003
USX Corp., 7% due 6/15/2017
Integrated Health Services Inc., 6% due 1/01/2003
Cypress Semiconductor Corporation, 3.15% due
3/15/2001
Tyco Toys, Inc., Series C
RJR Nabisco Holdings, Inc., Series C
Thermo Instrument Systems Inc., 4.50% due
10/15/2003
Trinity Industries Leasing Co.
<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.
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
<PAGE>
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.
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%.
<PAGE>
Convertible Holdings, Inc.
Officers and Directors
Arthur Zeikel--President and Director
Terry K. Glenn--Executive Vice President
and Director
James H. Bodurtha--Director
Herbert I. London--Director
Robert R. Martin--Director
Joseph L. May--Director
Andre F. Perold--Director
N. John Hewitt--Senior Vice President
Vincent T. Lathbury III--Vice President
Donald C. Burke--Vice President
Daniel A. Luchansky--Vice President and
Portfolio Manager
Barton A. Vogel--Vice President
Gerald M. Richard--Treasurer
Mark B. Goldfus--Secretary
Custodian
The Chase Manhattan Bank
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
