MERRILL LYNCH
CONVERTIBLE
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Annual Report
August 31, 1997
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless accompanied or
preceded by the Fund's current prospectus. Past performance results
shown in this report should not be considered a representation of future
performance. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than
their original cost. Statements and other information herein are as
dated and are subject to change.
Merrill Lynch
Convertible Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #10334 -- 8/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH CONVERTIBLE FUND, INC.
DEAR SHAREHOLDER
We are pleased to provide you with this first annual report for Merrill
Lynch Convertible Fund, Inc. As we announced in the June 30, 1997 semi-
annual report, on August 4, 1997 Merrill Lynch Convertible Fund, Inc.
converted to open-end status; that is, the Fund's shares are redeemable
at net asset value at any time. In addition, the Fund became available
through the Merrill Lynch Select PricingSM System; therefore, clients
can now purchase shares with an upfront sales charge (Class A or Class D
Shares), or at net asset value, subject to a contingent deferred sales
charge and/or an annual distribution fee (Class B or Class C Shares).
Holders of the Capital Shares of the closed-end fund became Class A
shareholders with this change. See "About Fund Performance" on page 4 of
this report to shareholders for a complete description of each class of
shares available. Performance information, including average annual
total returns, can be found on pages 4 and 5 of this report to
shareholders.
The Environment
The convertible market performed well this past year, benefiting from
sharply higher stock prices and a relatively benign interest rate
environment. Prices of convertible bonds got an added boost from a
dramatic increase in the volatility of stock prices which sustained
conversion premiums as a result of increases in the value of the call
options embedded within convertible bonds and convertible preferred
stocks.
During the year ended August 31, 1997, stocks advanced sharply in price
reflecting excellent fundamentals, which include a strong economic
environment, low inflation, and relatively stable and constructive
interest rates. However, we believe the valuation parameters of the
stock market discounted these positive fundamentals. As mentioned in our
June 30, 1997 report to shareholders, the stock market's valuations
based on book values and dividend yields are at historical highs. This
situation increases the risk in equities. If the economy is more robust
than expected, corporate earnings might be surprising. This could allow
for further upward potential for stocks. However, an economy strong
enough to accelerate earnings this much might 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.
Fiscal Year in Review
The Fund changed dramatically during the fiscal year ended August 31,
1997, having just completed its transition from a dual-structure closed-
end mutual fund to a multi-class open-end mutual fund. We also took this
opportunity to receive shareholder approval to modify the Fund's
investment objectives and policies. This conversion process started on
July 31, 1997 with the redemption of the Income Shares and
concluded with the change of our fiscal year.
During the fiscal year ended August 31, 1997, the Fund's Class A Shares'
net asset value increased 26.73% (including the performance of Capital
Shares prior to conversion, before charges and expenses) notwithstanding
the fact that about half of the Fund's assets were in cash during much
of this period. We maintained our cash reserves at this level to
accommodate the Fund's cash needs for the redemption of the Income
Shares as well as estimated liquidity needs for those Capital
shareholders wishing to reallocate their investments as the Fund became
open-ended. (Fund results shown do not reflect sales charges, and would
be lower if sales charges were included.)
During the 12 months ended August 31, 1997, we continued to consolidate
the Fund by reducing the number of positions and companies held. At the
start of the fiscal year, we held 112 positions in 99 companies. At the
end of the fiscal year, this figure had declined to 66 positions in 63
companies. This narrower focus allowed us to concentrate on security
selection and sector allocation to seek to enhance performance. For
example, we carried a large exposure to the pollution control sector,
which appreciated substantially during the year. In particular, two of
the investments we held during the year, Allied Waste Industries, Inc.
and Philip Environmental Inc., each nearly doubled in value. During the
year, other pollution control companies owned by the Fund which
contributed to our performance were USA Waste Services, Inc. and US
Filter Corporation. In addition, several of the companies held in the
Fund, while conglomerates, have exposure to pollution control. These
companies included Thermo Electron Corporation, Thermo Instrument
Systems Inc. and several of the Thermo spin-out companies.
While we have since sold most of the Fund's bank holdings for valuation
reasons, the Fund benefited greatly from its overweighting in this area
during the fiscal year. Such holdings included Banc One Corporation,
Boatmens' Bancshares, Inc., Deposit Guaranty Corp., Jefferson Pilot
Corp. (convertible into Nations Bank Corp.), Onbancorp Inc., Southern
National Corp. and Union Planters Corp. Only Jefferson Pilot Corp. and
BankAtlantic Bancorp., Inc. remained in the Fund at fiscal year-end.
When we bought most of these positions, the average bank stock sold for
about eight times earnings and about one times book value. Presently,
most banks are about 15 times earnings and about 2.5 times book value.
We had focused mainly on the regional banks, trying to capitalize on the
consolidation trend in force and their relative undervaluation.
The Fund benefited from many acquisitions and mergers during the 12
months ended August 31, 1997. Mergers and acquisitions affected several
of the banks already mentioned. In the financial services area, Pioneer
Financial Services Inc. and American Travelers Corp. were both acquired
by Conseco Inc. In healthcare, Regency Health Services, Inc. was
purchased by Sun Healthcare Group Inc. and Emergency Medical Response
was purchased by Laidlaw, Inc. Tyco Toys Inc. was taken over by Mattel
Inc. These acquisitions validated our original premise regarding the
values inherent in these businesses and their attractively low
stock valuations.
Our heavy exposure to the paper sector also contributed to the Fund's
performance during the fiscal year as paper prices firmed late in the
period, lifting the prices of paper stocks higher. Albany International
Corp., International Paper Co. and James River Corp. of Virginia were
Fund holdings that did particularly well. We took advantage of
opportunities to sell into strength. Only International Paper Co. and
small amounts of Albany International Corp. and Boise Cascade Corp.
remained in the Fund at fiscal year-end.
The technology sector, which we view as many sectors and not one
homogeneous area, was volatile during the 12 months and produced mixed
results. We had focused on the downtrodden semiconductor area through
our holdings in Cypress Semiconductor Corp., Integrated Device
Technology Inc. and Taiwan Semiconductor Co. and the semiconductor
equipment area through Novellus Systems Inc. Memory device companies
such as Storage Technology Corp. and EMC Corp. also added significantly
to Fund performance and were sold on strength. Safeguard Scientific, a
partnership of entrepreneurial companies focused on information
technology markets and which brings emerging technology companies public
through rights offerings to its shareholders, was another technology
company which was profitably bought and sold during the 12-month period.
We also profitably bought and sold Microsoft Corp. convertible preferred
stock. In addition, we also had exposure to two electronic parts
distributors stocks that were held after forced conversion of the
convertibles, Arrow Electronics Inc. and Avnet Inc. Both performed very
well, in our opinion, and consequently were later sold.
One area of disappointment for the Fund was in metals, where our
exposure to the steel sector through WHX Corp. and Worthington
Industries Inc. (convertible into Rouge Industries Inc.) hindered Fund
performance. AK Steel Holdings Corp., while up for the year,
underperformed the market. Coeur d'Alene Mines Corp., a silver and gold
producer, and Cypress Amax Minerals Co., a copper, molybdenum and
precious metals producer, were also disappointing as a result of weak
metal prices. Prices for these commodities continue to be weak. However,
the current low security valuations (indicating full discounting of
these problems), combined with near universal negativity regarding the
stocks, reinforce our positive long-term view on this sector. One aspect
about the steel sector which is of particular importance is that about
70% of the industry must renegotiate with its unions in 1998 and 1999.
This may lead to labor unrest and strikes. This has the effect of
tightening the supply/demand situation in the industry, improving raw
material prices and potentially earnings, as was recently the case when
WHX CORP. went on strike, the longest strike in the steel industry this
century.
We also had selective positions in the energy and oil service sectors
that were quite strong during the year. One of our largest positions was
in Key Energy Group Inc., an oil service company whose stock rose over
300% during the period. Most of the position was sold prior to fiscal
year-end. Other oil and gas investments that contributed to the Fund's
performance were the offshore oil drillers Diamond Offshore Drilling
Inc. and Nabors Industries Inc., and Callon Petroleum Co., a small
exploration and production company. USX-US Steel Group Inc. 7%
convertible debentures (which were convertible into one part USX-US
Steel Group Inc. and five parts USX-Marathon Group Oil) also provided
exposure to the oil sector. All of these were sold as investors'
perceptions of energy stocks moved from undervaluations and pessimism to
overvaluation and consensus optimism.
Finally, at the outset of the fiscal year, we had a large allocation in
common stocks (20.3% of total assets) which reflected our belief that
these stocks had excellent potential for appreciation since they were
historically inexpensive and the economic fundamentals were
constructive. We reduced the stock component of the Fund to 4.9% of
total assets by fiscal year-end 1997, based in part on our more cautious
stance on stocks.
In Conclusion
We thank you for your support of Merrill Lynch Convertible Fund, Inc.,
and we look forward to serving your investment needs in the months and
years ahead.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/DANIEL A. LUCHANSKY
Daniel A. Luchansky
Vice President and Portfolio Manager
October 1, 1997
IMPORTANT TAX INFORMATION
Of the ordinary income distributions paid quarterly to shareholders by
Merrill Lynch Convertible Fund, Inc. during its taxable year ended
August 31, 1997, 26.52% qualifies for the dividends received deduction
for corporations.
Additionally, there were no capital gains distributed by the Fund during
the period.
Please retain this information for your records.
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
[bullet] Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors.
[bullet] Class B Shares are subject to a maximum contingent deferred
sales charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B Shares
are subject to a distribution fee of 0.75% and an account maintenance
fee of 0.25%. These shares automatically convert to Class D Shares after
approximately 8 years. (There is no initial sales charge for automatic
share conversions.)
[bullet] Class C Shares are subject to a distribution fee of 0.75% and
an account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within one
year of purchase.
[bullet] Class D Shares incur a maximum initial sales charge of 5.25%
and an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of
future performance. Figures shown in the "Average Annual Total Return"
table as well as the total returns and cumulative total return in the
"Performance Summary" table assume reinvestment of all dividends and
capital gains distributions at net asset value on the ex-dividend date.
Investment return and principal value of shares will fluctuate so that
shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer
agency fees applicable to each class, which are deducted from the income
available to be paid to shareholders.
<TABLE>
<CAPTION>
Recent Performance Results*
12 Month 3 Month
8/31/97 5/31/97+ 8/31/96 % Change % Change+
<S> <C> <C> <C> <C> <C>
ML Convertible Fund, Inc. Class A Shares++ $17.36 $16.11 $14.25 + 21.82% + 7.76%
ML Convertible Fund, Inc. Class B Shares 17.35 16.91 -- -- + 2.60
ML Convertible Fund, Inc. Class C Shares 17.36 16.91 -- -- + 2.66
ML Convertible Fund, Inc. Class D Shares 17.36 16.91 -- -- + 2.66
ML Convertible Fund, Inc. Class A Shares -- Total Return++ + 26.73(1) + 7.76
ML Convertible Fund, Inc. Class B Shares -- Total Return -- + 2.60
ML Convertible Fund, Inc. Class C Shares -- Total Return -- + 2.66
ML Convertible Fund, Inc. Class D Shares -- Total Return -- + 2.66
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included.
+ Investment results and net asset values shown for Class B, Class C and Class D Shares are since their inception on 8/4/97.
++ Performance results for per share net asset value of Class A Shares prior to August 4, 1997 reflect the performance of the
Fund's Capital Shares during the period when the Fund was closed-end.
(1) Percent change includes reinvestment of $0.641 per share ordinary income dividends.
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return+
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
<S> <C> <C>
Year Ended 6/30/97 + 17.80% + 11.61%
Five Years Ended 6/30/97 + 11.78 + 10.59
Ten Years Ended 6/30/97 + 5.20 + 4.63
+ Performance results for per share net asset value of Class A Shares prior to August 4, 1997 reflect the performance
of the Fund's Capital Shares during the period when the Fund was closed-end.
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge currently applicable to Class A Shares.
</TABLE>
[GRAPHIC LINE CHART OMITTED: TOTAL RETURN BASED ON A $10,000 INVESTMENT]
Total Return Based on a $10,000 Investment -- Class A Shares
A line graph depicting the growth of an investment in the Fund's Class A
Shares compared to growth of an investment in the Value Line Convertible
Index. Beginning and ending values are:
8/87 8/97
ML Convertible Fund, Inc.+--
Class A Shares*+++ $ 9,475 $15,847
Value Line Convertible Index++ $10,000 $26,456
* Assuming maximum sales charge currently applicable to Class A
Shares, transaction costs and other operating expenses, including
advisory fees.
+ Merrill Lynch Convertible Fund, Inc. primarily invests in a
portfolio of convertible debt securities, convertible preferred
stocks and synthetic convertible securities.
++ This unmanaged Index tracks the performance of all convertibles
(over 590 bonds and preferreds). The Index gives equal weight to
each issue and is calculated on a total return basis.
+++ Performance results for Class A Shares prior to August 4, 1997
reflect the performance of the Fund's Capital Shares during the
period when the Fund was closed-end. Total return includes capital
appreciation/depreciation and income. Convertible Holdings, Inc.
(the predecessor fund) was a dual-structure closed-end fund. The
performance numbers referenced in the graph are for the funds
Capital Shares only. As a result, the results do not fully reflect
total historical performance since they do not include the
performance of the fund's Income Shares. The average annual total
return of the Income Shares over the ten-year period ended July 31,
1997 (the date of the conversion to open-end status) was +14.54%.
The cumulative ten-year Income Share total return over the same
period was +288.62%.
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares+
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
8/2/85 -- 12/31/85 $9.30 $10.34 -- -- + 11.18%
1986 10.34 11.49 $0.230 -- + 14.13
1987 11.49 8.49 0.460 -- - 21.34
1988 8.49 8.69 -- -- + 2.36
1989 8.69 10.12 -- -- + 16.46
1990 10.12 7.67 -- -- - 24.21
1991 7.67 10.91 -- -- + 42.24
1992 10.91 12.87 -- $0.120 + 19.48
1993 12.87 13.21 -- 1.168 + 13.94
1994 13.21 11.13 -- 0.008 - 15.68
1995 11.13 13.43 -- 0.363 + 24.44
1996 13.43 15.57 -- 0.641 + 20.60
1/1/97 -- 8/31/97 15.57 17.36 -- -- + 11.50
Total $0.690 Total $2.300
Cumulative total return as of 8/31/97: +146.36%**
+ Performance results for per share net asset value of Class A Shares prior to August 4, 1997 are for the
period when the Fund was a dual-structure closed-end fund and represents performance for the predecessor
Capital Shares only, but excludes returns from the Income Shares.
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <C> <C> <C> <C> <C>
Automotive NR* Baa1 $900,000 Magna International Inc., 7.25% due
Parts -- 5.9% 7/05/2005 $772,368 $1,024,496
BB- B1 2,000,000 Mascotech, Inc., 4.50% due 12/15/2003 1,840,000 1,855,000
Pep Boys -- Manny, Moe & Jack (The):
BBB Baa3 2,500,000 4% due 9/15/1999 2,575,000 2,487,500
BBB Baa3 1,500,000 4.089% due 9/20/2011 (d) 854,172 791,250
NR* NR* 750,000 Tower Automotive, Inc., 5% due
8/01/2004 (b) 750,000 803,438
------------ ------------
6,791,540 6,961,684
Banking & NR* NR* 500,000 BankAtlantic Bancorp, Inc., 6.75%
Financial -- 0.7% due 7/01/2006+ 830,955 790,000
Conglomerates -- 2.0% Polyphase Corporation+:
AAA Aaa 1,000,000 12% due 12/01/1997 (b) 1,000,000 185,000
NR* NR* 2,000,000 12% due 7/01/1999++ 2,000,000 370,000
A- Ba2 1,500,000 Thermo Electron Corporation, 4.25% due
1/01/2003 1,732,500 1,788,750
------------ ------------
4,732,500 2,343,750
Dental Supplies -- NR* NR* 550,000 Phoenix Shannon PLC, 9.50% due
0.1% 11/01/2000 (b)(c) 550,000 165,000
Environmental -- A- NR* 1,250,000 Thermo Ecotek Corp., 4.875% due
2.2% 4/15/2004 (b) 1,251,563 1,281,250
NR* NR* 750,000 Thermo Fibertek Inc., 4.50% due
7/15/2004 (b) 750,000 773,438
BBB- Ba2 500,000 USA Waste Services, Inc., 4%
due 2/01/2002 500,000 566,875
------------ ------------
2,501,563 2,621,563
Financial NR* NR* 2,750,000 Nal Acceptance Corp., 10% due
Services -- 1.7% 9/11/1998++ 2,750,000 2,035,000
Healthcare B B3 2,000,000 Integrated Health Services Inc.,
Services -- 6.6% 6% due 1/01/2003 1,880,000 2,195,000
BB- B1 1,250,000 PhyCor, Inc., 4.50% due 2/15/2003 1,353,750 1,237,500
BBB+ Ba1 3,122,000 Quantum Health Resources, Inc., 4.75%
due 10/01/2000 2,735,097 2,934,680
NR* NR* 1,500,000 RoTech Medical Corporation, 5.25%
due 6/01/2003 1,497,277 1,492,500
------------ ------------
7,466,124 7,859,680
Home Builders -- 3.0% B- B2 1,000,000 Continental Homes Holding Corp.,
6.875% due 11/01/2002 1,000,000 1,113,750
BB++ Ba3 751,000 Toll Brothers Inc., 4.75% due 1/15/2004 627,190 803,570
BB- B1 1,500,000 US Home Corp., 4.875% due 11/01/2005 1,316,875 1,601,250
------------ ------------
2,944,065 3,518,570
Metals & Mining -- BBB- Baa2 1,500,000 Inco, Limited, 5.75% due 7/01/2004 1,781,150 1,717,500
1.4%
Oil Services -- 0.7% NR* NR* 330,000 Key Energy Group Inc., 7% due
7/01/2003 (b) 520,575 884,813
Pharmaceuticals -- BBB- Baa3 1,500,000 Alza Corporation, 5% due 5/01/2006 1,595,625 1,522,500
1.3%
Real Estate Investment NR* B3 1,500,000 Capstone Capital Trust, Inc., 6.55%
Trusts -- 1.2% due 3/14/2002 1,365,290 1,445,625
Restaurants -- 2.4% B- B2 1,500,000 Boston Market, 7.75% due 5/01/2004 1,381,250 1,286,250
B B3 1,425,000 Hometown Buffet Inc., 7% due
12/01/2002 1,452,750 1,583,531
------------ ------------
2,834,000 2,869,781
Retail -- BB- Baa3 5,000,000 Office Depot, Inc., 4.891% due
Office Products -- 4.5% 11/01/2008 (d) 2,914,081 3,018,750
US Office Products Co.:
B- B3 1,000,000 5.50% due 5/15/2003 842,500 922,500
B- B3 1,500,000 5.50% due 5/15/2003 (b) 1,413,750 1,389,375
------------ ------------
5,170,331 5,330,625
Retail Stores -- 2.4% A+ A1 2,500,000 Home Depot, Inc. (The), 3.25%
due 10/01/2001 2,500,000 2,800,000
Scientific A- NR* 2,000,000 Thermo Cardiosystems, Inc., 4.75%
Equipment -- 3.9% due 5/15/2004 (b) 2,000,000 2,090,000
A Baa2 1,250,000 Thermo Instrument Systems Inc.,
4.50% due 10/15/2003 (b) 1,280,000 1,387,500
A- Baa3 1,000,000 Thermo Optek Corp., 5% due
10/15/2000 (b) 1,035,000 1,160,000
------------ ------------
4,315,000 4,637,500
Software Application NR* NR* 1,000,000 Wind River Systems Inc., 5% due
Development -- 1.0% 8/01/2002 (b) 1,000,000 1,126,250
Technology -- 2.8% NR* NR* 1,000,000 Apple Computer, Inc., 6% due
6/01/2001 950,000 1,000,000
B- B3 750,000 Data General Corporation, 6%
due 5/15/2004 (b) 750,000 1,181,250
NR* NR* 1,000,000 Premiere Technologies, Inc.,
5.75% due 7/01/2004 (b) 1,000,000 1,123,750
------------ ------------
2,700,000 3,305,000
Textiles -- 0.9% B+ B1 1,100,000 Fieldcrest Cannon, Inc., 6% due
3/15/2012 753,500 1,006,500
Water Treatment BB+ B2 1,750,000 US Filter Corporation, 4.50%
Systems -- 1.7% due 12/15/2001 1,750,000 1,964,375
------------ ------------
Total Convertible Debentures -- 46.4% 54,852,218 54,905,716
============ ============
<CAPTION>
Shares
Held Convertible Preferred Stocks
<S> <C> <C> <C> <C> <C>
Banking & NR* A1 10,000 Jefferson Pilot Corp. (ACESSM)
Financial -- 0.9% (into Nations Bank Corp.) (e) 725,000 1,051,250
Energy -- 1.7% BB- Ba3 40,000 CalEnergy Capital Trust II, 6.25% (b) 2,000,000 1,995,000
Minerals -- 2.0% NR* Ba1 43,150 Cyprus Amax Minerals Co., $4.00,
Series A 2,312,840 2,324,706
Paper -- 1.9% BBB+ Baa1 40,000 International Paper Co., $5.25 (b) 1,902,000 2,225,000
Precious Metals -- NR* B2 59,900 Coeur d'Alene Mines Corporation 1,080,136 1,059,481
0.9%
Real Estate BBB+ Baa2 30,000 Public Storage Inc., $2.062 759,300 1,380,000
Investment
Trusts -- 1.1%
Restaurants -- 1.7% BBB Baa2 35,000 Wendy's International, Inc.,
Series A 1,750,000 1,977,500
Retail -- 1.0% NR* NR* 19,500 Kmart Financing I 1,024,920 1,149,281
Steel -- 4.6% B B1 52,000 AK Steel Holding Corp. 1,348,342 2,054,000
B NR* 40,000 WHX Corporation, Series A 1,590,840 1,775,000
A- A3 103,610 Worthington Industries, Inc. 1,751,527 1,683,663
------------ ------------
4,690,709 5,512,663
Transportation -- 0.5% BBB+ Ba2 10,000 CNF Transportation Inc., Series A 500,000 580,000
Utilities -- 1.3% AA Aa3 35,500 Citizens Utilities Trust 1,519,755 1,584,187
------------ ------------
Total Convertible Preferred
Stocks -- 17.6% 18,264,660 20,839,068
============ ============
<CAPTION>
Common Stocks
<S> <C> <C> <C> <C>
Drug Distribution -- 0.6% 27,400 Bindley Western Industries Inc. 526,144 690,138
Environmental -- 0.2% 16,918 Allied Waste Industries, Inc. (c) 80,883 253,770
Financial Services -- 0.0% 1 Nal Acceptance Corp. (Warrants)(a)++ 0 8,594
Food & Beverage -- 0.7% 25,000 RJR Nabisco, Inc. 821,875 870,312
Funeral Services -- 0.5% 20,000 Service Corporation International 366,079 640,000
Paper -- 0.6% 17,700 Boise Cascade Corporation 585,162 700,256
Paper/Machine -- 0.5% 20,000 Albany International Corp., Class A 448,262 541,250
Railcar Production -- 0.5% 15,479 Trinity Industries Leasing Co. 293,789 615,290
Semiconductors -- 1.6% 58,800 Cypress Semiconductor Corporation (c) 706,253 1,043,700
60,000 Integrated Device Technology, Inc. (c) 788,465 813,750
------------ ------------
1,494,718 1,857,450
------------ ------------
Total Common Stocks -- 5.2% 4,616,912 6,177,060
============ ============
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <C> <C> <C>
Commercial $6,000,000 Countrywide Home Loans, Inc.,
Paper** -- 20.3% 5.52% due 9/16/1997 $5,983,440 $5,983,440
4,000,000 Finova Capital Corp., 5.54% due
10/21/1997 3,967,375 3,967,375
3,036,000 General Motors Acceptance Corp.,
5.69% due 9/02/1997 3,034,081 3,034,081
6,000,000 Lexington Parker Capital Company LLC,
5.52% due 9/02/1997 5,996,320 5,996,320
5,000,000 WCP Funding Inc., 5.52%
due 10/02/1997 4,973,933 4,973,933
------------ ------------
Total Short-Term Securities -- 20.3% 23,955,149 23,955,149
============ ============
Total Investments -- 89.5% $101,688,939 105,876,993
============
Short Sales (Proceeds -- $736,673) -- (0.6%) (723,594)
Other Assets Less Liabilities -- 11.1% 13,162,616
------------
Net Assets --100.0% $118,316,015
============
(a) Warrants entitle the Fund 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.
(b) The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(c) Non-income producing security.
(d) Represents a zero coupon or step bond; the interest rate shown
is the effective yield at the time of purchase by the Fund.
(e) Adjustable Convertible Extendable Securities.
* 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 Fund.
+ Covered Short Sales entered into as of August 31, 1997 were as follows:
Value
Shares Issue (Notes 1a & 1h)
55,000 BankAtlantic Bancorp. $(715,000)
5,500 Polyphase Corporation (8,594)
----------
Total (Proceeds -- $736,673) $(723,594)
==========
++ Restricted securities as to resale. The value of the Fund's investment
in restricted securities was approximately $2,414,000, representing 2.0%
of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Nal Acceptance Corp.,
10% due 9/11/1998 9/12/1996 $2,750,000 $2,035,000
Nal Acceptance Corp.
(Warrants) 9/12/1996 0 8,594
Polyphase Corporation,
12% due 7/01/1999 7/05/1994 2,000,000 370,000
---------- ----------
Total $4,750,000 $2,413,594
========== ==========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $101,688,939) (Note 1a) $105,876,993
Cash 46,934
Deposits on short sales (Note 1h) 670,775
Receivables:
Securities sold $14,259,214
Interest 734,481
Capital shares sold 426,797
Dividends 148,414 15,568,906
-------------
Prepaid registration fees and other assets (Note 1f) 59,660
-------------
Total assets 122,223,268
-------------
Liabilities: Common stock sold short, at market value (proceeds -- $736,673)
(Notes 1a & 1h) 723,594
Payables:
Capital shares redeemed 2,923,609
Investment adviser (Note 2) 67,358
Distributor (Note 2) 2,848 2,993,815
-------------
Accrued expenses and other liabilities 189,844
-------------
Total liabilities 3,907,253
-------------
Net Assets: Net assets $118,316,015
=============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $634,642
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 33,187
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 5,841
Class D Common Stock, $0.10 par value, 100,000,000 shares authorized 7,862
Paid-in capital in excess of par 84,298,010
Undistributed investment income -- net 645,348
Undistributed realized capital gains on investments -- net 28,490,017
Unrealized appreciation on investments -- net 4,201,108
-------------
Net assets $118,316,015
=============
Net Asset Value: Class A -- Based on net assets of $110,178,412 and 6,346,421
shares outstanding $17.36
=============
Class B -- Based on net assets of $5,758,869 and 331,864 shares outstanding $17.35
=============
Class C -- Based on net assets of $1,013,763 and 58,412 shares outstanding $17.36
=============
Class D -- Based on net assets of $1,364,971 and 78,624 shares outstanding $17.36
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Period For the
Jan. 1, 1997 Year Ended
to Aug. 31, 1997 Dec. 31, 1996
<S> <C> <C> <C>
Investment Income Interest and discount earned $7,843,078 $10,364,183
(Notes 1d & 1e): Dividends* 2,568,226 5,941,459
------------ ------------
Total income 10,411,304 16,305,642
------------ ------------
Expenses: Investment advisory fees (Note 2) 1,102,729 1,695,738
Dividends on securities sold short 190,393 4,704
Transfer agent fees -- Class A (Note 2) 65,095 87,085
Accounting services (Note 2) 63,816 99,274
Professional fees 48,754 69,955
Printing and shareholder reports 44,431 49,591
Listing fees 35,573 250
Interest on securities sold short 30,788 36,292
Directors' fees and expenses 29,582 45,322
Amortization of organization expenses 22,259 38,159
Custodian fees 17,657 26,466
Account maintenance and distribution fees -- Class B (Note 2) 2,343 --
Pricing services 2,023 2,983
Transfer agent fees -- Class B (Note 2) 460 --
Account maintenance and distribution fees -- Class C (Note 2) 369 --
Account maintenance fees -- Class D (Note 2) 136 --
Transfer agent fees -- Class D (Note 2) 108 --
Transfer agent fees -- Class C (Note 2) 78 --
Other 8,834 44,684
------------ ------------
Total expenses 1,665,428 2,200,503
------------ ------------
Investment income -- net 8,745,876 14,105,139
------------ ------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments -- net 50,688,978 19,901,753
(Loss) on Income taxes on realized gain on investments -- (4,841,320)
Investments & Foreign currency transactions -- net (108,244) (19,719)
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions -- Net Investments -- net (31,783,870) 17,386,660
(Notes 1b, 1c, Foreign currency transactions -- net 633 (441)
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 18,797,497 32,426,933
------------ ------------
Net Increase in Net Assets Resulting from Operations $27,543,373 $46,532,072
------------ ------------
* Net withholding tax on dividends -- $2,260
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Period
Jan. 1, 1997 to For the Year
Aug. 31, Ended December 31,
Increase (Decrease) in Net Assets: 1997 1996 1995
<S> <C> <C> <C> <C>
Operations: Investment income -- net $8,745,876 $14,105,139 $14,296,369
Realized gain on investments and foreign currency
transactions -- net 50,580,734 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 (31,783,237) 17,386,219 19,334,251
------------- ------------- -------------
Net increase in net assets resulting from operations 27,543,373 46,532,072 45,445,493
------------- ------------- -------------
Dividends & Investment income -- net+ (8,134,631) (14,192,493) (14,117,464)
Distributions to Realized gain on investments -- net (Class A)++ -- (7,473,704) (4,235,374)
Shareholders ------------- ------------- -------------
(Note 1g): Net decrease in net assets resulting from dividends and
distributions to shareholders (8,134,631) (21,666,197) (18,352,838)
------------- ------------- -------------
Capital Share Net decrease in net assets from capital share
Transactions transactions (190,895,600) -- --
(Note 4): Offering costs resulting from issuance of
new classes of shares (190,000) -- (431,384)
------------- ------------- -------------
Net decrease in net assets derived from capital share
transactions (191,085,600) -- (431,384)
------------- ------------- -------------
Net Assets: Total increase (decrease) in net assets (171,676,858) 24,865,875 26,661,271
Beginning of period 289,992,873 265,126,998 238,465,727
------------- ------------- -------------
End of period* $118,316,015 $289,992,873 $265,126,998
============= ============= =============
* Undistributed investment income -- net (Note 1i) $645,348 $128,996 $223,416
============= ============= =============
+ Dividends from investment income -- net reflect when the Fund was a dual-structure closed-end
management investment company. All dividends were paid to Income Shareholders. Such shares were
redeemed on July 31, 1997.
++ Formerly Capital Shares.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A++++++
The following per share data and ratios have been For the Period
derived from information provided in the financial Jan. 1, 1997 to For the Year Ended December 31,
statements. Aug. 31,
1997+++ 1996+++ 1995 1994 1993 1992
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $15.57 $13.43 $11.13 $13.21 $12.87 $10.91
Performance:++++ -------- -------- -------- -------- -------- --------
Investment income -- net .06 -- -- -- -- --
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net 1.75 2.78 2.66 (2.12) 1.43 2.03
-------- -------- -------- -------- -------- --------
Total from investment operations 1.81 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
-------- -------- -------- -------- -------- --------
Capital charge resulting from
issuance of new classes of shares (.02) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period $17.36 $15.57 $13.43 $11.13 $13.21 $12.87
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 11.50%+++++ 20.60% 24.44% (15.68%) 13.94% 19.48%
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses*** .90%* .78% .79% .87% .80% .80%
Net Assets: ======== ======== ======== ======== ======== ========
Investment income -- net 4.76%* 4.98% 5.40% 5.43% 5.10% 6.34%
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $110,178 $289,993 $265,127 $238,466 $274,999 $289,366
======== ======== ======== ======== ======== ========
Portfolio turnover 92.86% 129.06% 87.69% 69.37% 116.03% 76.54%
======== ======== ======== ======== ======== ========
Average commission rate paid++ $.0522 $.0447 -- -- -- --
======== ======== ======== ======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads. Performance results prior to August 31, 1997
are for when the Fund was a dual-structure closed-end management investment company and include only the
returns for the Capital Shares but exclude results from the Income Shares.
*** Excluding taxes on undistributed net realized long-term capital gains for years prior to the period January
1, 1997 to August 31, 1997.
+ Amount is less than $.01 per share.
++ 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.
+++ Excludes the effect of per share operating performance of the Fund's Income Shares, which were redeemed on
July 31, 1997. Per share operating performance prior to the period January 1, 1997 to August 31, 1997
reflects when the Fund was a dual-structure closed-end management investment company. For the period
January 1, 1997 to July 31, 1997, investment income -- net per Income Share was $0.73 and dividends of
investment income -- net per Income Share were $0.70.
++++ Based on average shares outstanding during the period.
+++++ Aggregate total investment return.
++++++ Formerly Capital Shares.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Aug. 4, 1997+ to Aug. 31, 1997
Class B++ Class C++ Class D++
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $16.91 $16.91 $16.91
Operating -------- -------- --------
Performance: Investment income -- net .05 .05 .07
Realized and unrealized gain on investments and foreign
currency transactions -- net .39 .40 .38
-------- -------- --------
Total from investment operations .44 .45 .45
-------- -------- --------
Net asset value, end of period $17.35 $17.36 $17.36
======== ======== ========
Total Investment Based on net asset value per share 2.60%++++ 2.66%++++ 2.66%++++
Return:** ======== ======== ========
Ratios to Average Expenses 2.66%* 2.74%* 1.92%*
Net Assets: ======== ======== ========
Investment income -- net 3.77%* 3.58%* 4.81%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $5,759 $1,014 $1,365
Data: ======== ======== ========
Portfolio turnover 92.86% 92.86% 92.86%
======== ======== ========
Average commission rate paid $.0522 $.0522 $.0522
======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Convertible Fund, Inc. (the "Fund"), formerly Convertible
Holdings, Inc., is registered under the Investment Company Act of 1940
as a non-diversified, open-end management investment company. Effective
August 4, 1997, as a result of the approval of its shareholders, the
Fund converted to an open-end management investment company. At that
time, the Fund's Capital Shares were converted to Class A Shares. The
Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. Shares of Class A and Class D are sold with a front-
end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B
and Class C Shares bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, 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 last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and on a
stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale price
in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market, the
last bid price. Short-term securities are valued at amortized cost,
which approximates market value. Other investments, including futures
contracts and related options, are stated at market value. Securities
and assets for which market value quotations are not readily available
are valued at their fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the contract or
if the counterparty does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
[bullet] Options -- The Fund is authorized to write and purchase call
and put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market
to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
[bullet] Forward foreign exchange contracts -- The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium or
discount is amortized over the life of the contracts.
[bullet] Foreign currency options and futures -- The Fund is also
authorized to purchase or sell listed or over-the-counter foreign
currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by
the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
(c) 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.
(d) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required. Under the applicable foreign tax law, a withholding tax may
be imposed on interest, dividends, and capital gains at various rates.
(e) 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 dates. 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.
(f) Prepaid registration fees -- Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Short Sales -- When the Fund engages in a short sale, an amount
equal to the proceeds received by the Fund is reflected as an asset and
an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the market value of the short sale. The Fund
maintains a segregated account of securities as collateral for the short
sales. The Fund is exposed to market risk based on the amount, if any,
that the market value of the stock exceeds the market value of the
securities in the segregated account.
(i) Reclassification -- Generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, current
year's permanent book/tax differences of $94,893 have been reclassified
between undistributed net realized capital gains and undistributed net
investment income and differences of $20,830,363 have been reclassified
between undistributed net realized capital gains and paid-in capital in
excess of par. These reclassifications have no effect on net assets or
net asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
The Fund has also entered into a Distribution Agreement and Distribution
Plans with Merrill Lynch Funds Distributors, Inc. ("MLFD"), a wholly-
owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of 0.60% of the
average daily net assets of the Fund.
Pursuant to the distribution plans (the "Distribution Plans") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company Act
of 1940, the Fund pays the Distributor ongoing account maintenance and
distribution fees. The fees are accrued daily and paid monthly at annual
rates based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor
and MLPF&S for providing shareholder and distribution-related services
to Class B and Class C shareholders.
For the period January 1, 1997 to August 31, 1997, MLFD earned
underwriting discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $4,260 $1,242
Class D $2,306 $26,348
In addition, MLPF&S received $255,664 in commissions on the execution of
portfolio security transactions for the Fund for the period January 1,
1997 to August 31, 1997.
During the period January 1, 1997 to August 31, 1997, the Fund paid
Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, $1,490
for security price quotations to compute the net asset value of the
Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the period January 1, 1997 to August 31, 1997 were $167,419,463 and
$363,659,855, respectively.
Net realized and unrealized gains (losses) as of August 31, 1997 were as
follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $51,193,460 $4,188,054
Short sales (504,482) 13,079
Foreign currency
transactions (108,244) (25)
------------- -------------
Total $50,580,734 $4,201,108
============= =============
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $3,990,249, of which $8,332,698 related to
appreciated securities and $4,342,449 related to depreciated securities.
The aggregate cost of investments at August 31, 1997 for Federal income
tax purposes was $101,886,744.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$190,895,600 for the period January 1, 1997 to August 31, 1997. During
the year ended December 31, 1996, Capital Shares issued and outstanding
remained constant at 11,653,700.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Period January 1, 1997 Dollar
to August 31, 1997 Shares Amount
Shares sold 45,211 $774,119
Shares redeemed (5,352,490) (91,314,601)
------------- -------------
Net decrease (5,307,279) $(90,540,482)
============= =============
Class B Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
Shares sold 347,816 $5,946,236
Shares redeemed (15,952) (272,208)
------------- -------------
Net increase 331,864 $5,674,028
============= =============
+ Commencement of Operations.
Class C Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
Shares sold 59,874 $1,024,877
Shares redeemed (1,462) (25,410)
------------- -------------
Net increase 58,412 $999,467
============= =============
+ Commencement of Operations.
Class D Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
Shares sold 96,058 $1,653,202
Shares redeemed (17,434) (302,405)
------------- -------------
Net increase 78,624 $1,350,797
============= =============
+ Commencement of Operations.
In addition, on July 31, 1997, all 11,653,700 Income Shares were
redeemed amounting to $108,379,410.
5. Subsequent Event:
On September 2, 1997, the Fund's Board of Directors declared an ordinary
income dividend in the amount of $.168967 per Class A Share, $.156437
per Class B Share, $.156428 per Class C Share, $.165229 per Class D
Share and a long-term capital gain distribution in the amount of
$4.420817 per share for each of the four Classes, payable on September
23, 1997 to shareholders of record as of September 15, 1997.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Convertible Fund, Inc.
(Formerly Convertible Holdings, Inc.):
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Convertible
Fund, Inc. as of August 31, 1997, the related statements of operations
for the period January 1, 1997 to August 31, 1997 and for the year ended
December 31, 1996, the statements of changes in net assets for the
period January 1, 1997 to August 31, 1997 and each of the years in the
two-year period ended December 31, 1996 and the financial highlights for
the period January 1, 1997 to August 31, 1997 and for each of the years
in the five-year period ended December 31, 1996. These financial
statements and the financial highlights are the responsibility of the
Fund'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 August 31, 1997 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
Merrill Lynch Convertible Fund, Inc. as of August 31, 1997, 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
October 15, 1997
PORTFOLIO INFORMATION (unaudited)
As of August 31, 1997
Percent of
Ten Largest Holdings Net Assets
Office Depot, Inc., 4.891% due 11/01/2008 2.6%
Quantum Health Resources, Inc., 4.75%
due 10/01/2000 2.5
Home Depot, Inc. (The), 3.25% due 10/01/2001 2.4
Pep Boys -- Manny, Moe & Jack (The), 4% due
9/15/1999 2.1
Cyprus Amax Minerals Co., $4.00, Series A 2.0
International Paper Co., $5.25 1.9
Integrated Health Services Inc., 6% due
1/01/2003 1.9
Thermo Cardiosystems, Inc., 4.75% due
5/15/2004 1.8
AK Steel Holding Corp. 1.7
Nal Acceptance Corp., 10% due 9/12/1998 1.7
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Terry K. Glenn, Executive Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Vincent T. Lathbury III, Vice President
Daniel A. Luchansky, Vice President and
Portfolio Manager
Barton A. Vogel, Vice President
Gerald M. Richard, Treasurer
Ira P. Shapiro, Secretary
Custodian
The Chase Manhattan Bank
Global Securities Services
Chase MetroTech Center
Brooklyn, NY 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863