MERRILL LYNCH
CONVERTIBLE
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Quarterly Report
November 30, 1997
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
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 -- 11/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH CONVERTIBLE FUND, INC.
DEAR SHAREHOLDER
During the three months ended November 30, 1997, the stock market made
limited progress as measured by the major stock indexes such as the
Dow Jones Industrial Average (DJIA) and the NASDAQ Composite Index.
The DJIA's price increased 2.63% and the NASDAQ Composite Index rose
only 0.83%. While these are relatively small price increases given the
market's powerful performance over the past several years, they masked
the sharp increase in volatility.
Equities first rallied strongly during September and early October
only to collapse with the worst point decline in the history of the
DJIA (-554 points) on October 27. The DJIA's largest point increase
occurred the next day when it rallied 337 points, beginning a recovery
that continued through the end of November. The fact that the DJIA
recorded both its largest point gain and largest point loss in history
in the same week is one example of the increase in volatility. Another
example was the extension of the historical range of the Volatility
Index (VIX) during the November quarter. This Index reflects stock
market implied volatility based on "at-the-money" quotes (quote where
the strike price and market price are the same) on the Standard &
Poor's 100 Index options. Over the past five years, this Index has
ranged between 10% -- 20%, and sometimes slightly exceeded 20% for
short periods. The range for the VIX over the past three months has
been a low of 21.2% and a record high of 55.5%. This increase may
signal potentially exaggerated fluctuations in prices as volatility
generally increases at both market tops and bottoms. We note that the
valuation levels on the equity market are quite high on a historical
basis, increasing risk.
To illustrate current conditions, we believe a review of the past is
helpful. At the major bottom of the stock market in August 1982, the
DJIA was at 776 and sold at about 1 times its book value. This
compares to 7,823 and about 5.5 times book value at the end of
November 1997. Its price/earnings ratio was about 8 times trailing
earnings as compared to about 21 times at November month-end. The
market's yield was 6.88% as compared to 1.7% on November 30, 1997.
Admittedly, the macroeconomic environment, interest rate levels and
inflation were quite different then, but current valuation levels and
the concept of "reversion to the mean" (the process by which over the
long term, valuations tend to revert toward their average) suggest a
more cautious stance on equities. Accordingly, we have reduced our
equity exposure from a high of 29.7% of total net assets on March 30,
1996, when we were more constructive on equity prices based on their
valuations, to 7.1% on November 30, 1997. In addition, we have favored
higher conversion premium and less equity-sensitive convertibles over
lower conversion premium convertibles with greater equity sensitivity.
Finally, we have improved the credit quality of holdings in the
portfolio in an effort to further reduce risk.
We continue to be somewhat constructive on the macroeconomic
environment in the United States as we move forward into 1998,
notwithstanding recent turbulence in the currencies, economies and
stock markets of the Pacific Basin. In our opinion, equity prices and
their valuations already reflect this positive view, hence our more
cautious posture.
Portfolio Review
There were some significant transactions in the portfolio during the
quarter ended November 30, 1997. In the healthcare area, we
established a position in Medpartners Inc. and added to our existing
position in PhyCor Inc. Both companies are in the physician practice
management business. We also initiated a position in Assisted Living
Concepts Inc., a growth company which owns, operates and develops
residences for the elderly who need help with the activities of daily
living. In the energy sector, we added bonds issued by Loews Corp.,
convertible into Diamond Offshore Drilling, and Lomak Petroleum, Inc.
We purchased ThermoTrex Corporation, a manufacturer of imaging systems
and mammography equipment, and Kellstrom Industries Inc., an aviation
maintenance company. We paired our positions in the metals and mining
sector, selling Coeur d'Alene Mines Corporation as well as reducing
our AK Steel Holding Corporation position through conversion and sale
of the common stock. We also sold our holding of Wind River Systems
Inc., a software company. Some of the issues which were traded during
the quarter included BankAtlantic Bancorp, Inc. and Key Energy Group
Inc.
In Conclusion
We believe this may be a particularly good time to invest in
convertible securities in light of the current market environment and
their inherent properties. Total returns of convertible securities
historically capture most of the equity market's advance, but only
participate in about half of a market's decline. Additionally,
convertible securities currently yield almost three times more than
equities in general. Compared to the fixed-income universe,
convertible securities are consistently ranked among the best-
performing sub-categories as measured by Lipper Analytical Services
over all measured time periods. In our view, convertible issues are
likely to offer good upside potential during firm equity and bond
markets, yet offer a degree of protection when conditions become
negative.
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
January 7, 1998
PORTFOLIO INFORMATION
As of November 30, 1997
Percent of
Ten Largest Holdings Net Assets
PhyCor, Inc., 4.50% due 2/15/2003 4.9%
BankAtlantic Bancorp, Inc.* 4.0
Pep Boys -- Manny, Moe & Jack (The)* 3.8
Home Depot, Inc. (The), 3.25% due 10/01/2001 3.8
Office Depot, Inc., 4.891% due 11/01/2008 3.8
Wendy's International, Inc., 5%, Series A 3.5
ALZA Corporation, 5% due 5/01/2006 3.4
Citizens Utilities Trust, 5% 2.8
Cyprus Amax Minerals Co., $4.00, Series A 2.5
Integrated Health Services Inc., 6% due
1/01/2003 2.4
* Includes combined holdings.
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.
Average Annual Total Return+
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/97 +22.68% +16.24%
Five Years Ended 9/30/97 +12.37 +11.17
Ten Years Ended 9/30/97 + 5.85 + 5.29
+ 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.
Aggregate Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (8/04/97) through
9/30/97 +4.39% +1.29%
* Maximum contingent deferred sales charge is 4% and reduced to 0%
after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (8/04/97)
through 9/30/97 +4.39% +3.61%
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Inception (8/04/97)
through 9/30/97 +4.52% -0.97%
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Recent Performance Results*
12 Month 3 Month
11/30/97 8/31/97 11/30/96+ % Change+ % Change
<S> <C> <C> <C> <C> <C>
ML Convertible Fund, Inc. Class A Shares++ $12.70 $17.36 $16.39 +3.88%(1) -1.93%(1)
ML Convertible Fund, Inc. Class B Shares 12.67 17.35 16.91 +0.44(1) -2.10(1)
ML Convertible Fund, Inc. Class C Shares 12.68 17.36 16.91 +0.52(1) -2.08(1)
ML Convertible Fund, Inc. Class D Shares 12.69 17.36 16.91 +0.60(1) -2.00(1)
ML Convertible Fund, Inc. Class A Shares -- Total Return++ +9.11(2) -0.97(3)
ML Convertible Fund, Inc. Class B Shares -- Total Return +1.35(4) -1.22(4)
ML Convertible Fund, Inc. Class C Shares -- Total Return +1.43(4) -1.20(4)
ML Convertible Fund, Inc. Class D Shares -- Total Return +1.56(5) -1.07(5)
* 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 $4.421 per share capital gains distributions.
(2) Percent change includes reinvestment of $0.810 per share ordinary income dividends and $4.421 per share capital gains
distributions.
(3) Percent change includes reinvestment of $0.169 per share ordinary income dividends and $4.421 per share capital gains
distributions.
(4) Percent change includes reinvestment of $0.156 per share ordinary income dividends and $4.421 per share capital gains
distributions.
(5) Percent change includes reinvestment of $0.165 per share ordinary income dividends and $4.421 per share capital gains
distributions.
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
S&P Moody's Face
Industry Rating Rating Amount Convertible Debentures Cost Value
<S> <C> <C> <C> <C> <C>
Assisted Living -- NR* NR* $1,300,000 Assisted Living Concepts, Inc., 6%
1.5% due 11/01/2002 $1,300,000 $1,309,750
Automotive NR* Baa1 900,000 Magna International Inc., 7.25%
Parts -- 7.8% due 7/05/2005 772,368 948,567
BB- B1 2,000,000 Mascotech, Inc., 4.50% due 12/15/2003 1,840,000 1,735,000
Pep Boys -- Manny, Moe & Jack (The):
BBB Baa3 2,500,000 4% due 9/01/1999 2,575,000 2,475,000
BBB Baa3 1,500,000 4.089% due 9/20/2011(b) 862,738 810,000
NR* NR* 750,000 Tower Automotive, Inc., 5% due
8/01/2004 750,000 753,750
----------- -----------
6,800,106 6,722,317
Aviation Equipment -- NR* NR* 1,000,000 Kellstrom Industries Inc., 5.75%
1.3% due 10/15/2002 1,000,000 1,125,000
Banking -- 4.0% BankAtlantic Bancorp, Inc.+:
NR* NR* 1,250,000 6.75% due 7/01/2006 2,152,413 2,075,000
NR* NR* 1,400,000 5.625% due 12/01/2007 1,400,000 1,400,000
----------- -----------
3,552,413 3,475,000
Conglomerates -- 2.9% Polyphase Corporation+:
NR* NR* 1,000,000 12% due 12/01/1997 1,000,000 265,000
NR* NR* 2,000,000 12% due 7/01/1999 2,000,000 530,000
A- Baa3 1,500,000 Thermo Electron Corporation, 4.25%
due 1/01/2003 1,732,500 1,676,250
----------- -----------
4,732,500 2,471,250
Dental Supplies -- NR* NR* 550,000 Phoenix Shannon PLC, 9.50%
0.2% due 11/01/2000 550,000 165,000
Drilling -- 1.2% A+ A2 1,000,000 Loews Corp., 3.125% due 9/15/2007 1,000,000 993,750
(into Diamond Offshore Drilling Inc.)
Environmental -- A- Baa3 1,605,000 Thermo Ecotek Corp., 4.875%
3.4% due 4/15/2004 1,606,119 1,609,013
A- NR* 750,000 Thermo Fibertek Inc., 4.50%
due 7/15/2004 750,000 780,938
BBB- Ba3 500,000 USA Waste Services, Inc., 4%
due 2/01/2002 500,000 513,125
----------- -----------
2,856,119 2,903,076
Healthcare B B3 2,000,000 Integrated Health Services Inc., 6%
Services -- 9.5% due 1/01/2003 1,880,000 2,107,500
BB- B1 4,500,000 PhyCor, Inc., 4.50% due 2/15/2003 4,413,750 4,241,250
BBB+ Ba1 400,000 Quantum Health Resources, Inc., 4.75%
due 10/01/2000 366,375 371,000
NR* NR* 1,500,000 RoTech Medical Corporation, 5.25%
due 6/01/2003 1,497,278 1,496,250
----------- -----------
8,157,403 8,216,000
Home Builders -- 0.7% B- B2 450,000 Continental Homes Holding Corp.,
6.875% due 11/01/2002+ 450,000 635,625
Imaging A- NR* 700,000 ThermoTrex Corporation, 3.25%
Systems -- 0.8% due 11/01/2007 700,000 703,500
Metals & Mining -- BBB- Baa2 1,500,000 Inco, Limited, 5.75% due 7/01/2004 1,781,150 1,470,000
1.7%
Pharmaceuticals -- BBB- Baa3 3,000,000 ALZA Corporation, 5% due 5/01/2006 3,095,625 2,962,500
3.4%
Real Estate Investment NR* B2 1,500,000 Capstone Capital Trust, Inc., 6.55%
Trusts -- 1.7% due 3/14/2002 1,371,401 1,458,750
Restaurants -- 2.2% B- B2 500,000 Boston Chicken, Inc., 7.75% due
5/01/2004 465,000 383,125
B B2 1,425,000 Hometown Buffet Inc., 7% due
12/01/2002 1,452,750 1,505,156
----------- -----------
1,917,750 1,888,281
Retail -- Building A+ A1 2,500,000 Home Depot, Inc. (The), 3.25%
Materials -- 3.8% due 10/01/2001+ 2,500,000 3,278,125
Retail -- BB- Baa3 5,000,000 Office Depot, Inc., 4.891%
Office Products -- 5.9% due 11/01/2008 (b) 2,945,849 3,256,250
US Office Products Co.:
B- B3 1,000,000 5.50% due 5/15/2003 842,500 927,500
B- B3 1,000,000 5.50% due 5/15/2003 942,500 918,750
----------- -----------
4,730,849 5,102,500
Scientific A- NR* 2,000,000 Thermo Cardiosystems, Inc., 4.75%
Equipment -- 5.2% due 5/15/2004 2,000,000 1,995,000
A Baa2 1,250,000 Thermo Instrument Systems Inc.,
4.50% due 10/15/2003 1,280,000 1,329,688
A- Baa3 1,000,000 Thermo Optek Corp., 5% due
10/15/2000 1,035,000 1,172,500
----------- -----------
4,315,000 4,497,188
Semiconductors -- NR* NR* 750,000 Cypress Semiconductor Corp., 6%
0.8% due 10/01/2002 750,000 674,063
Technology -- 2.7% CCC Caa2 1,000,000 Apple Computer, Inc., 6% due
6/01/2001 950,000 895,000
B B3 750,000 Data General Corporation, 6%
due 5/15/2004 750,000 746,250
NR* NR* 650,000 Premiere Technologies, Inc., 5.75%
due 7/01/2004+ 650,000 642,688
----------- -----------
2,350,000 2,283,938
Textiles -- 1.0% B+ NR* 1,100,000 Fieldcrest Cannon, Inc., 6% due
3/15/2012 753,500 902,000
Water Treatment BB+ B2 1,750,000 US Filter Corporation, 4.50%
Systems -- 2.2% due 12/15/2001 1,750,000 1,852,812
----------- -----------
Total Convertible Debentures --
63.9% 56,413,816 55,090,425
=========== ===========
<CAPTION>
Shares
Held Convertible Preferred Stocks
<S> <C> <C> <C> <C> <C>
Banking & NR* A1 10,000 Jefferson Pilot Corp., 7.25% (ACESSM)
Financial -- 1.2% (into Nations Bank Corp.) (c) 725,000 1,055,000
Energy -- 1.2% BB- Ba2 20,000 CalEnergy Capital Trust II, 6.25% 1,000,000 997,500
Healthcare -- 1.4% BBB- Baa2 50,000 Medpartners Inc., 6.50% 1,109,375 1,200,000
Minerals -- 2.5% NR* Ba1 43,150 Cyprus Amax Minerals Co., $4.00,
Series A 2,312,840 2,189,862
Oil & Gas B B3 20,000 Lomak Petroleum, Inc., 5.75% 1,000,000 967,500
Producers -- 1.1%
Paper -- 2.4% BBB+ Baa1 40,000 International Paper Co., $5.25 1,902,000 2,060,000
Real Estate Investment BBB Baa3 30,000 Public Storage Inc., $2.062 759,300 1,380,000
Trusts -- 1.6%
Restaurants -- 3.5% BBB Baa2 60,000 Wendy's International, Inc., 5%,
Series A 3,055,938 3,030,000
Retail -- 1.3% B+ B2 19,500 Kmart Financing I, 7.75% 1,024,920 1,079,812
Steel -- 4.0% B Caa 40,000 WHX Corporation, 6.50%, Series A 1,590,840 1,860,000
A- A3 103,610 Worthington Industries, Inc., 7.25%
(into Rouge Industries, Inc.) 1,751,527 1,580,052
----------- -----------
3,342,367 3,440,052
Utilities -- 2.8% AA Aa3 50,500 Citizens Utilities Trust, 5% 2,191,905 2,417,687
----------- -----------
Total Convertible Preferred
Stocks -- 23.0% 18,423,645 19,817,413
=========== ===========
<CAPTION>
Common Stocks & Warrants
<S> <C> <C> <C>
Consumer Products -- 25,000 RJR Nabisco Holdings Corp. 821,875 910,937
1.1%
Drug Distribution -- 0.4% 10,000 Bindley Western Industries, Inc. 191,850 307,500
Environmental -- 0.1% 6,000 Allied Waste Industries, Inc. 28,804 130,875
Financial Services -- 0.0% 34,375 Nal Acceptance Corp. (Warrants)(a) 0 9,797
Funeral Services -- 0.8% 20,000 Service Corporation International 366,078 731,250
Home Builders -- 0.6% 20,000 Toll Brothers, Inc. 486,200 482,500
Paper -- 0.7% 17,700 Boise Cascade Corporation 585,162 596,269
Pharmaceuticals -- 0.0% 2,182 Crescendo Pharmaceuticals Corporation 25,093 24,684
Railcar Production -- 0.8% 15,479 Trinity Industries Leasing Co. 293,789 702,360
Semiconductors -- 1.0% 75,800 Cypress Semiconductor Corporation 974,147 829,062
Steel -- 0.9% 40,000 AK Steel Holding Corporation 601,549 787,500
Technology -- 0.7% 60,000 Integrated Device Technology, Inc. 788,465 611,250
Utilities -- 0.0% 2,374 Citizens Utilities Company (Class B) 19,534 22,993
----------- -----------
Total Common Stocks & Warrants --
7.1% 5,182,546 6,146,977
=========== ===========
<CAPTION>
Face
Amount Short-Term Securities
<S> <C> <C> <C>
Commercial $2,261,000 General Motors Acceptance Corp.,
Paper** -- 4.1% 5.75% due 12/01/1997 2,259,917 2,259,917
1,300,000 Lexington Parker Capital Company
LLC, 5.60% due 12/05/1997 1,298,584 1,298,584
----------- -----------
3,558,501 3,558,501
US Government Agency 1,300,000 Federal Home Loan Mortgage Corp.,
Obligations** -- 1.5% 5.48% due 12/12/1997 1,297,230 1,297,230
----------- -----------
Total Short-Term Securities -- 5.6% 4,855,731 4,855,731
=========== ===========
Total Investments -- 99.6% $84,875,738 85,910,546
===========
Short Sales (Proceeds -- $4,780,419) -- (5.5%)+ (4,780,000)
Other Assets Less Liabilities -- 5.9% 5,137,586
-----------
Net Assets -- 100.0% $86,268,132
===========
Net Asset Class A -- Based on net assets of $74,705,392 and 5,880,826 shares outstanding $12.70
Value: ===========
Class B -- Based on net assets of $8,555,662 and 675,113 shares outstanding $12.67
===========
Class C -- Based on net assets of $1,380,620 and 108,916 shares outstanding $12.68
===========
Class D -- Based on net assets of $1,626,458 and 128,118 shares outstanding $12.69
===========
(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) Represents a zero coupon or step bond; the interest rate shown
is the effective yield at the time of purchase by the Fund.
(c) Adjustable Convertible Extendable Securities.
* 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 Fund.
+ Covered short sales entered into as of November 30, 1997 were as
follows:
Shares Issue Value
140,300 BankAtlantic Bancorp, Inc. $(1,894,050)
8,900 Continental Homes Holding Corp. (289,806)
40,000 Home Depot, Inc. (The) (2,237,500)
5,500 Polyphase Corporation (5,844)
14,700 Premiere Technologies, Inc. (352,800)
------------
Total (Proceeds -- $4,780,419) $(4,780,000)
============
</TABLE>
