MERRILL LYNCH
CONVERTIBLE
FUND, INC.
FUND LOGO
Quarterly Report
May 31, 1999
Officers and Directors
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Arthur Zeikel, Director
Vincent T. Lathbury III, Senior Vice
President
Joseph T. Monagle Jr., Senior Vice President
Daniel A. Luchansky, Vice President
Donald C. Burke, Vice President and
Treasurer
Ira P. Shapiro, Secretary
Custodian
The State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Transfer Agent
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
Printed on post-consumer recycled paper
MERRILL LYNCH CONVERTIBLE FUND, INC.
DEAR SHAREHOLDER
For the three months ended May 31, 1999, total returns for Merrill
Lynch Convertible Fund, Inc.'s Class A, Class B, Class C and Class D
Shares were +5.84%, +5.53%, +5.56% and +5.75%, respectively. (Fund
results do not include sales charges, and would be lower if sales
charges were included. Complete performance information can be found
on pages 2 and 3 of this report to shareholders.)
The Environment
While our long-term outlook for the equity market is constructive,
our near-term outlook is more cautious. Although several key
technical US stock market indicators improved in late March and
April, they faltered in the final month of the quarter. For example,
the New York Stock Exchange advance/decline indicator rose, but
failed to exceed the highs made in early April of last year. Since
then, it has declined somewhat and has not been able to resume an
upward trend. The contrary indicator of investor sentiment became
very bullish late in the period. In addition, valuations remained
extreme by historical standards and speculation seemed to have
increased. Illustrating these extreme valuations were the trailing
price/earnings ratios of the major indexes. At May period end,
price/earnings ratios were over 100 for the NASDAQ Composite Index,
82 for the NASDAQ 100 Index, 83 for the Russell 2000 Index (small
cap stocks), 26 for the Dow Jones Industrial Average and 33 for the
Standard & Poor's 500 Index.
These high valuations may reflect a new era of prosperity brought
about by positive demographics, low inflation, as well as high and
sustainable economic growth and productivity. Alternatively, they
may represent abnormal excesses in valuations that are due to revert
toward the mean. In this case, these high valuations may prove to be
more reflective of what has already occurred rather than discounting
a continuation of these positive economic fundamentals. US stocks
may be undergoing a run up akin to the rise in Japanese equity
prices in the late 1980s. At this time, it is impossible to tell
which scenario will prove to be correct. However, history suggests
to us that a cautious stance is appropriate, since most periods of
extreme overvaluation have ended in painful and sometimes rapid
reversion toward the mean.
Portfolio Matters
During the May quarter, the Fund's performance benefited from the
strength of cyclicals, a sector in which we were overweight. We
purchased several of these issues in the last 12 months--including
Union Pacific Capital Trust convertible preferred stock and Case
Corporation common stock--at bargain prices that were well below
the highs they achieved during the quarter. Late in the quarter,
Case agreed to be acquired by New Holland, NV for $55 per share in
cash. While the transaction is not expected to be completed until
late this year, its proposed price is more than twice the cost we
paid in late 1998, thus validating the undervaluation that we
perceived.
We were defensive with regard to credit quality during the May
quarter, but some of the best gains in the convertible market came
from more speculative-grade securities, notably in the areas of
cable television, communications and the Internet. Although we
declined to invest in several of the more speculative new technology
issues, we believe the Fund's performance for the quarter
illustrates how it is possible to seek attractive returns in the
convertible securities market while preserving the attractive risk
characteristics that convertibles offer relative to equities. Our
investment of choice in the cable television area was a bond issued
by Bell Atlantic Financial Services Inc., an A+/A1 rated credit,
exchangeable into Cable and Wireless Communications PLC, one of the
United Kingdom's largest cable companies. Our telephony exposure is
in another Bell Atlantic Financial Services Inc. bond, this one
exchangeable into Telecom Corp. of New Zealand. While these
securities did not perform as well as the more speculative issues in
the same industries, we believe that they are a lower-risk way to
benefit from the growth of the communications sector. In addition,
their investment values provide a firmer "bond floor" than the lower-
grade issues in the event of price declines.
Merrill Lynch Convertible Fund, Inc.
May 31, 1999
In the technology area, we established positions in LSI Logic
Corporation, Micron Technology Inc. and Sanmina Corporation. The
first two companies manufacture semiconductors. The latter is a
contract manufacturer of electronics. We also bought new convertible
issues of Internet access providers PSInet Inc. and Mindspring
Enterprises. We sold Amazon.com Inc.'s convertible bond at a profit
after the company warned that losses in coming quarters would be
greater than previously anticipated. We also took profits in
Japanese holdings Sony Corporation, Matsushita Electric Industrial
Company, Ltd., Sanyo Coca-Cola Bottling Co. and Tokyo Electron Ltd.
after their prices had recovered.
As of May 31, 1999, the current yield and the weighted average
conversion premium on the Fund's convertible investments were 5.04%
and 30%, respectively.
In Conclusion
We believe that convertibles are a defensive way of participating in
equity market advances because they combine the appreciation
potential of common stocks with the risk-moderating attributes of
fixed-income securities. In our opinion, this suggests that in the
current market environment equity-oriented investors may want to
consider adding convertibles to their asset mix.
We appreciate your continued investment in the Merrill Lynch
Convertible Fund, Inc., and we look forward to reviewing our outlook
and strategy with you again in our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Daniel Luchansky)
Daniel Luchansky
Vice President and Portfolio Manager
June 25, 1999
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* 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.
* 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.)
* 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.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
Merrill Lynch Convertible Fund, Inc.
May 31, 1999
PERFORMANCE DATA (concluded)
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Average Annual Total Return" tables 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>
Recent Performance Results*
<CAPTION>
Ten Years/
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Convertible Fund, Inc. Class A Shares++ - 9.06% +5.84% +106.59%
ML Convertible Fund, Inc. Class B Shares -10.00 +5.53 - 0.78
ML Convertible Fund, Inc. Class C Shares -10.00 +5.56 - 0.81
ML Convertible Fund, Inc. Class D Shares - 9.24 +5.75 + 0.66
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's ten-year/since inception dates are Class A Shares, for the
ten years ended 5/31/99 and Class B, Class C & Class D Shares, from
8/04/97 to 5/31/99.
++Investment results for Class A Shares prior to August 4, 1997
reflect the performance of the Fund's Capital Shares when the Fund
was a closed-end, dual investment company. Results for this period
reflect only capital appreciation of the Fund's holdings, and do not
reflect income.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares++*
Year Ended 3/31/99 -13.02% -17.59%
Five Years Ended 3/31/99 + 7.15 + 6.00
Ten Years Ended 3/31/99 + 7.83 + 7.25
<FN>
++Performance results for Class A Shares prior to August 4, 1997
reflect the performance of the Fund's Capital Shares when the Fund
was closed-end.
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge currently applicable to
Class A Shares.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/99 -13.82% -17.13%
Inception (8/04/97)
through 3/31/99 - 2.40 - 3.55
<FN>
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/99 -13.90% -14.73%
Inception (8/04/97)
through 3/31/99 - 2.43 - 2.43
<FN>
*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*
Year Ended 3/31/99 -13.13% -17.69%
Inception (8/04/97)
through 3/31/99 - 1.62 - 4.77
<FN>
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Convertible Fund, Inc.
May 31, 1999
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
S&P Moody's Face
Industry Rating Rating Amount Convertible Debentures Cost Value
<S> <S> <S> <C> <S> <C> <C>
Advertising--1.5% NR* NR* US$ 1,125,000 Interpublic Group Company Inc., 1.87% due
6/01/2006 $ 933,952 $ 933,952
Automotive A- Baa1 1,000,000 Magna International Inc., 4.875%
Parts--2.9% due 2/15/2005 1,017,500 1,025,000
B+ B2 750,000 Tower Automotive, Inc., 5% due 8/01/2004 750,000 804,375
------------ ------------
1,767,500 1,829,375
Aviation Kellstrom Industries Inc.:
Equipment--2.0% B- B3 1,000,000 5.75% due 10/15/2002 1,000,000 885,000
B- B3 500,000 5.50% due 6/15/2003 500,000 405,625
------------ ------------
1,500,000 1,290,625
Banking & NR* NR* 700,000 BankAtlantic Bancorp, Inc., 5.625%
Financial--0.9% due 12/01/2007 628,566 579,250
Conglomerates-- NR* NR* 600,000 Polyphase Corporation, 12% due 7/01/1999*** 600,000 132,000
0.2%
Electronics--1.3% NR* NR* 750,000 Sanmina Corporation, 4.25% due 5/01/2004 750,000 836,250
Energy--1.6% BB Ba2 1,000,000 Pennzenergy Company, 4.95% due 8/15/2008 980,000 1,016,250
Environmental-- A- Baa3 1,000,000 Thermo Fibertek Inc., 4.50% due 7/15/2004 775,000 850,000
1.3%
Home BBB+ A3 1,450,000 Newell Financial Trust I, 5.25% due
Furnishings--2.4% 12/01/2027 (Preferred) 1,571,924 1,504,375
Internet--0.3% B- B3 200,000 Mindspring Enterprises, 5% due 4/15/2006 200,000 172,250
Lodging--1.5% BBB- Baa3 1,000,000 Hilton Hotels Corp., 5% due 5/15/2006 987,500 938,750
Medical NR* NR* 550,000 Phoenix Shannon PLC, 9.50% due 11/01/2000 216,707 5,500
Supplies--0.0%
Networking NR* NR* 1,400,000 Network Associates, Inc., 5.195%
Products--0.7% due 2/13/2018 (c) 536,508 418,250
Paper--3.0% NR* NR* 2,000,000 Metsa Serla Oyj (A Shares), 4.375% due
10/15/2002 1,973,425 1,885,000
Pharmaceuticals-- B NR* 375,000 Alpharma Inc., 3% due 6/01/2006 375,000 375,000
3.5% NR* NR* 500,000 Genzyme Corp.--General Division, 5.25% due
6/01/2005 505,000 613,125
NR* NR* 1,200,000 Swiss Life Finance Ltd. (Convertible into
Glaxo Wellcome PLC), 2% due 5/20/2003 1,272,750 1,239,000
------------ ------------
2,152,750 2,227,125
Restaurants--1.6% NR* B2 1,000,000 Hometown Buffet Inc., 7% due 12/01/2002 967,500 1,045,000
Retail--Building A+ A1 1,000,000 The Home Depot Inc., 3.25% due 10/01/2001 1,004,687 2,463,750
Materials--3.9%
Scientific A- Baa3 500,000 Thermo Optek Inc., 5% due 10/15/2000 517,500 491,250
Equipment--1.5% A- Baa3 500,000 ThermoQuest Corporation, 5% due 8/15/2000 507,500 491,875
------------ ------------
1,025,000 983,125
Semiconductors-- B NR* 375,000 LSI Logic Corporation, 4.25% due 3/15/2004 375,000 512,812
2.1% B B2 850,000 Micron Technology Inc., 7% due 7/01/2004 896,750 850,000
------------ ------------
1,271,750 1,362,812
</TABLE>
Merrill Lynch Convertible Fund, Inc.
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
S&P Moody's Face
Industry Rating Rating Amount Convertible Debentures Cost Value
<S> <S> <S> <C> <S> <C> <C>
Technology--2.3% Data General Corp.:
B B3 US$ 500,000 6% due 5/15/2004 $ 500,000 $ 417,500
B B3 1,250,000 6% due 5/15/2004 1,205,000 1,040,625
------------ ------------
1,705,000 1,458,125
Telecommunica- Bell Atlantic Financial Services Inc.:
tions--5.5% A+ A1 1,000,000 5.75% due 4/01/2003 (into Telecom Corp.
of New Zealand) 1,012,500 1,025,000
NR* NR* 2,400,000 4.25% due 9/15/2005 (into Cable &
Wireless Communications PLC) 2,445,500 2,490,000
------------ ------------
3,458,000 3,515,000
Water Treatment BBB Ba3 600,000 U.S. Filter Corp., 4.50% due 12/15/2001 636,000 588,000
Systems--0.9%
Total Convertible Debentures--40.9% 25,641,769 26,034,764
Shares
Held Convertible Preferred Stocks
Auto Parts-- B+ B1 20,000 Federal-Mogul Financial Trust, 7% 1,085,000 1,110,000
1.7%
Banking & NR* A1 10,000 Jefferson Pilot Corp. (ACES SM) (into
Financial--1.7% NATIONSBANK),7.25% (a) 725,000 1,080,000
Construction & BBB- Baa3 25,000 Fleetwood Capital Trust, 6% 1,260,625 1,028,125
Housing--3.6% BBB- Baa3 30,000 Fleetwood Capital Trust, 6% 1,305,000 1,233,750
------------ ------------
2,565,625 2,261,875
Containers--1.3% B+ Ba3 20,000 Owens-Illinois Inc., 4.75% 1,000,000 832,500
Energy--5.8% BB Ba1 30,000 CalEnergy Capital Trust II, 6.25% 1,457,050 1,473,750
BBB- Baa2 40,000 Unocal Capital Trust, 6.25% 2,136,250 2,210,000
------------ ------------
3,593,300 3,683,750
Internet--1.1% NR* NR* 15,000 PSInet Inc., 6.75% 750,000 699,375
Oil & Gas BBB Baa3 10,000 Occidental Petroleum Corporation, $3.00 580,600 513,750
Producers--1.4% B B3 7,500 Pogo Trust I, 6.50% 375,000 375,000
------------ ------------
955,600 888,750
Paper--2.2% BBB- Baal 28,000 International Paper Capital Trust, 5.25% 1,331,400 1,424,500
Railroads--2.6% BB+ Ba2 32,000 Union Pacific Capital Trust, 6.25% 1,513,875 1,672,000
Real Estate NR* Baa1 45,000 Equity Residential Properties,
Investment Series J, $2.15 1,207,854 1,335,937
Trusts--2.1%
Restaurants-- BBB- Baa2 20,000 Wendy's Financing I, Series A, 5% 1,044,750 1,185,000
1.9%
Retail--1.7% B+ Ba3 19,500 Kmart Financing I, 7.75% 1,085,857 1,090,781
Steel--4.2% B- Caa 60,000 WHX Corporation, Series A, 6.50% 2,584,540 2,062,500
A- Baa1 78,610 Worthington Industries, Inc. (Convertible,
Series DECS into Rouge Steel
Common Stock), 7.25% 1,328,902 619,054
------------ ------------
3,913,442 2,681,554
</TABLE>
Merrill Lynch Convertible Fund, Inc.
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
S&P Moody's Face
Industry Rating Rating Amount Convertible Debentures Cost Value
<S> <S> <S> <C> <S> <C> <C>
Telecommunica- B- B3 20,000 Loral Space and Communications Ltd., 6% $ 952,500 $ 967,500
tions--1.5%
Utilities--1.4% A A2 20,000 Citizens Utilities Trust, 5% 886,200 880,000
Total Convertible Preferred Stocks--34.2% 22,610,403 21,793,522
Common Stocks &Warrants
Analytical Equipment 70,000 Thermo Electron Corporation 1,124,168 1,338,750
Manufacturing--2.1%
Building & Construction--1.3% 81,700 Morrison Knudsen Corporation 998,337 811,894
Building Products--0.9% 15,000 Texas Industries, Inc. 380,300 545,625
Computers--1.2% 60,000 Silicon Graphics, Inc. 965,557 742,500
Conglomerates--0.0% 105,000 Polyphase Corporation*** 158,550 11,550
52,500 Polyphase Corporation (Warrants)(b)*** 13,125 525
52,500 Polyphase Corporation (Warrants)(b)*** 26,250 2,100
------------ ------------
197,925 14,175
Consumer & Business Services--1.6% 55,000 Cendant Corporation 1,141,856 1,014,062
Consumer Products--1.7% 35,000 RJR Nabisco Holdings Corp. 1,142,475 1,082,813
Healthcare Services--1.3% 60,000 HEALTHSOUTH Corporation 658,699 802,500
Machinery--1.7% 23,000 Case Corporation 543,943 1,081,000
Mining--1.6% 37,000 Cyprus Amax Minerals Company 625,776 464,813
40,000 Inco Limited 739,218 570,000
------------ ------------
1,364,994 1,034,813
Networking Products--1.1% 25,000 3Com Corporation 1,195,894 682,813
Oil & Gas Producers--1.9% 44,000 Diamond Offshore Drilling, Inc. 1,086,268 1,199,000
Semiconductors--1.6% 32,500 Cypress Semiconductor Corporation 452,262 361,563
85,000 Integrated Device Technology, Inc. 776,940 669,375
1,229,202 1,030,938
Steel--1.8% 15,000 AK Steel Holding Corporation 225,581 360,000
30,000 USX-U.S. Steel Group 709,974 808,125
------------ ------------
935,555 1,168,125
Utilities--0.2% 15,940 Citizens Utilities Company (Class B) 141,137 152,427
Total Common Stocks & Warrants--20.0% 13,106,310 12,701,435
</TABLE>
Merrill Lynch Convertible Fund, Inc.
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Face
Amount Short-Term Securities Cost Value
<S> <C> <S> <C> <C>
Commercial US$ 2,086,000 General Motors Acceptance Corp.,
Paper**--3.3% 4.94% due 6/01/1999 $ 2,085,141 $ 2,085,141
US Government Federal Home Loan Mortgage Corporation:
Agency 1,440,000 4.72% due 6/04/1999 1,438,867 1,438,867
Obligations**--3.8% 1,000,000 4.72% due 6/11/1999 998,296 998,296
------------ ------------
2,437,163 2,437,163
Total Short-Term Securities--7.1% 4,522,304 4,522,304
Total Investments--102.2% $ 65,880,786 65,052,025
============
Short Sales (Proceeds--$22,577)--0.0%*** (2,406)
Liabilities in Excess of Other Assets--(2.2%) (1,381,011)
------------
Net Assets--100.0% $ 63,668,608
============
Net Asset Class A--Based on net assets of $39,071,219 and 3,387,822 share
Value: of beneficial interest outstanding $ 11.53
============
Class B--Based on net assets of $16,499,124 and 1,430,886 shares
of beneficial interest outstanding $ 11.53
============
Class C--Based on net assets of $3,350,156 and 290,719 shares of
beneficial interest outstanding $ 11.52
============
Class D--Based on net assets of $4,748,109 and 410,596 shares of
beneficial interest outstanding $ 11.56
============
<FN>
(a)Adjustable Convertible Extendable Securities.
(b)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock and are non-income producing. The purchase
price and number of shares are subject to adjustment under certain
conditions until the expiration date.
(c)Represents a zero coupon or step bond; the interest rate shown
reflects the effective yield at the time of purchase by the Fund.
*Not Rated.
**Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis; the interest rates shown reflect the
discount rates paid at the time of purchase by the Fund.
***Covered short sales entered into as of May 31, 1999 were as
follows:
Shares Issue Value
5,500 Polyphase Corporation $ (2,406)
------------
Total (Proceeds--$22,577) $ (2,406)
============
PORTFOLIO INFORMATION
As of May 31, 1999
Percent of
Ten Largest Holdings Net Assets
Bell Atlantic Financial Services Inc.* 5.5%
The Home Depot Inc., 3.25% due
10/01/2001 3.9
Fleetwood Capital Trust, 6%* 3.6
Unocal Capital Trust, 6.25% 3.5
WHX Corporation, Series A, 6.50% 3.2
Metsa Serla Oyj (A Shares), 4.375% due
10/15/2002 3.0
Union Pacific Capital Trust, 6.25% 2.6
Newell Financial Trust I, 5.25% due
12/01/2027 (Preferred) 2.4
CalEnergy Capital Trust II, 6.25% 2.3
Data General Corp., 6% due 5/15/2004* 2.3
<FN>
*Includes combined holdings.
</TABLE>
