MERRILL LYNCH
CONVERTIBLE
FUND, INC.
FUND LOGO
Annual Report
August 31, 2000
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
Fiscal Year in Review
For the fiscal year ended August 31, 2000, total returns for Merrill
Lynch Convertible Fund, Inc.'s Class A, Class B, Class C and Class D
Shares were +5.01%, +4.00%, +3.94% and +4.80%, respectively.
(Investment results shown do not reflect sales charges and would be
lower if sales charges were included. Complete performance
information can be found on pages 3 - 5 of this report to
shareholders.) This compares to the returns of +5.15% for the Dow
Jones Industrial Average and +6.05% for the Salomon Smith Barney 10-
year Treasury Index for the same period. The Dow Jones Industrial
Average fell last autumn, then firmed last winter but declined
sharply again through spring of 2000. After rallying in April 2000,
the Dow Jones Industrial Average moved sideways within a trading
range through the balance of the Fund's fiscal year.
The internal condition of the stock market has improved during the
past year. For example, the New York Stock Exchange advance/decline
line, which was very weak through the spring of 2000, recently
improved dramatically. The US economy has remained quite strong,
although energy prices have increased significantly. This prompted
the Federal Reserve Board to be concerned about rising inflation.
Consequently, the Federal Reserve Board increased short-term
interest rates several times to slow economic growth. During the
fiscal year ended August 31, 2000, the Federal Funds rate was
increased from 5.25% to 6.50%. Short-term interest rates rose during
the fiscal year, while long-term interest rates declined, causing
the yield curve to invert in April 2000. Long-term interest rates on
30-year Treasury bonds declined from 6.07% to 5.67%.
During the fiscal year, the Fund's performance was affected by many
factors. A large part of the Fund's holdings were in value-oriented
issues, which negatively affected our performance. We found
compelling value in the so-called "old-economy stocks," many of
which had declined to levels we believed overdiscounted the
negatives. This left their equity prices below our estimation of
their intrinsic value and/or replacement costs as businesses.
Examples of these investments were our holdings in container
manufacturer Owens-Illinois, Inc., Canadian National Railway Company
and Union Pacific Capital Trust, as well as our holdings of auto
parts manufacturers that included Federal-Mogul Corp., Magna
International Inc., and Tower Automotive, Inc. Other "old-economy"
value investments that performed poorly included various steel and
paper producing companies. The recovery of these investments has
been slower than we anticipated.
The performance of our steel holdings was also a disappointment. We
expected strength in the economy, rationalization of capacity, and
industry consolidation combined with very low valuation of the
equities to lead to solid investment returns. However, pricing
within the industry remained weak. We sold our USX-U.S. Steel Group
common stock and Texas Industries, Inc. common stock at a profit,
but the investments we held in AK Steel Holding Corporation, WHX
Corporation and Rouge Industries, Inc. declined. We continue to
believe equity valuations are especially compelling in the steel
sector where our holdings trade at a substantial discount-to-book
value and replacement cost.
Another area of disappointment this year was continuing weakness in
the paper industry. As with the steel industry, we expected the
combined effects of industry consolidation and resultant capacity
rationalization with improved economic conditions in 2000 to lead to
a better commodity-pricing environment. While there has been
industry consolidation, the commodity pricing improvement has been
slow to materialize. We sold Metsa-Serla Oyj but retained the bulk
of our position in International Paper Capital Trust, which we
continue to find an attractive long-term investment.
Alternatively, an emphasis of the energy sector benefited the Fund
during the year. Some energy issues, which aided our performance
this year, were Canadian Occidental Petroleum, Ltd., Diamond
Offshore Drilling, Inc., Kerr-McGee Corp., Pogo Trust I and Unocal
Capital Trust. We believed this group was a compelling long-term
value depressed by warm weather, low oil prices and reduced demand
from Asia. Furthermore, in our opinion, the negative investor
sentiment was overdone and this created investment opportunities
that ultimately benefited the Fund.
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
Similarly, our investments in the semiconductor group and selected
technology companies also benefited the Fund's performance during
the year. Cypress Semiconductor Corp., where we took profits in the
common stock and purchased a convertible debenture, Integrated
Device Technology, Inc. common stock and Micron Technology, Inc.
common stock were strong performers. Other strong performers in the
technology area were Rational Software Corporation, Siebel Systems,
Inc., I2 Technologies Inc. and SCI Systems Inc. A contributing
factor in the success of these investments was a boom in the
communications market and strong personal computer sales fueled by
the Internet's growing popularity.
However, the performance of our technology holdings was not
homogeneous. Internet investments were disappointing and our
communications, biotech and genomics holdings' performance was
mixed. Our exposure to the Internet sector through investments in
leading service, content and delivery providers did not live up to
our expectations. Investments in these sectors included America
Online, Inc. convertible debentures and Reliant Energy Inc.
debentures convertible into Time Warner, Inc. These two companies
have agreed to merge, creating the largest Internet service and
content provider. Convertible debentures issued by Internet service
provider At Home Corporation also declined. Communications
investments that helped Fund performance were Telefonos de Mexico SA
and EchoStar Communications Corporation. Convertible debentures
issued by Nextel Communications, Inc. were virtually unchanged but
our investment in the common stock of AT&T Corp. declined.
The biotech sector performed well and our holdings in Alpharma, Inc.
and Genzyme Corporation were standouts. Convertible debentures
issued by pharmaceutical giant Roche Holdings, Inc. declined
modestly. Our smaller positions in convertibles of the emerging area
of human genomics represented by Affymetrix, Inc., Curagen
Corporation and Human Genome Sciences, Inc. declined.
In Conclusion
On June 21, 2000, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other
conditions, whereby Merrill Lynch Balanced Capital Fund, Inc. would
acquire substantially all of the assets and liabilities of the Fund
in exchange for newly issued shares of Merrill Lynch Balanced
Capital Fund, Inc. These Funds are registered, open-end management
investment companies. Both entities have a similar investment
objective and are managed by Merrill Lynch Investment Managers, L.P.
We appreciate your investment in Merrill Lynch Convertible Fund,
Inc.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Daniel Luchansky)
Daniel Luchansky
Vice President and Portfolio Manager
October 6, 2000
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
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).
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/
6 Month 12 Month Since Inception
As of August 31, 2000 Total Return Total Return Total Return
<S> <C> <C> <C>
ML Convertible Fund, Inc. Class A Shares++ -1.74% +5.01% +154.94%
ML Convertible Fund, Inc. Class B Shares -2.21 +4.00 + 5.67
ML Convertible Fund, Inc. Class C Shares -2.19 +3.94 + 5.66
ML Convertible Fund, Inc. Class D Shares -1.78 +4.80 + 8.34
*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 periods are ten years for Class A
Shares and from 8/04/97 for Class B, Class C & Class D Shares.
++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.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph illustrating the growth of a investment in
ML Convertible Fund, Inc. Class A Shares*+++ compared to the
Value Line Convertible Index++++. Beginning and ending
values are:
8/90 8/00
ML Convertible Fund, Inc.-
Class A Shares*+++ $ 9,475 $24,155
Value Line Convertible Index++++ $10,000 $34,945
A line graph illustrating the growth of a investment in
ML Convertible Fund, Inc. Class B, Class C and Class D Shares**
compared to the Value Line Convertible Index++++. Beginning and
ending values are:
8/04/97*** 8/00
ML Convertible Fund, Inc.-
Class B Shares** $10,000 $10,499
ML Convertible Fund, Inc.-
Class C Shares** $10,000 $10,566
ML Convertible Fund, Inc.-
Class D Shares** $ 9,475 $10,265
Value Line Convertible Index++++ $10,000 $11,915
*Assuming maximum sales charge currently applicable to Class A
Shares, transaction costs and other operating expenses, including
advisory fees.
**Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
***Commencement of operations.
++ML 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 Fund's
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 (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.
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares++*
One Year Ended 6/30/00 -1.97% -7.12%
Five Years Ended 6/30/00 +7.37 +6.22
Ten Years Ended 6/30/00 +7.92 +7.34
++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*
One Year Ended 6/30/00 -2.98% -6.76%
Inception (8/04/97)
through 6/30/00 +0.15 -0.29
*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*
One Year Ended 6/30/00 -2.98% -3.92%
Inception (8/04/97)
through 6/30/00 +0.14 +0.14
*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*
One Year Ended 6/30/00 -2.22% -7.36%
Inception (8/04/97)
through 6/30/00 +0.94 -0.91
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
PORTFOLIO INFORMATION
As of August 31, 2000
Percent of
Ten Largest Holdings Net Assets
Reliant Energy Inc., 2% due 9/15/2029
(convertible into Time Warner Inc.) 4.4%
Unocal Capital Trust, 6.25% 4.1
Nextel Communications, Inc., 5.25% due
1/15/2010 3.4
Verizon Communications, Series B, 4.25%
due 9/15/2005 (convertible into Cable &
Wireless PLC and NTL Inc.) 3.3
Thermo Electron Corporation 3.2
Union Pacific Capital Trust, 6.25% 3.0
International Paper Capital Trust, 5.25% 2.6
Newell Financial Trust I, 5.25% due
12/01/2027 (Preferred) 2.6
AT&T Corp., 7% due 11/15/2002 (convertible
into Vodafone Group PLC) 2.4
America Online Inc., 2.851% due
12/06/2019 2.4
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
S&P Moody's Face
Industry Rating Rating Amount Convertible Debentures Value
<S> <S> <S> <C> <S> <C>
Advertising A Baa1 US$ 250,000 Interpublic Group Co., Inc., 1.87% due 6/01/2006 $ 227,665
--0.9% BB+ Baa3 150,000 Young & Rubicam Inc., 3% due 1/15/2005 (c) 157,687
------------
385,352
Automotive A- Baa1 800,000 Magna International Inc., 5% due 10/15/2002 814,496
Parts--3.3% BB- B2 750,000 Tower Automotive, Inc., 5% due 8/01/2004 (c) 600,938
------------
1,415,434
Banking & NR* NR* 234,000 BankAtlantic Bancorp, Inc., 5.625% due 12/01/2007 159,705
Financial--0.4%
Biotechnology CCC+ NR* 250,000 Affymetrix Inc., 4.75% due 2/15/2007 (c) 188,125
--3.2% CCC NR* 250,000 Curagen Corporation, 6% due 2/02/2007 (c) 216,563
NR* NR* 300,000 Genzyme Corporation, 5.25% due 6/01/2005 602,625
CCC NR* 250,000 Human Genome Sciences, Inc., 5% due 2/01/2007 (c) 403,438
------------
1,410,751
Broadcasting-- BBB- Baa3 1,000,000 Clear Channel Communications, 1.50% due 12/01/2002 985,000
8.4% NR* NR* 600,000 Echostar Communications, 4.875% due 1/01/2007 745,500
BBB Baa2 2,290,000 Reliant Energy Inc., 2% due 9/15/2029
(convertible into Time Warner Inc.) (e) 1,913,593
------------
3,644,093
E-Commerce CCC NR* 100,000 Ventro Corporation, 6% due 4/01/2007 35,000
--0.1%
Electronics BBB- Ba1 750,000 SCI Systems Inc., 3% due 3/15/2007 956,250
--2.2%
Environmental BBB Baa3 1,000,000 Thermo Fibertek Inc., 4.50% due 7/15/2004 (c) 837,500
--1.9%
Financial B+ NR* 150,000 E*Trade Group Inc., 6% due 2/01/2007 (c) 144,000
Services--0.3%
Healthcare BBB+ Baa3 750,000 Wellpoint Health Network, 2% due 7/02/2019 (a) 560,625
--1.3%
Home NR* NR* 1,450,000 Newell Financial Trust I, 5.25% due 12/01/2027 (Preferred) 1,111,969
Furnishings
--2.6%
Internet--4.3% BB- Ba3 2,000,000 America Online Inc., 2.851% due 12/06/2019 (a) 1,045,000
B- B3 750,000 At Home Corporation, 0.525% due 12/28/2018 (c) 315,000
CCC+ NR* 250,000 Exodus Communications Inc., 4.75% due 7/15/2008 (c) 486,250
------------
1,846,250
Machinery--1.5% NR* NR* 500,000 Advanced Energy Industries, 5.25% due 11/15/2006 654,250
Medical NR* NR* 550,000 ++Phoenix Shannon PLC, 9.50% due 11/01/2000 (c) 5,500
Supplies--0.0%
Networking NR* NR* 1,400,000 Network Associates Inc., 5.195% due 2/13/2018 (a) 542,500
Products--1.2%
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
S&P Moody's Face
Industry Rating Rating Amount Convertible Debentures Value
<S> <S> <S> <C> <S> <C>
Oil & Gas BBB- Baa2 US$ 500,000 Kerr-McGee Corporation, 5.25% due 2/15/2010 $ 599,375
Producers--1.4%
Pharmaceuti- NR* NR* 100,000 Alkermes Inc., 3.75% due 2/15/2007 (c) 83,625
cals--1.6% NR* NR* 1,300,000 Roche Holdings Inc., 5.614% due 5/06/2012 (a)(c) 617,500
------------
701,125
Semiconductors B B1 500,000 Cypress Semiconductor, 4% due 2/01/2005 636,250
--4.1% B- NR* 500,000 Lattice Semiconductor Co., 4.75% due 11/01/2006 976,570
CCC+ NR* 100,000 Semtech Corporation, 4.50% due 2/01/2007 (c) 152,500
------------
1,765,320
Software--4.4% NR* NR* 250,000 Rational Software Corporation, 5% due 2/01/2007 (c) 452,188
NR* NR* 250,000 I2 Technologies Inc., 5.25% due 12/15/2006 (c) 595,625
NR* NR* 200,000 Siebel Systems Inc., 5.50% due 9/15/2006 (c) 846,250
------------
1,894,063
Telecommun- NR* NR* 2,630,000 AT&T Corp., 7% due 11/15/2002 (convertible into
ications--10.6% Vodafone Group PLC) 1,053,644
B NR* 500,000 American Tower Corporation, 5% due 2/15/2010 (c) 472,500
B+ B1 200,000 Colt Telecom Group PLC, 2% due 12/16/2006 (c) 164,928
B B1 1,500,000 Nextel Communications, Inc., 5.25% due 1/15/2010 (c) 1,471,875
NR* NR* 1,200,000 Verizon Communications, Series B, 4.25% due 9/15/2005
(convertible into Cable & Wireless PLC and NTL Inc.) 1,452,000
------------
4,614,947
Total Convertible Debentures
(Cost--$21,935,317)--53.7% 23,284,009
Shares
Held Convertible Preferred Stocks
Aerospace--1.0% B- B3 7,000 Loral Space & Communications, 6% 169,750
B- B3 10,000 Loral Space & Communications, Series C, 6% 262,500
------------
432,250
Conglomerates BB ba2 6,800 Seagram Company Ltd., 7.50% 374,000
--0.9%
Construction & BBB- baa3 5,000 Fleetwood Capital Trust, 6% 143,750
Housing--1.3% BBB- baa3 15,000 Fleetwood Capital Trust, 6% (c) 431,250
------------
575,000
Containers--1.0% B+ ba3 20,000 Owens-Illinois Inc., 4.75% 422,500
Energy--5.1% B b3 7,500 Pogo Trust I, 6.50% 457,500
BBB- baa2 40,000 Unocal Capital Trust, 6.25% 1,780,000
------------
2,237,500
Internet--1.0% NR* caa 7,500 PSINET Inc., 6.75% (c) 285,000
NR* caa 5,000 PSINET Inc., Series C, 6.75% (b)(c) 130,000
------------
415,000
Paper--2.6% BBB- baa2 28,000 International Paper Capital Trust, 5.25% (c) 1,137,500
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
S&P Moody's Face
Industry Rating Rating Amount Convertible Preferred Stocks Value
<S> <S> <S> <C> <S> <C>
Railroads--3.5% BB+ baa3 5,000 Canadian National Railway Company, 5.25% $ 226,875
BB ba2 32,000 Union Pacific Capital Trust, 6.25% 1,316,000
------------
1,542,875
Real Estate BBB baa1 15,000 Equity Residential Properties, Series J, $2.15 344,062
Investment
Trusts--0.8%
Restaurants BBB- baa2 20,000 Wendy's Financing I, Series A, 5% 950,000
--2.2%
Retail--1.6% B+ ba2 19,500 Kmart Financing I, 7.75% 705,656
Steel--2.3% CCC+ caa 60,000 WHX Corporation, Series A, 6.50% 1,016,250
Telecommun- NR* NR* 12,000 DECS Trust VI, 6.25% (convertible into Metromedia
ications--1.9% Fiber Network, Inc.) 828,000
Television CCC caa 2,500 Pegasus Communications Corporation, 6.50% (c) 226,562
--1.0% NR* caa 5,000 UnitedGlobalCom Inc., Series D, 7% 197,500
------------
424,062
Utilities--1.2% NR* ba2 5,000 Calpine Capital Trust II, 5.50% (c)(e) 503,750
Total Convertible Preferred Stocks
(Cost--$15,657,610)--27.4% 11,908,405
Common Stocks & Warrants
Analytical Equipment 60,000 ++Thermo Electron Corporation 1,395,000
Manufacturing--3.2%
Communication--1.0% 14,000 AT&T Corp. 441,000
Computers--0.1% 200 ++Palm, Inc. 8,787
1,474 ++Parametric Technology Corporation 19,715
------------
28,502
Conglomerates--0.4% 99,500 ++Polyphase Corporation 99,500
105,000 Polyphase Corporation (Warrants)(d) 78,750
------------
178,250
Oil & Gas Producers--0.2% 2,000 Diamond Offshore Drilling, Inc. 89,625
Semiconductors--0.6% 1,000 ++Integrated Device Technology, Inc. 87,687
2,000 ++Micron Technology, Inc. 163,500
------------
251,187
Steel--1.0% 15,000 AK Steel Holding Corporation 163,125
78,610 Rouge Industries, Inc. (Class A) 275,135
------------
438,260
Television--0.0% 161 ++Pegasus Communications Corporation 7,969
Total Common Stocks & Warrants
(Cost--$3,597,445)--6.5% 2,829,793
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Face
Industry Amount Convertible Preferred Stocks Value
<S> <C> <S> <C>
Commercial Paper** US$1,889,000 General Motors Acceptance Corp., 6.69% due 9/01/2000 $ 1,889,000
--4.4%
US Government Agency Federal National Mortgage Association:
Obligations**--8.1% 1,000,000 6.44% due 9/07/2000 998,927
2,540,000 6.45% due 9/14/2000 2,534,084
------------
3,533,011
Total Short-Term Securities (Cost--$5,422,011)--12.5% 5,422,011
Total Investments (Cost--$46,612,383)--100.1% 43,444,218
Liabilities in Excess of Other Assets--(0.1%) (37,245)
------------
Net Assets--100.0% $ 43,406,973
============
(a)Represents a zero coupon bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
(b)Represents a pay-in-kind security which may pay dividends in
additional shares.
(c)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(d)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.
(e)Floating rate note.
*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.
++Non-income producing security.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$46,612,383) $ 43,444,218
Cash 403
Foreign cash 7,205
Receivables:
Interest $ 156,633
Dividends 55,969
Capital shares sold 16,435 229,037
--------------
Prepaid registration fees and other assets 58,357
--------------
Total assets 43,739,220
--------------
Liabilities: Payables:
Capital shares redeemed 186,903
Investment adviser 18,812
Distributor 9,585 215,300
--------------
Accrued expenses and other liabilities 116,947
--------------
Total liabilities 332,247
--------------
Net Assets: Net assets $ 43,406,973
==============
Net Assets Class A Common Stock, $.10 par value, 100,000,000 shares
Consist of: authorized $ 248,940
Class B Common Stock, $.10 par value, 100,000,000 shares
authorized 71,366
Class C Common Stock, $.10 par value, 100,000,000 shares
authorized 18,410
Class D Common Stock, $.10 par value, 100,000,000 shares
authorized 27,421
Paid-in capital in excess of par 47,298,484
Undistributed investment income--net 284,233
Accumulated realized capital losses on investments and foreign
currency transactions--net (1,373,882)
Unrealized depreciation on investments and foreign currency
transactions--net (3,167,999)
--------------
Net assets $ 43,406,973
==============
Net Asset Value: Class A--Based on net assets of $29,501,523 and 2,489,401 shares
outstanding $ 11.85
==============
Class B--Based on net assets of $8,464,422 and 713,655 shares
outstanding $ 11.86
==============
Class C--Based on net assets of $2,181,752 and 184,097 shares
outstanding $ 11.85
==============
Class D--Based on net assets of $3,259,276 and 274,205 shares
outstanding $ 11.89
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 2000
<S> <S> <C> <C>
Investment Interest and discount earned $ 1,369,889
Income: Dividends (net of $492 foreign withholding tax) 1,312,191
--------------
Total income 2,682,080
--------------
Expenses: Investment advisory fees $ 298,211
Account maintenance and distribution fees--Class B 109,557
Professional fees 72,857
Accounting services 71,780
Printing and shareholder reports 61,970
Registration fees 39,867
Transfer agent fees--Class A 28,583
Directors' fees and expenses 25,977
Account maintenance and distribution fees--Class C 24,755
Transfer agent fees--Class B 12,640
Custodian fees 9,433
Account maintenance fees--Class D 9,198
Pricing services 3,683
Transfer agent fees--Class D 3,225
Transfer agent fees--Class C 2,931
Other 3,332
--------------
Total expenses 777,999
--------------
Investment income--net 1,904,081
--------------
Realized & Realized gain from:
Unrealized Gain Investments--net 3,092,042
(Loss) on Foreign currency transactions--net 497 3,092,539
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net: Investments--net (2,753,485)
Foreign currency transactions--net (188) (2,753,673)
-------------- --------------
Net Increase in Net Assets Resulting from Operations $ 2,242,947
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
August 31,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 1,904,081 $ 2,629,079
Realized gain (loss)on investments and foreign currency
transactions--net 3,092,539 (4,040,535)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net (2,753,673) 7,203,219
------------ ------------
Net increase in net assets resulting from operations 2,242,947 5,791,763
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (1,312,770) (3,109,143)
Shareholders: Class B (312,820) (1,077,140)
Class C (71,749) (245,610)
Class D (137,618) (375,748)
In excess of realized gain on investments--net:
Class A -- (23,131)
Class B -- (10,558)
Class C -- (2,358)
Class D -- (2,981)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (1,834,957) (4,846,669)
------------ ------------
Capital Share Net decrease in net assets derived from capital
Transactions: share transactions (16,492,605) (29,987,587)
------------ ------------
Net Assets: Total decrease in net assets (16,084,615) (29,042,493)
Beginning of year 59,491,588 88,534,081
------------ ------------
End of year* $ 43,406,973 $ 59,491,588
============ ============
*Undistributed investment income--net $ 284,233 $ 207,081
============ ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A++++++++
For the
The following per share data and ratios have been derived For the Period Year
from information provided in the financial statements. For the Year Jan. 1, 1997 Ended
Ended August 31, to Aug. 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 2000+++ 1999+++ 1998+++ 1997+++ 1996+++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.75 $ 11.59 $ 17.36 $ 15.57 $ 13.43
Operating --------- --------- --------- --------- ---------
Performance:++++ Investment income--net .48 .45 .60 .06 --
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .09 .51 (1.37) 1.75 2.78
--------- --------- --------- --------- ---------
Total from investment operations .57 .96 (.77) 1.81 2.78
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.47) (.79) (.32) -- --
Realized gain on investments--net -- -- (4.55) -- (.64)
In excess of realized gain on
investments--net -- (.01) (.07) -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (.47) (.80) (4.94) -- (.64)
--------- --------- --------- --------- ---------
Capital charge resulting from
issuance of Common Stock -- -- (.06) -- --
--------- --------- --------- --------- ---------
Capital charge resulting from
issuance of new classes of shares -- -- --++ (.02) --
--------- --------- --------- --------- ---------
Net asset value, end of period $ 11.85 $ 11.75 $ 11.59 $ 17.36 $ 15.57
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 5.01% 8.54% (7.03%) 11.50%+++++ 20.60%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses*** 1.27% 1.32% 1.29% .90%* .78%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 4.33% 3.91% 4.48% 4.76%* 4.98%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 29,502 $ 37,142 $ 52,425 $ 110,178 $ 289,993
Data: ========= ========= ========= ========= =========
Portfolio turnover 63.87% 85.42% 155.20% 92.86% 129.06%
========= ========= ========= ========= =========
*Annualized.
**Total investment returns exclude the effects of sales charges.
Performance results prior to August 4, 1997 reflect 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.
++++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 1, 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 $.73 and
dividends of investment income--net per Income Share were $.70.
+++Based on average shares outstanding.
+++++Aggregate total investment return.
++++++++Formerly Capital Shares.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class B+++++
For the
Period
The following per share data and ratios have been derived For the Year Aug. 4, 1997++
from information provided in the financial statements. Ended August 31, to Aug. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.74 $ 11.53 $ 17.35 $ 16.91
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .35 .34 .44 .05
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .11 .49 (1.34) .39
---------- ---------- ---------- ----------
Total from investment operations .46 .83 (.90) .44
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.34) (.61) (.28) --
Realized gain on investments--net -- -- (4.55) --
In excess of realized gain on investments--net -- (.01) (.07) --
---------- ---------- ---------- ----------
Total dividends and distributions (.34) (.62) (4.90) --
---------- ---------- ---------- ----------
Capital charge resulting from issuance of
Common Stock -- -- (.02) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 11.86 $ 11.74 $ 11.53 $ 17.35
========== ========== ========== ==========
Total Investment Based on net asset value per share 4.00% 7.36% (7.76%) 2.60%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 2.29% 2.35% 2.35% 2.66%*
Net Assets: ========== ========== ========== ==========
Investment income--net 3.22% 2.91% 3.31% 3.77%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 8,464 $ 14,774 $ 23,900 $ 5,759
Data: ========== ========== ========== ==========
Portfolio turnover 63.87% 85.42% 155.20% 92.86%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
+++Aggregate total investment return.
+++++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class C+++++
For the
Period
The following per share data and ratios have been derived For the Year Aug. 4, 1997++
from information provided in the financial statements. Ended August 31, to Aug. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.74 $ 11.54 $ 17.36 $ 16.91
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .35 .34 .44 .05
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .10 .49 (1.34) .40
---------- ---------- ---------- ----------
Total from investment operations .45 .83 (.90) .45
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.34) (.62) (.28) --
Realized gain on investments--net -- -- (4.55) --
In excess of realized gain on investments--net -- (.01) (.07) --
---------- ---------- ---------- ----------
Total dividends and distributions (.34) (.63) (4.90) --
---------- ---------- ---------- ----------
Capital charge resulting from issuance of
Common Stock -- -- (.02) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 11.85 $ 11.74 $ 11.54 $ 17.36
========== ========== ========== ==========
Total Investment Based on net asset value per share 3.94% 7.34% (7.76%) 2.66%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 2.29% 2.35% 2.36% 2.74%*
Net Assets: ========== ========== ========== ==========
Investment income--net 3.28% 2.91% 3.34% 3.58%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 2,182 $ 3,141 $ 5,138 $ 1,014
Data: ========== ========== ========== ==========
Portfolio turnover 63.87% 85.42% 155.20% 92.86%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
+++Aggregate total investment return.
+++++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class D+++++
For the
Period
The following per share data and ratios have been derived For the Year Aug. 4, 1997++
from information provided in the financial statements. Ended August 31, to Aug. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.78 $ 11.61 $ 17.36 $ 16.91
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .46 .43 .54 .07
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .09 .50 (1.34) .38
---------- ---------- ---------- ----------
Total from investment operations .55 .93 (.80) .45
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.44) (.75) (.31) --
Realized gain on investments--net -- -- (4.55) --
In excess of realized gain on investments--net -- (.01) (.07) --
---------- ---------- ---------- ----------
Total dividends and distributions (.44) (.76) (4.93) --
---------- ---------- ---------- ----------
Capital charge resulting from issuance of
Common Stock -- -- (.02) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 11.89 $ 11.78 $ 11.61 $ 17.36
========== ========== ========== ==========
Total Investment Based on net asset value per share 4.80% 8.22% (6.96%) 2.66%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.51% 1.57% 1.59% 1.92%*
Net Assets: ========== ========== ========== ==========
Investment income--net 4.07% 3.68% 4.02% 4.81%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 3,259 $ 4,435 $ 7,071 $ 1,365
Data: ========== ========== ========== ==========
Portfolio turnover 63.87% 85.42% 155.20% 92.86%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
+++Aggregate total investment return.
+++++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Convertible Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. The Fund's financial statements
are prepared in accordance with accounting principles generally
accepted in the United States of America, which may require the use
of management accruals and estimates. The Fund offers four classes
of shares under the Merrill Lynch Select Pricing SM 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 that are traded
on stock exchanges are valued at the last sale price on the exchange
that such securities are traded on, 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 that 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 or
purchased are valued at the last sale price in the case of exchange-
traded options. In the case of options traded in the over-the-
counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). 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 investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts 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.
* 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).
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
NOTES TO FINANCIAL STATEMENTS (continued)
Written and purchased options are non-income producing investments.
* 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.
* 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. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends from net investment
income are declared and paid quarterly. Distributions of capital
gains are recorded on the ex-dividend dates. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for post-October losses.
(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) Reclassifiation--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, the current year's permanent book/tax differences of
$8,028 have been reclassified between accumulated net realized
capital losses and undistributed net investment income and $9 has
been reclassified between paid-in capital in excess of par and
accumulated net realized capital losses. 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 Investment Managers, L.P. ("MLIM"). The general
partner of MLIM 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 FAM Distributors,
Inc. ("FAMD" or the "Distributor"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLIM is responsible for the management of the Fund'sportfolio 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 .60% of
the average daily net assets of the Fund.
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
Pursuant to 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 .25% .75%
Class C .25% .75%
Class D .25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("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 year ended August 31, 2000, FAMD 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:
FAMD MLPF&S
Class A $673 $105
Class D $ 40 $705
For the year ended August 31, 2000, MLPF&S received contingent
deferred sales charges of $63,900 and $29 relating to transactions
in Class B and Class C Shares, respectively.
During the year ended August 31, 2000, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $288 for security
price quotations to compute the net asset value of the Fund.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 2000 were $30,020,338 and $50,482,707,
respectively.
Net realized gains (losses) for the year ended August 31, 2000 and
net unrealized gains (losses) as of August 31, 2000 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ 3,077,854 $ (3,168,165)
Short-term investments (84) --
Short sales 14,272 --
Foreign currency transactions 497 166
------------ ------------
Total $ 3,092,539 $ (3,167,999)
============ ============
As of August 31, 2000, net unrealized depreciation for Federal
income tax purposes aggregated $3,740,816, of which $4,580,065
related to appreciated securities and $8,320,881 related to
depreciated securities. The aggregate cost of investments at August
31, 2000 for Federal income tax purposes was $47,185,034.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $16,492,605 and $29,987,587 for the years ended August 31, 2000
and August 31, 1999, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
Shares sold 66,503 $ 786,052
Shares issued to shareholders
in reinvestment of dividends 41,422 478,456
------------ ------------
Total issued 107,925 1,264,508
Shares redeemed (780,808) (9,184,452)
------------ ------------
Net decrease (672,883) $ (7,919,944)
============ ============
Class A Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
Shares sold 87,781 $ 1,030,148
Shares issued to shareholders
in reinvestment of dividends
and distributions 99,755 1,134,773
------------ ------------
Total issued 187,536 2,164,921
Shares redeemed (1,547,522) (17,946,626)
------------ ------------
Net decrease (1,359,986) $(15,781,705)
============ ============
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
Class B Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
Shares sold 89,179 $ 1,048,835
Shares issued to shareholders
in reinvestment of dividends 19,360 224,087
------------ ------------
Total issued 108,539 1,272,922
Automatic conversion
of shares (13,436) (157,868)
Shares redeemed (639,623) (7,514,979)
------------ ------------
Net decrease (544,520) $ (6,399,925)
============ ============
Class B Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
Shares sold 115,605 $ 1,344,949
Shares issued to shareholders
in reinvestment of dividends
and distributions 71,158 808,779
------------ ------------
Total issued 186,763 2,153,728
Automatic conversion
of shares (42,938) (498,986)
Shares redeemed (958,225) (11,060,710)
------------ ------------
Net decrease (814,400) $ (9,405,968)
============ ============
Class C Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
Shares sold 7,417 $ 87,766
Shares issued to shareholders
in reinvestment of dividends 5,139 59,464
------------ ------------
Total issued 12,556 147,230
Shares redeemed (96,087) (1,125,646)
------------ ------------
Net decrease (83,531) $ (978,416)
============ ============
Class C Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
Shares sold 30,898 $ 357,873
Shares issued to shareholders
in reinvestment of dividends
and distributions 15,080 171,466
------------ ------------
Total issued 45,978 529,339
Shares redeemed (223,804) (2,606,130)
------------ ------------
Net decrease (177,826) $ (2,076,791)
============ ============
Class D Shares for the Year Dollar
Ended August 31, 2000 Shares Amount
Shares sold 3,974 $ 47,747
Automatic conversion
of shares 13,411 157,868
Shares issued to shareholders
in reinvestment of dividends 9,173 106,341
------------ ------------
Total issued 26,558 311,956
Shares redeemed (128,963) (1,506,276)
------------ ------------
Net decrease (102,405) $ (1,194,320)
============ ============
Class D Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
Shares sold 15,422 $ 179,679
Automatic conversion
of shares 42,767 498,986
Shares issued to shareholders
in reinvestment of dividends
and distributions 25,681 292,765
------------ ------------
Total issued 83,870 971,430
Shares redeemed (316,367) (3,694,553)
------------ ------------
Net decrease (232,497) $ (2,723,123)
============ ============
5. Short-Term Borrowings:
On December 3, 1999, the Fund, along with certain other funds
managed by MLIM and its affiliates, entered into a $1,000,000,000
credit agreement with Bank of America, N.A. and other lenders. The
Fund may borrow under the credit agreement to fund shareholder
redemptions and other lawful purposes, other than for leverage. The
Fund may borrow up to the maximum amount allowable under the Fund's
current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund
pays a commitment fee of .09% per annum based on the Fund's pro rata
share of the unused portion of the facility. Amounts borrowed under
the facility bear interest at a rate equal to, at each fund's
election, the Federal Funds rate plus .50% or a base rate as
determined by Bank of America,N.A. The Fund did not borrow under the
facility during the year ended August 31, 2000.
6. Capital Loss Carryforward:
At August 31, 2000, the Fund had a net capital loss carryforward of
approximately $1,256,000, of which $1,035,000 expires in 2007 and
$221,000 expires in 2008. This amount will be available to offset
like amounts of any future taxable gains.
7. Reorganization Plan:
On August 31, 2000, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other
conditions, whereby Merrill Lynch Balanced Capital Fund, Inc. would
acquire substantially all of the assets and liabilities of the Fund
in exchange for newly issued shares of Merrill Lynch Balanced
Capital Fund, Inc. These Funds are registered, open-end management
investment companies. Both entities have a similar investment
objective and are managed by MLIM.
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Convertible Fund, 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, 2000, the related statements
of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the
financial highlights for the periods presented. 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 auditing standards
generally accepted in the United States of America. 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, 2000 by
correspondence with the custodian. 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, 2000, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Princeton, New Jersey
October 11, 2000
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
IMPORTANT TAX INFORMATION (unaudited)
Of the ordinary distributions paid quarterly by Merrill Lynch
Convertible Fund, Inc. during the fiscal year ended August 31, 2000,
52.97% qualifies for the dividends received deduction for
corporations.
Additionally, there were no long-term capital gains distributions
paid by the Fund during the fiscal year.
Please retain this information for your records.
Merrill Lynch Convertible Fund, Inc.
August 31, 2000
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Joseph L. May, Director
Andre F. Perold, Director
Roberta Cooper Ramo, 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
