MERRILL LYNCH
CONVERTIBLE
FUND, INC.
FUND LOGO
Annual Report
August 31, 1998
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
Vincent T. Lathbury III, Senior
Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Daniel A. Luchansky, Vice President
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
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
The fiscal year ended August 31, 1998 was a difficult one for the
convertible market, and Merrill Lynch Convertible Fund, Inc. was not
immune to this weakness. Equities traded in a wide range, and there
was increased volatility during the period. Stock prices rallied
through early October 1997, then fell sharply in the worst one-day
point decline (554 points) in the history of the Dow Jones
Industrial Average (DJIA) on fears caused by the Asian currency
crisis and deflationary trends in the Pacific Basin. Stock prices
bottomed in mid-January 1998, and rallied strongly from April
through mid-July. Smaller-capitalization stocks in indexes such as
the Russell 2000 Index peaked first in mid-April. The larger stocks
in indexes such as the DJIA, the Standard & Poor's 500 Composite
Index and the National Association of Securities Dealers Automated
Quotations (NASDAQ) Composite Index peaked in mid-July. Thereafter,
equities collapsed again on new concerns precipitated by Russia's
de facto default on its government obligations and fear that the
deflationary trends being felt elsewhere around the world might
spread to the US economy.
Long-term interest rates fell from a high of 6.69% near the
beginning of the Fund's fiscal year to a low of 5.27% by fiscal year-
end. However, credit quality spreads widened late in the period,
more than offsetting the positive impact of these lower interest
rates on convertible securities prices. For example, according to
Goldman Sachs, yield spreads between straight B-rated bonds and
Treasury securities of similar maturities widened from 350 basis
points (3.50%) to more than 600 basis points in August 1998 alone.
This was one of the most rapid deteriorations in credit quality
spreads in history and negatively affected the convertible market.
Fiscal Year in Review
A confluence of negative factors impacted the Fund during the fiscal
year ended August 31, 1998. There were three overall market trends
that had a negative impact on performance. The first was a bear
market in secondary stocks, accompanied by very poor market
internals and breadth. Investors showed a preference for stocks of
larger, more well-established companies over smaller ones. For
example, the unmanaged Russell 2000 Equity Index's total return
declined 19.40% during the fiscal year ended August 31, 1998 as
compared to a rise of 0.61% for the DJIA. According to Donaldson
Lufkin & Jenrette, as of August 31, 1998 an average unweighted
sample of 6,625 companies on the New York Stock Exchange and NASDAQ
showed the average stock down over 40% from its 52-week high. Half
of the stocks in the sample had experienced price declines of 50% or
more. Merrill Lynch Convertible Fund, Inc., which is invested mostly
in smaller value-type secondary issues, experienced a decline of
16.2% in its Class A Shares from the high during its fiscal year.
The second trend was a shift in investor's preference for growth
over value investing. Lastly, as mentioned earlier, credit quality
spreads widened significantly during the fiscal year, which
negatively impacted the market prices of convertible securities.
In the security specific category, the Fund's performance was
negatively affected by weakness in the energy sector, an area that
we recently emphasized. This industry sector was the largest in our
portfolio, accounting for 11.7% of the Fund's net assets. We believe
that many companies in this sector represent value, having fallen
substantially in response to weakness in oil prices, warm weather
and reduced demand from Asia. While it is difficult to call the
exact bottom, we continued to find this sector of the market a
compelling long-term value. A recent report indicated that energy
company insiders have been buying their companies' common stocks
recently, reinforcing our view.
Automotive parts, the second-largest industry represented in the
Fund at about 11.1% of net assets on August 31, 1998, was negatively
impacted by the General Motors strike. The metal producers,
including the steel, nickel and, to a lesser extent, copper
companies, which accounted for about 7% of the Fund, were affected
by this strike as well. Given the low valuations of these companies
and the conclusion of the strike, we continued to favor these
companies. We also had exposure to the paper companies, which
continued to suffer from a weak pricing environment. Many of these
companies were trading at valuations consistent with a recessionary
environment, possibly signaling that a recession may be forthcoming.
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
The physician practice management companies declined after the
bankruptcy of FPA Medical (which the Fund did not own) and poor
earnings reports both by industry leaders Medpartners Inc. and
PhyCor, Inc. (which were Fund holdings). This raised questions about
the industry's viability in light of recent dynamic structural
changes within the industry. We sold out of our holdings in these
companies and redeployed the capital to sectors we believed offered
better prospects.
Finally, the Fund has holdings in Thermo Electron Corporation and
six of its satellite companies, many of which have seen their
earnings growth weaken, partially as a result of the weakness in the
Asian region. These are investment-grade companies, and many of the
convertibles sell relatively close to their investment values (and
at a discount to par).
Portfolio Matters
We made some substantial transactions in the portfolio since our May
quarterly report to shareholders. We favored the defensive
characteristics inherent in the healthcare sector and established
positions in Genzyme Corporation, a developer of therapeutic and
surgical products, and Swiss Life Finance Limited, convertible into
Glaxo Wellcome PLC, one of the world's leading pharmaceutical
companies. We exchanged our common stock position received from the
conversion of Integrated Health Services Inc. 6% convertible
debentures for the more defensive 5.75% convertible debentures of
the same company. This company is a sub-acute and post-acute
healthcare provider. We initiated positions in two major diversified
oil companies, Chevron Corp., via a convertible bond issued by
Pennzoil Co., and Unocal Capital Trust preferred stock, both
investment-grade securities. We also purchased the investment-grade
convertible debentures of Diamond Offshore Drilling, Inc., which is
an offshore driller of oil and gas wells. We anticipate continued
consolidation in the energy sector, and hope to capitalize on this
trend.
During the quarter ended August 31, 1998, we also purchased the
convertible preferred Fleetwood Capital Trust, a leading producer of
manufactured housing, and we added the convertible preferred of
Union Pacific Capital Trust, the nation's largest railroad. This was
in an effort to capitalize on this downtrodden railroad's
anticipated turnaround. As mentioned earlier, we eliminated both
physician management companies, Medpartners Inc. and Phycor, Inc.,
in response to deteriorating fundamentals. We reduced our exposure
to Thermo Electron Corporation somewhat by selling the convertibles
of Thermo Trex Corporation, a manufacturer of specialized medical
equipment. We also reduced our holdings in Thermo Instrument Systems
Inc., a manufacturer of analytical instruments, by selling some of
our position in both the 4.0% and 4.5% debentures. We sold out of
the Fieldcrest Cannon, Inc. bonds convertible into Pillowtex Corp.
since the common stock attained our target price. We took profits in
the common stocks of Public Storage, Inc., a real estate investment
trust, and Magna International, Inc., an auto parts company
(although we continue to hold the more defensive convertibles in
this company). Finally, we profitably closed out our arbitrage
position in Premier Technologies, Inc.
Equity valuations continue to suggest this is not a low risk entry
point for equity purchases. Valuation measurements of the major
indexes are still extreme. The theory of "reversion to the mean"
(the process by which over the long term, valuations tend to revert
toward their averages), amplified by an apparent global economic
slowdown and continued lower expected domestic earnings growth,
suggests a continued cautious stance. We remain defensively
postured, owning more convertible bonds with fixed-income
characteristics over equity-sensitive securities.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Daniel A. Luchansky)
Daniel A. Luchansky
Vice President and Portfolio Manager
October 9, 1998
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
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" table assume reinvestment
of all dividends and capital gains distributions at net asset value
on the ex-dividend date. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<TABLE>
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++ -7.03% -13.89% +115.51%
ML Convertible Fund, Inc. Class B Shares -7.76 -14.15 - 5.36
ML Convertible Fund, Inc. Class C Shares -7.76 -14.07 - 5.30
ML Convertible Fund, Inc. Class D Shares -6.96 -13.87 - 4.48
<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/inception periods are Class A Shares, for the ten
years ended 8/31/98 and Class B, Class C &Class D Shares from
8/04/97 to 8/31/98.
++Investment 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.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's
Class A Shares compared to growth of an investment in the Value Line
Convertible Index.
8/88 8/98
ML Convertible Fund, Inc.++--
Class A Shares*+++ $ 9,475 $20,420
Value Line Convertible Index++++ $10,000 $28,255
A line graph depicting the growth of an investment in the Fund's
Class B, Class C and Class D Shares compared to growth of an
investment in the Value Line Convertible Index-All Covertibles.
Beginning and Ending Values are:
8/4/97*** 8/98
ML Convertible Fund, Inc.++--
Class B Shares** $10,000 $ 9,270
ML Convertible Fund, Inc.++--
Class C Shares** $10,000 $ 9,470
ML Global Convertible Fund, Inc.++--
Class D Shares** $ 9,475 $ 9,050
Value Line Convertible Index++--
All Convertibles $10,000 $ 9,219
[FN]
*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, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares++*
Year Ended 6/30/98 +12.24% +6.34%
Five Years Ended 6/30/98 +9.67 +8.49
Ten Years Ended 6/30/98 +8.16 +7.58
[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.
Aggregate Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (8/04/97) through 6/30/98 +7.70% +4.58%
[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*
Inception (8/04/97)
through 6/30/98 +7.75% +6.96%
[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*
Inception (8/04/97)
through 6/30/98 +8.44% +2.74%
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
PORTFOLIO INFORMATION
As of August 31, 1998
Percent of
Ten Largest Holdings Net Assets
Home Depot, Inc. (The), 3.25% due
10/01/2001 3.7%
BankAtlantic Bancorp, Inc.* 3.5
Pep Boys--Manny, Moe & Jack (The), 4%
due 9/01/1999 3.3
WHX Corporation, 6.50%, Series A 2.9
Kmart Financing I, 7.75% 2.6
Assisted Living Concepts, Inc.* 2.6
US Filter Corp., 4.50% due 12/15/2001 2.5
Tower Automotive, Inc., 5% due 8/01/2004 2.5
Integrated Health Services Inc., 5.75%
due 1/01/2001 2.5
Citizens Utilities Trust, 5% 2.4
[FN]
*Includes combined holdings.
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <S> <C> <S> <S> <S>
Assisted Assisted Living Concepts, Inc.:
Living--2.6% NR* NR* US$ 2,300,000 6% due 11/01/2002 $ 2,323,247 $ 1,960,750
NR* NR* 400,000 5.625% due 5/01/2003 (e) 400,000 322,500
------------- -------------
2,723,247 2,283,250
Automotive A- NR* C$ 1,500,000 Magna International Inc., 4.875%
Parts--11.1% due 2/15/2005 (e) 1,500,000 1,530,000
Mark IV Industries, Inc.:
BB+ Ba2 US$ 650,000 4.75% due 11/01/2004 617,500 542,750
BB+ Ba2 1,000,000 4.75% due 11/01/2004 (e) 923,750 845,000
B+ B1 2,000,000 Mascotech, Inc., 4.50% due 12/15/2003 1,840,000 1,742,500
BBB Baa3 3,000,000 Pep Boys--Manny, Moe & Jack (The),
4% due 9/01/1999 3,006,250 2,940,000
B+ NR* 2,250,000 Tower Automotive, Inc., 5% due
8/01/2004 2,346,000 2,219,062
------------- -------------
10,233,500 9,819,312
Aviation Kellstrom Industries Inc.:
Equipment--1.7% B- B3 1,000,000 5.75% due 10/15/2002 (e) 1,000,000 1,010,000
B- B3 500,000 5.50% due 6/15/2003 500,000 469,375
------------- -------------
1,500,000 1,479,375
Banking & BankAtlantic Bancorp, Inc.++:
Financial-- NR* NR* 1,364,000 6.75% due 7/01/2006 2,377,584 1,677,720
3.5% NR* NR* 1,585,000 5.625% due 12/01/2007 1,591,875 1,446,313
------------- -------------
3,969,459 3,124,033
Boat Construc- B+ B2 1,000,000 Halter Marine Group, Inc., 4.50%
tion--0.8% due 9/15/2004 897,855 705,000
Conglomerates NR* NR* 600,000 Polyphase Corporation, 12% due
- --1.4% 7/01/1999 (f)++ 600,000 264,000
A- Ba2 1,100,000 Thermo Electron Corporation, 4.25%
due 1/01/2003 1,270,500 958,375
------------- -------------
1,870,500 1,222,375
Electronics NR* NR* YEN 50,000,000 Matsushita Electric Industrial Co.,
- --1.3% Ltd., 1.30% due 3/29/2002 513,387 463,947
NR* NR* 30,000,000 Sony Corp., 1.40% due 9/30/2003 361,653 410,540
NR* NR* 30,000,000 Tokyo Electron Limited, 0.90%
due 9/30/2003 343,548 262,218
------------- -------------
1,218,588 1,136,705
Energy--6.3% A- Baa2 US$ 2,000,000 Diamond Offshore Drilling, Inc.,
3.75% due 2/15/2007 1,976,875 1,795,000
NR* NR* 1,480,000 Key Energy Group Inc., 5% due
9/15/2004 (e) 1,209,039 974,950
NR* NR* 600,000 Lomak Petroleum, Inc., 6% due
2/01/2007 584,250 453,000
B- B3 585,000 Parker Drilling Co., 5.50% due
8/01/2004 591,337 403,650
BBB Ba1 2,000,000 Pennzoil Co., 4.95% due 8/15/2008 2,027,500 1,930,000
------------- -------------
6,389,001 5,556,600
Environmental A- Baa3 1,605,000 Thermo Ecotek Corp., 4.875%
- --4.2% due 4/15/2004 (e) 1,606,119 1,572,900
A- NR* 750,000 Thermo Fibertek Inc., 4.50% due
7/15/2004 (e) 750,000 706,875
BBB Ba1 1,250,000 Waste Management, Inc., 4% due
2/01/2002 1,274,375 1,450,000
------------- -------------
3,630,494 3,729,775
Food & NR* NR* Pound 500,000 Allied Domecq PLC, 6.75% due 7/07/2008 858,247 835,257
Beverage--1.1% Sterling
NR* NR* YEN 14,000,000 Sanyo Coca-Cola Bottling Inc.,
0.90% due 6/30/2003 146,267 101,147
------------- -------------
1,004,514 936,404
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <S> <S> <S> <C> <S> <S> <S>
Healthcare BBB- Ba2 US$ 1,250,000 HealthSouth Corp., 3.25% due
Services--3.8% 4/01/2003 $ 1,182,500 $ 1,175,000
B- B3 2,325,000 Integrated Health Services Inc.,
5.75% due 1/01/2001 2,373,313 2,194,219
------------- -------------
3,555,813 3,369,219
Medical NR* NR* 550,000 Phoenix Shannon PLC, 9.50% due
Supplies--1.3% 11/01/2000 (c)(e) 216,707 5,500
A- NR* 1,350,000 Thermolase Corporation, 4.375% due
8/05/2004 (e) 1,214,433 1,144,125
------------- -------------
1,431,140 1,149,625
Office BB+ Baa3 1,500,000 Office Depot, Inc., 4.891% due
Supplies--1.2% 11/01/2008 (b) 913,369 1,055,625
Paper--1.2% NR* NR* 1,200,000 Metsa-Serla OYJ, 4.375% due
10/15/2002 1,257,000 1,098,000
Pharmaceuti- BBB- Baa3 750,000 ALZA Corporation, 5% due 5/01/2006 750,000 896,250
cals--4.5% NR* NR* 1,900,000 Genzyme Corporation, 5.25% due
6/01/2005 (e) 1,843,750 1,805,000
NR* NR* 1,200,000 Swiss Life Finance Limited, 2% due
5/20/2003 (into Glaxo Wellcome PLC) 1,272,750 1,248,000
------------- -------------
3,866,500 3,949,250
Precious CCC+ B3 1,090,000 Coeur D'Alene Mines Corporation, 7.25%
Metals--0.8% due 10/31/2005 (e) 801,150 698,963
Real Estate NR* B2 1,500,000 Capstone Capital Corp., 6.55% due
Investment 3/14/2002 1,390,639 1,396,875
Trusts--1.6%
Restaurants-- B B2 400,000 Hometown Buffet Inc., 7% due 12/01/2002 402,000 479,500
0.5%
Retail-- A+ A1 1,750,000 Home Depot, Inc. (The), 3.25% due
Building 10/01/2001++ 1,754,687 3,292,187
Materials--3.7%
Scientific A- NR* 2,000,000 Thermo Cardiosystems, Inc., 4.75%
Equipment--5.0% due 5/15/2004 (e) 2,000,000 1,887,500
Thermo Instrument Systems Inc.:
A Baa2 250,000 4.50% due 10/15/2003 (e) 256,875 213,125
A- Baa3 1,750,000 4% due 1/15/2005 1,743,750 1,465,625
A- Baa3 1,000,000 Thermo Optek Corp., 5% due
10/15/2000 (e) 1,035,000 897,500
------------- -------------
5,035,625 4,463,750
Semiconductors B NR* 750,000 Cypress Semiconductor Corp., 6%
- --0.7% due 10/01/2002 (e) 750,000 618,750
Technology NR* NR* 1,000,000 Apple Computer, Inc., 6% due
- --2.8% 6/01/2001 950,000 1,185,000
Data General Corporation:
B B3 1,250,000 6% due 5/15/2004 1,205,000 943,750
B B3 500,000 6% due 5/15/2004 (e) 500,000 371,875
------------- -------------
2,655,000 2,500,625
Water BBB- Ba3 2,350,000 US Filter Corp., 4.50% due 12/15/2001 2,386,000 2,238,375
Treatment
Systems--2.5%
Total Convertible Debentures--63.6% 59,636,081 56,303,573
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Preferred Stocks Cost (Note 1a)
<S> <S> <S> <S> <C> <S> <S> <S>
Banking & AA A1 10,000 Jefferson Pilot Corp. (ACES SM)
Financial--1.2% (into Nations Bank Corp.), 7.25% (d) $ 725,000 $ 1,097,500
Construction & BBB+ Baa3 15,000 Fleetwood Capital Trust, 6% (e) 808,125 718,125
Housing--0.8%
Containers--0.9% BB- Ba3 20,000 Owens-Illinois, Inc., 4.75% 1,000,000 792,500
Energy--2.1% BB- Ba2 20,000 CalEnergy Capital Trust II, 6.25% (e) 1,000,000 822,500
BBB Baa2 20,000 Unocal Capital Trust, 6.25% 1,080,000 992,500
------------- -------------
2,080,000 1,815,000
Oil & Gas CCC+ Caa 12,000 Chesapeake Energy Corp., 7% (e) 600,000 288,000
Producers--1.7% B B3 27,000 Lomak Financing Trust, 5.75% (e) 1,350,000 756,000
BBB- Baa3 10,000 Occidental Petroleum Corp., $3 580,600 500,000
------------- -------------
2,530,600 1,544,000
Paper--2.1% BBB Baal 40,000 International Paper Capital
Trust, 5.25% 1,902,000 1,820,000
Railroads--0.8% BB+ Ba2 15,000 Union Pacific Capital Trust, 6.25% 690,938 663,750
Real Estate BBB Baa3 20,000 Merry Land & Investment Co., Inc.,
Investment $2.15, Series C 509,463 517,500
Trusts--0.6%
Restaurants-- BBB Baa2 20,000 Wendy's Financing I, 5%, Series A 1,044,750 1,000,000
1.1%
Retail--2.6% BB- B1 44,500 Kmart Financing I, 7.75% 2,417,045 2,333,469
Steel--5.3% NR* Baa3 30,000 USX Capital Trust I, 6.75% 1,387,500 1,252,500
B Caa 60,000 WHX Corporation, 6.50%, Series A 2,584,540 2,580,000
A- A3 103,610 Worthington Industries, Inc., 7.25%
(into Rouge Industries, Inc.) 1,751,527 880,685
------------- -------------
5,723,567 4,713,185
Utilities--2.4% A+ A2 50,500 Citizens Utilities Trust, 5% 2,191,905 2,089,437
Total Convertible Preferred
Stocks--21.6% 21,623,393 19,104,466
Common Stocks & Warrants
Building & 74,100 Morrison Knudsen Corp. (c) 919,835 782,681
Construction--0.9%
Conglomerates--0.0% 105,000 Polyphase Corporation++ 158,550 31,500
52,500 Polyphase Corporation (Warrants)(a)++ 13,125 1,050
52,500 Polyphase Corporation (Warrants)(a)++ 26,250 7,350
------------- -------------
197,925 39,900
Consumer Products--0.8% 35,000 RJR Nabisco Holdings Corp. 1,142,475 759,063
Mining--0.8% 37,000 Cyprus Amax Minerals Co. 625,776 339,937
40,000 Inco Ltd. 739,218 335,000
------------- -------------
1,364,994 674,937
Pharmaceuticals--0.0% 3,273 Crescendo Pharmaceuticals
Corporation (c) 37,640 42,344
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Value
Industry Held Common Stocks and Warrants Cost (Note 1a)
<S> <C> <S> <S> <S>
Semiconductors--0.4% 32,500 Cypress Semiconductor Corp. (c) $ 452,262 $ 199,063
30,000 Integrated Device Technology,
Inc. (c) 405,531 135,000
857,793 334,063
Steel--0.3% 20,000 AK Steel Holding Corporation 300,775 277,500
Utilities--0.1% 8,900 Citizens Utilities Company
(Class B)(c) 84,213 63,971
Total Common Stocks & Warrants--3.3% 4,905,650 2,974,459
Face
Amount Short-Term Securities
Commercial US$ 1,856,000 General Motors Acceptance Corp.,
Paper**--6.7% 5.81% due 9/01/1998 1,856,000 1,856,000
2,076,000 International Securitization Corp.,
5.56% due 9/03/1998 2,075,359 2,075,359
2,000,000 Variable Funding Capital, 5.54%
due 9/10/1998 1,997,230 1,997,230
Total Investments in Short-Term
Securities--6.7% 5,928,589 5,928,589
Total Investments--95.2% $ 92,093,713 84,311,087
=============
Short Sales (Proceeds--$2,947,895)--(3.1%)++ (2,782,913)
Other Assets Less Liabilities--7.9% 7,005,907
-------------
Net Assets--100.0% $ 88,534,081
=============
<FN>
*Not Rated.
**Commercial Paper is traded on a discount basis; the interest rates
shown reflect the discount rate paid at the time of purchase by the
Fund.
(a)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.
(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)Non-income producing security.
(d)Adjustable Convertible Extendable Securities.
(e)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(f)Restricted securities as to resale. The value of the Fund's
investment in restricted securities was $264,000, representing 0.3%
of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Polyphase Corporation,
12% due 7/01/1999 7/05/1994 $ 600,000 $ 264,000
-------------- --------------
Total $ 600,000 $ 264,000
============== ==============
++Covered short sales entered into as of August 31, 1998 were as
follows:
Value
Shares Issue (Notes 1a & 1h)
177,000 BankAtlantic Bancorp, Inc. $ (1,371,750)
36,600 Home Depot, Inc. (The) (1,409,100)
5,500 Polyphase Corporation (2,063)
-------------
Total (Proceeds--$2,947,895) $ (2,782,913)
=============
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, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$92,093,713)
(Note 1a) $ 84,311,087
Cash 691,829
Foreign cash (Note 1c) 345
Deposits on short sales (Note 1h) 2,411,741
Receivables:
Securities sold $ 4,326,252
Interest 768,585
Dividends 88,494
Capital shares sold 5,330 5,188,661
------------
Prepaid registration fees and other assets (Note 1f) 57,515
------------
Total assets 92,661,178
------------
Liabilities: Common stock sold short, at market value
(proceeds--$2,947,895) (Notes 1a & 1h) 2,782,913
Payables:
Securities purchased 690,937
Capital shares redeemed 264,382
Investment adviser (Note 2) 49,068
Distributor (Note 2) 28,282 1,032,669
------------
Accrued expenses and other liabilities 311,515
------------
Total liabilities 4,127,097
------------
Net Assets: Net assets $ 88,534,081
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 452,227
Class B Common Stock, $0.10 par value, 100,000,000
shares authorized 207,258
Class C Common Stock, $0.10 par value, 100,000,000
shares authorized 44,545
Class D Common Stock, $0.10 par value, 100,000,000
shares authorized 60,911
Paid-in capital in excess of par 93,379,881
Undistributed investment income--net 2,510,665
Accumulated distributions in excess of realized capital
gains on investments and foreign currency transactions
--net (Note 1g) (503,861)
Unrealized depreciation on investments and foreign currency
transactions--net (7,617,545)
------------
Net assets $ 88,534,081
============
Net Asset Value: Class A--Based on net assets of $52,424,646 and 4,522,270
shares outstanding $ 11.59
============
Class B--Based on net assets of $23,899,890 and 2,072,575
shares outstanding $ 11.53
============
Class C--Based on net assets of $5,138,601 and 445,454
shares outstanding $ 11.54
============
Class D--Based on net assets of $7,070,944 and 609,107
shares outstanding $ 11.61
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1998
<S> <S> <C> <C>
Investment Interest and discount earned (net of $320 foreign
Income withholding tax) $ 4,083,973
(Notes 1d & 1e): Dividends (net of $277 foreign withholding tax) 1,368,733
------------
Total income 5,452,706
------------
Expenses: Investment advisory fees (Note 2) $ 570,057
Professional fees 191,382
Account maintenance and distribution fees--Class B
(Note 2) 158,876
Accounting services (Note 2) 106,046
Registration fees (Note 1f) 69,860
Transfer agent fees--Class A (Note 2) 68,305
Interest on securities sold short 61,603
Printing and shareholder reports 57,888
Directors' fees and expenses 44,030
Account maintenance and distribution fees--Class C
(Note 2) 31,270
Dividends on securities sold short 21,412
Transfer agent fees--Class B (Note 2) 18,510
Custodian fees 11,858
Account maintenance fees--Class D (Note 2) 10,136
Pricing services 4,228
Transfer agent fees--Class D (Note 2) 3,979
Transfer agent fees--Class C (Note 2) 3,694
Other 4,083
------------
Total expenses 1,437,217
------------
Investment income--net 4,015,489
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 733,576
(Loss) on Foreign currency transactions--net (93,613) 639,963
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (12,657,876)
(Notes 1b, 1c, Foreign currency transactions--net 308 (12,657,568)
1e & 3): ------------ ------------
Net realized and unrealized loss on investments
and foreign currency transactions (12,017,605)
------------
Net Decrease in Net Assets Resulting from Operations $ (8,002,116)
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the For the Period For the
Year Ended Jan. 1, 1997 Year Ended
August 31, to August 31, Dec. 31,
Increase (Decrease) in Net Assets: 1998 1997 1996
<S> <S> <C> <C> <C>
Operations: Investment income--net $ 4,015,489 $ 8,745,876 $ 14,105,139
Realized gain on investments and foreign
currency transactions--net 639,963 50,580,734 19,882,034
Income taxes on realized gain on investments -- -- (4,841,320)
Change in unrealized appreciation/depreciation
on investments and foreign currency
transactions--net (12,657,568) (31,783,237) 17,386,219
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations (8,002,116) 27,543,373 46,532,072
------------ ------------ ------------
Dividends & Investment income--net:
Distributions to Class A (1,935,219) -- --
Shareholders Class B (157,651) -- --
(Note 1g): Class C (24,527) -- --
Class D (32,775) -- --
Income Shares -- (8,134,631)++ (14,192,493)++
Realized gain on investment--net:
Class A (27,880,328) -- (7,473,704)++++
Class B (924,500) -- --
Class C (145,575) -- --
Class D (179,577) -- --
In excess of realized gain on investments--net:
Class A (458,015) -- --
Class B (15,188) -- --
Class C (2,391) -- --
Class D (2,950) -- --
------------ ------------ ------------
Net decrease in net assets resulting from
dividends and distributions to shareholders (31,758,696) (8,134,631) (21,666,197)
------------ ------------ ------------
Capital Share Net decrease in net assets from capital share
Transactions transactions (14,230,110) (190,895,600) --
(Note 4): Proceeds from issuance of Common Stock resulting
from reorganization 24,580,592 -- --
Offering costs from issuance of Common Stock
resulting from reorganization (371,604) -- --
Offering costs resulting from issuance of new
classes of shares -- (190,000) --
------------ ------------ ------------
Net increase (decrease) in net assets derived
from capital share transactions 9,978,878 (191,085,600) --
============ ============ ============
Net Assets: Total increase (decrease) in net assets (29,781,934) (171,676,858) 24,865,875
Beginning of period 118,316,015 289,992,873 265,126,998
------------ ------------ ------------
End of period* $ 88,534,081 $118,316,015 $289,992,873
============ ============ ============
*Undistributed investment income--net $ 2,510,665 $ 645,348 $ 128,996
============ ============ ============
<FN>
++Dividends from investment income--net during this time period
reflect when the Fund was a dual-structure closed-end management
investment company. All dividends were paid to Income Shareholders.
Such shares were redeemed on July 31, 1997.
++++Formerly Capital Shares.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A++++++++
The following per share data and ratios For the For the
have been derived from information provided Year Period
in the financial statements. Ended Jan. 1, 1997
Aug. 31, to Aug. 31, For the Year Ended December 31,
Increase (Decrease) in Net Asset Value: 1998+++ 1997+++ 1996+++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 17.36 $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87
Performance++++: --------- --------- --------- --------- --------- ---------
Investment income--net .60 .06 -- -- -- --
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net (1.37) 1.75 2.78 2.66 (2.12) 1.43
--------- --------- --------- --------- --------- ---------
Total from investment
operations (.77) 1.81 2.78 2.66 (2.12) 1.43
--------- --------- --------- --------- --------- ---------
Less dividends and
distributions:
Investment income--net (.32) -- -- -- -- --
Realized gain on
investments--net (4.55) -- (.64) (.36) (.01) (1.17)
In excess of realized
gain on investments--net (.07) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total dividends and
distributions (4.94) -- (.64) (.36) (.01) (1.17)
--------- --------- --------- --------- --------- ---------
Capital charge resulting from
issuance of Common Stock (.06) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Effect of repurchase of
Treasury Stock -- -- -- --++ .05 .08
--------- --------- --------- --------- --------- ---------
Capital charge resulting
from issuance of new
classes of shares -- (.02) -- -- -- --
--------- --------- --------- --------- --------- ---------
Net asset value,
end of period $ 11.59 $ 17.36 $ 15.57 $ 13.43 $ 11.13 $ 13.21
========= ========= ========= ========= ========= =========
Total Investment Based on net asset
Return:** value per share (7.03%) 11.50%+++++ 20.60% 24.44% (15.68%) 13.94%
========= ========= ========= ========= ========= =========
Ratios to Average Expenses*** 1.29% .90%* .78% .79% .87% .80%
Net Assets: ========= ========= ========= ========= ========= =========
Investment income--net 4.48% 4.76* 4.98% 5.40% 5.43% 5.10%
========= ========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $ 52,425 $ 110,178 $ 289,993 $ 265,127 $ 238,466 $ 274,999
========= ========= ========= ========= ========= =========
Portfolio turnover 155.20% 92.86% 129.06% 87.69% 69.37% 116.03%
========= ========= ========= ========= ========= =========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
Performance results prior to August 4, 1997 are for when the Fund
was a dual-structure closed-end management investment company and
include only the returns for the Capital Shares but exclude results
from the Income Shares.
***Excluding taxes on undistributed net realized long-term capital
gains for years prior to the period January 1, 1997 to August 31,
1997.
++Amount is less than $.01 per share.
++++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 $0.73 and
dividends of investment income--net per Income Share were $0.70.
+++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, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class B+++++ Class C+++++ Class D+++++
The following per share data and ratios For the For the For the For the For the For the
have been derived from information provided Year Period Year Period Year Period
in the financial statements. Ended Aug. 4, 1997++ Ended Aug. 4, 1997++ Ended Aug. 4, 1997++
August 31, to Aug. 31, August 31, to Aug. 31, August 31, to Aug. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1998 1997 1998 1997
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 17.35 $ 16.91 $ 17.36 $ 16.91 $ 17.36 $ 16.91
Performance: --------- --------- --------- --------- --------- ---------
Investment income--net .44 .05 .44 .05 .54 .07
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net (1.34) .39 (1.34) .40 (1.34) .38
--------- --------- --------- --------- --------- ---------
Total from investment
operations (.90) .44 (.90) .45 (.80) .45
--------- --------- --------- --------- --------- ---------
Less dividends and
distributions:
Investment income--net (.28) -- (.28) -- (.31) --
Realized gain on
investments--net (4.55) -- (4.55) -- (4.55) --
In excess of realized
gain on investments--net (.07) -- (.07) -- (.07) --
--------- --------- --------- --------- --------- ---------
Total dividends and
distributions (4.90) -- (4.90) -- (4.93) --
--------- --------- --------- --------- --------- ---------
Capital charge resulting
from issuance of Common
Stock (.02) -- (.02) -- (.02) --
--------- --------- --------- --------- --------- ---------
Net asset value,
end of period $ 11.53 $ 17.35 $ 11.54 $ 17.36 $ 11.61 $ 17.36
========= ========= ========= ========= ========= =========
Total Investment Based on net asset
Return:** value per share (7.76%) 2.60%+++ (7.76%) 2.66%+++ (6.96%) 2.66%+++
========= ========= ========= ========= ========= =========
Ratios to Average Expenses 2.35% 2.66%* 2.36% 2.74%* 1.59% 1.92%*
Net Assets: ========= ========= ========= ========= ========= =========
Investment income--net 3.31% 3.77%* 3.34% 3.58%* 4.02% 4.81%*
========= ========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $ 23,900 $ 5,759 $ 5,138 $ 1,014 $ 7,071 $ 1,365
========= ========= ========= ========= ========= =========
Portfolio turnover 155.20% 92.86% 155.20% 92.86% 155.20% 92.86%
========= ========= ========= ========= ========= =========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
+++Aggretate total investment return.
+++++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
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 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 which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not readily available are
valued at their fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
* Foreign currency options and futures--The Fund is also authorized
to purchase or sell listed or over-the-counter foreign currency
options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-US dollar denominated
securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates. Distributions in
excess of realized capital gains are due primarily to differing tax
treatments for futures transactions and 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) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$25,317 have been reclassified between accumulated distributions in
excess of net realized capital gains and paid-in capital in excess
of par. These reclassifications have no effect on net assets or net
asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Fund Distributor
("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of 0.60% of
the average daily net assets of the Fund.
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
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 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended August 31, 1998, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $4,537 $ 6,208
Class D $3,366 $47,365
For the year ended August 31, 1998, MLPF&S received contingent
deferred sales charges of $72,765 and $13,971 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $30,723 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
August 31, 1998.
During the year ended August 31, 1998, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $504 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 MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1998 were $137,046,369 and
$147,006,655, respectively.
Net realized gains (losses) for the year ended August 31, 1998 and
net unrealized gains (losses) as of August 31, 1998 were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 1,348,043 $ (7,782,626)
------------ ------------
Short-term investments (334) --
Short sales (614,133) 164,982
Foreign currency transactions (93,613) 99
------------ ------------
Total $ 639,963 $ (7,617,545)
============ ============
As of August 31, 1998, net unrealized depreciation for Federal
income tax purposes aggregated $7,953,776, of which $2,771,371
related to appreciated securities and $10,725,147 related to
depreciated securities. The aggregate cost of investments at August
31, 1998 for Federal income tax purposes was $92,264,863.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $9,978,878 and $(191,085,600) for the year ended
August 31, 1998 and for the period January 1, 1997 to August 31,
1997, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 270,139 $ 3,520,626
Shares issued to shareholders
in reinvestment of dividends
and distributions 810,769 10,502,647
Shares issued resulting from
reorganization 237,740 2,970,678
------------ ------------
Total issued 1,318,648 16,993,951
Shares redeemed (3,142,799) (41,731,802)
------------ ------------
Net decrease (1,824,151) $(24,737,851)
============ ============
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
Class A Shares for the Period
January 1, 1997 to Dollar
August 31, 1997 Shares Amount
Shares sold 45,211 $ 774,119
Shares redeemed (5,352,490) (91,314,601)
------------ ------------
Net decrease (5,307,279) $(90,540,482)
============ ============
Class B Shares
for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 1,051,524 $ 13,706,977
Shares issued to shareholders
in reinvestment of dividends
and distributions 76,312 984,129
Shares issued resulting from
reorganization 1,064,812 14,537,285
------------ ------------
Total issued 2,192,648 29,228,391
Automatic conversion
of shares (8,227) (103,231)
Shares redeemed (443,710) (6,457,825)
------------ ------------
Net increase 1,740,711 $ 22,667,335
============ ============
Class B Shares for the Period
August 4, 1997++ to Dollar
August 31, 1997 Shares Amount
Shares sold 347,816 $ 5,946,236
Shares redeemed (15,952) (272,208)
------------ ------------
Net increase 331,864 $ 5,674,028
============ ============
[FN]
++Commencement of operations.
Class C Shares
for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 376,135 $ 5,016,545
Shares issued to shareholders
in reinvestment of dividends
and distributions 11,912 153,615
Shares issued resulting from
reorganization 71,543 970,911
------------ ------------
Total issued 459,590 6,141,071
Shares redeemed (72,548) (1,099,949)
------------ ------------
Net increase 387,042 $ 5,041,122
============ ============
Class C Shares for the Period
August 4, 1997++ to Dollar
August 31, 1997 Shares Amount
Shares sold 59,874 $ 1,024,877
Shares redeemed (1,462) (25,410)
------------ ------------
Net increase 58,412 $ 999,467
============ ============
[FN]
++Commencement of operations.
Class D Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 222,720 $ 2,911,763
Automatic conversion
of shares 8,184 103,231
Shares issued to shareholders
in reinvestment of dividends
and distributions 13,888 179,305
Shares issued resulting from
reorganization 417,921 5,730,114
------------ ------------
Total issued 662,713 8,924,413
Shares redeemed (132,230) (1,916,141)
------------ ------------
Net increase 530,483 $ 7,008,272
============ ============
Class D Shares for the Period
August 4, 1997++ to Dollar
August 31, 1997 Shares Amount
Shares sold 96,058 $ 1,653,202
Shares redeemed (17,434) (302,405)
------------ ------------
Net increase 78,624 $ 1,350,797
------------ ------------
[FN]
++Commencement of operations.
5. Acquisition of Merrill Lynch Global
Convertible Fund, Inc.:
On May 11, 1998, the Fund acquired all of the net assets of Merrill
Lynch Global Convertible Fund, Inc. pursuant to a plan of
reorganization. The acquisition was accomplished by a tax-free
exchange of 2,702,091 shares of common stock of Merrill Lynch Global
Convertible Fund, Inc. for 1,792,016 shares of common stock of the
Fund. Merrill Lynch Global Convertible Fund, Inc.'s net assets on
that date of $24,580,592, including $838,915 of unrealized
appreciation and $30,089 of accumulated net realized capital losses,
were combined with those of the Fund. The aggregate net assets
immediately after the acquisition amounted to $114,878,809.
Merrill Lynch Convertible Fund, Inc.
August 31, 1998
<AUDIT-REPORT>
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, 1998, the related statements
of operations for the year then ended and the statements of changes
in net assets for the year ended August 31, 1998 and the period
January 1, 1997 to August 31, 1997 and for the year ended December
31, 1996 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 generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at August
31, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Convertible Fund, Inc. as of August 31, 1998, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 16, 1998
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
<TABLE>
The following information summarizes all per share distributions
paid by Merrill Lynch Convertible Fund, Inc. during the taxable year
ended August 31, 1998:
<CAPTION>
Qualifying Non-Qualifying Total Long-Term
Record Payable Ordinary Ordinary Ordinary Capital
Date Date Income Income Income Gains
<S> <C> <C> <C> <C> <C> <C>
Class A Shares
9/15/97 9/23/97 $.025897 $.143070 $.168967 $4.420817*
12/10/97 12/18/97 $.094181 $.267855 $.362036 --
Class B Shares
9/15/97 9/23/97 $.023976 $.132461 $.156437 $4.420817*
12/10/97 12/18/97 $.085760 $.243906 $.329666 --
Class C Shares
9/15/97 9/23/97 $.023975 $.132453 $.156428 $4.420817*
12/10/97 12/18/97 $.084746 $.241022 $.325768 --
Class D Shares
9/15/97 9/23/97 $.025324 $.139905 $.165229 $4.420817*
12/10/97 12/18/97 $.091762 $.260975 $.352737 --
<FN>
*Of this distribution, 62.63% is subject to the 28% tax rate and
37.37% is subject to the 20% tax rate.
The qualifying domestic ordinary income qualifies for the dividends
received deduction for corporations.
Please retain this information for your records.
</TABLE>
