<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25 , 1996
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /x/
Filed by a party other than the Registrant / /
Check the appropriate box:
/x/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CONVERTIBLE HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Same as above
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
/x/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registrations statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
PRELIMINARY COPY
CONVERTIBLE HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------
NOTICE OF 1996 ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 16, 1996
------------------------
TO THE STOCKHOLDERS OF CONVERTIBLE HOLDINGS, INC.:
Notice is hereby given that the 1996 Annual Meeting of Stockholders (the
"Meeting") of Convertible Holdings, Inc. (the "Company") will be held at the
offices of Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road,
Plainsboro, New Jersey, on December 16, 1996, at 9:00 A.M. for the following
purposes:
(1) To elect seven Directors to serve until the next Annual Meeting of
Stockholders and until their successors are duly elected and qualified;
(2) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP to serve as independent auditors of the Company for
its current fiscal year;
(3) To consider and act upon a proposal to convert the Company from a
closed-end investment company to an open-end investment company to be
effective on or about September 1, 1997 (the "Effective Time"), which
proposal would be implemented by the following:
(a) Changing the Company's subclassification from a closed-end
investment company to an open-end investment company;
(b) Amending and restating the Company's Articles of Incorporation,
in the form of the Amended and Restated Articles of Incorporation to,
among other things:
1. Effect the Company's conversion to an open-end investment
company;
2. Increase the number of authorized shares of capital stock of
the Company; and
3. Change the Company's name to "Merrill Lynch Convertible Fund,
Inc.";
(4) To consider and act upon a proposal to change the Company's
investment objective and policies to be effective as of the Effective Time;
(5) To consider and act upon a proposal to amend the Company's
fundamental investment restrictions to be effective as of the Effective
Time;
(6) To consider and act upon a proposal to approve an Amended
Investment Advisory Agreement between the Company and Merrill Lynch Asset
Management, L.P. to be effective as of the Effective Time;
<PAGE> 3
(7) To consider and act upon a proposal to implement the Merrill Lynch
Select Pricing(SM) System, a multi-class distribution system for the offer
and sale of shares of the Company, to be effective as of the Effective
Time; and
(8) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
ONLY HOLDERS OF CAPITAL SHARES ARE ENTITLED TO VOTE ON ITEMS 3, 4, 5, 6 AND
7.
The Board of Directors has fixed the close of business on October 18, 1996
as the record date for the determination of stockholders entitled to notice of
and to vote at the Meeting or any adjournment thereof.
A complete list of the stockholders of the Company entitled to vote at the
Meeting will be available and open to the examination of any stockholder of the
Company for any purpose germane to the Meeting during ordinary business hours
from and after December 2, 1996 at the office of the Company, 800 Scudders Mill
Road, Plainsboro, New Jersey. You are cordially invited to attend the Meeting.
STOCKHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE REQUESTED TO
COMPLETE, DATE AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED FOR THIS PURPOSE. The enclosed proxy is being solicited on
behalf of the Board of Directors of the Company.
By Order of the Board of Directors
MARK B. GOLDFUS
Secretary
Plainsboro, New Jersey
Dated: November , 1996
<PAGE> 4
PRELIMINARY COPY
PROXY STATEMENT
------------------------
CONVERTIBLE HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------
1996 ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 16, 1996
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Convertible Holdings, Inc., a
Maryland corporation (the "Company"), to be voted at the 1996 Annual Meeting of
Stockholders of the Company (the "Meeting"), to be held at the offices of
Merrill Lynch Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road,
Plainsboro, New Jersey, on Monday, December 16, 1996 at 9:00 A.M. The
approximate mailing date of this Proxy Statement is November , 1996.
All properly executed proxies received prior to the Meeting will be voted
at the Meeting in accordance with the instructions marked thereon or otherwise
as provided therein. Unless instructions to the contrary are marked, proxies
will be voted "FOR" the election of the Board of Directors, "FOR" the
ratification of the selection of independent auditors to serve for the Company's
current fiscal year, "FOR" the proposal to convert the Company from a closed-end
investment company to an open-end investment company, "FOR" changing the
Company's investment objective and policies, "FOR" amending the Company's
fundamental investment restrictions, "FOR" approval of the Amended Investment
Advisory Agreement and "FOR" implementation of the Merrill Lynch Select
Pricing(SM) System (the "Select Pricing System"). By voting "FOR" the proposal
to convert the Company to an open-end investment company, a stockholder will
also be deemed to be voting "FOR" approval of the Company's Amended and Restated
Articles of Incorporation (the "Amended Charter") which incorporates increasing
the number of authorized shares of capital stock of the Company and changing the
Company's name to Merrill Lynch Convertible Fund, Inc. Any proxy may be revoked
at any time prior to the exercise thereof by giving written notice to the
Secretary of the Company at the Company's address indicated above or by voting
in person at the Meeting.
THE COMPANY WILL NOT CONVERT TO AN OPEN-END INVESTMENT COMPANY UNLESS THE
REQUIRED FAVORABLE VOTE OF THE HOLDERS OF THE COMPANY'S CAPITAL SHARES, PAR
VALUE $.10 PER SHARE ("CAPITAL SHARES"), IS OBTAINED ON EACH OF THE FOUR
OPEN-ENDING PROPOSALS: THE PROPOSAL TO CONVERT TO AN OPEN-END INVESTMENT
COMPANY; THE PROPOSAL TO CHANGE THE COMPANY'S INVESTMENT OBJECTIVE AND POLICIES;
THE PROPOSAL TO AMEND THE COMPANY'S FUNDAMENTAL INVESTMENT RESTRICTIONS; AND THE
PROPOSAL TO APPROVE THE AMENDED INVESTMENT ADVISORY AGREEMENT. THE COMPANY'S
ARTICLES OF INCORPORATION, AS CURRENTLY AMENDED AND IN EFFECT (THE "CURRENT
CHARTER"), PROVIDE THAT IF THE REQUIRED VOTE IS NOT RECEIVED ON THE OPEN-ENDING
PROPOSALS, THE COMPANY'S BOARD MUST CONSIDER OTHER ALTERNATIVES AND THE COMPANY
WILL CONTINUE TO OPERATE AS A CLOSED-END FUND PENDING SUCH DETERMINATION. ONE OF
THE ALTERNATIVES WHICH THE BOARD MAY ELECT IS TO HAVE THE COMPANY
<PAGE> 5
TENDER TO ACQUIRE THE OUTSTANDING CAPITAL SHARES. TENDERING STOCKHOLDERS WOULD
RECEIVE FOR THEIR SHARES AN AMOUNT EQUAL TO THE NET ASSET VALUE OF THE SHARES.
IF PURSUANT TO SUCH TENDER OFFER, HOLDERS OF CAPITAL SHARES DO NOT RECEIVE
PAYMENT FOR THEIR SHARES BY MAY 31, 1998, OR THE BOARD DECIDES AGAINST
PROCEEDING WITH A TENDER OFFER, THEN ON JULY 31, 1998, WITHOUT FURTHER ACTION BY
THE BOARD OR THE STOCKHOLDERS, THE COMPANY'S ASSETS WOULD BE LIQUIDATED AND THE
PROCEEDS WOULD BE DISTRIBUTED PRO RATA TO THE HOLDERS OF CAPITAL SHARES.
IF THE TENDER OFFER IS COMPLETED AND PROVISION IS MADE FOR THE TENDERING
HOLDERS OF CAPITAL SHARES TO RECEIVE PAYMENT FOR THEIR SHARES, THEN THE COMPANY
WILL HAVE THE POWER, IN ADDITION TO ANY OTHER POWERS IT MAY POSSESS, TO CONTINUE
OPERATION AS A CLOSED-END FUND OR TO EFFECT ANY MERGER, CONSOLIDATION OR OTHER
REORGANIZATION WITH ANOTHER CORPORATION. IN ACCORDANCE WITH THE COMPANY'S
CURRENT CHARTER, BECAUSE THE CONVERSION TO AN OPEN-END INVESTMENT COMPANY CAN BE
EFFECTIVE ONLY AFTER THE COMPANY'S INCOME SHARES, PAR VALUE $.10 PER SHARE
("INCOME SHARES") HAVE BEEN REDEEMED ON JULY 31, 1997, ONLY THE HOLDERS OF
CAPITAL SHARES ARE ENTITLED TO VOTE ON ANY OF THE PROPOSALS TO CONVERT THE
COMPANY TO AN OPEN-END INVESTMENT COMPANY.
The Board of Directors has fixed the close of business on October 18, 1996
as the record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Meeting and at any adjournment thereof.
As of the Record Date, the Company had outstanding 11,653,700 Capital Shares and
11,653,700 Income Shares. (Income Shares and Capital Shares are sometimes
referred to herein collectively as the "Shares"). Holders of Capital Shares and
Income Shares on the Record Date will be entitled to one vote for each share
held, with no shares having cumulative voting rights, with respect to each
proposal on which such shares are entitled to vote. To the knowledge of the
Company, as of the Record Date, no person is the beneficial owner of more than
five percent of its outstanding Capital Shares or Income Shares. In accordance
with Maryland law, the Company's Current Charter and an opinion of Maryland
counsel, holders of Capital Shares are entitled to vote on all matters to be
presented at the Meeting and holders of Income Shares are entitled to vote only
on Item 1. "Election of Directors" and Item 2. "Ratification of Selection of
Independent Auditors".
The Board of Directors of the Company knows of no business other than that
mentioned in Items 1 through 7 of the Notice of Meeting which will be presented
for consideration at the Meeting. If any other matter is properly presented, it
is the intention of the persons named in the enclosed proxy to vote in
accordance with their best judgment.
2
<PAGE> 6
The class of stockholders solicited and entitled to vote on each proposal
is outlined in the chart below:
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM CAPITAL SHARES INCOME SHARES
<CAPTION>
<S> <C> <C>
1 -- Election of Directors(1) Yes(2) Yes(3)
2 -- Ratification of Selection of Independent Auditors Yes Yes
3 -- Conversion to Open-End Status Yes No
4 -- Change Investment Objective and Policies Yes No
5 -- Amend Investment Restrictions Yes No
6 -- Amend Investment Advisory Agreement Yes No
7 -- Implement Select Pricing System Yes No
</TABLE>
- ---------------
(1) Seven directors are to be elected: two Directors are to be elected by the
holders of Capital Shares voting separately as a class, two Directors are to
be elected by the holders of Income Shares voting separately as a class and
the remaining three Directors are to be elected by the holders of Capital
Shares and the holders of Income Shares voting together as a single class.
(2) Holders of Capital Shares are entitled to elect two Directors and together
with the holders of Income Shares are entitled to elect an additional three
Directors.
(3) Holders of Income Shares are entitled to elect two Directors and together
with the holders of Capital Shares are entitled to elect an additional three
Directors.
ITEM 1. ELECTION OF DIRECTORS
At the Meeting, the Board of Directors, currently consisting of seven
Directors, will be elected to serve until the next Annual Meeting of
Stockholders and until their successors are elected and qualified. If the
proposal to convert the Company to open-end status is approved, it is
anticipated that the conversion will become effective on or about September 1,
1997 (the "Effective Time") following the redemption of all of the Company's
outstanding Income Shares as provided in the Company's Current Charter. Upon
conversion to open-end status, the Board will be declassified and will consist
of six Directors each of whom will serve for an indefinite term until his
successor is elected and qualified, until his death, until he resigns or is
otherwise removed under the Amended Charter or until December 31 of the year in
which he reaches age 72. It is currently anticipated that Mr. Glenn will resign
from the Board concurrently with conversion to open-end status. It is the
intention of the persons named in the enclosed proxy to nominate and vote in
favor of the election of the persons listed below. It is intended that all
properly executed proxies will be voted (unless such authority has been withheld
in the proxy) as follows:
(1) All such proxies representing both Income Shares and Capital
Shares voting together as a single class in favor of the three persons
designated as Directors to be elected by holders of Income Shares and
Capital Shares;
(2) All such proxies representing Capital Shares will be voted in
favor of the two persons designated as Directors to be elected by holders
of Capital Shares, voting separately as a class; and
(3) All such proxies representing Income Shares will be voted in favor
of the two persons designated as Directors to be elected by holders of
Income Shares, voting separately as a class.
3
<PAGE> 7
The Board of Directors of the Company knows of no reason why any of these
nominees will be unable to serve, but in the event of any such unavailability,
the proxies received will be voted for such substitute nominee or nominees as
the Board of Directors may recommend.
Certain information concerning the nominees, including their designated
classes, is set forth below:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON
THE RECORD DATE
PRINCIPAL OCCUPATION ------------------
DURING PAST FIVE YEARS DIRECTOR INCOME CAPITAL
NAME AND ADDRESS AGE AND PUBLIC DIRECTORSHIPS(1) SINCE SHARES SHARES
- ---------------------------------- --- ---------------------------------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
TO BE ELECTED BY THE HOLDERS OF
BOTH INCOME SHARES AND CAPITAL
SHARES VOTING TOGETHER AS A
SINGLE CLASS
James H. Bodurtha(1)(2)........... 52 Director and Executive Vice 1995 0 0
36 Popponesset Road President, The China Business
Cotuit, Massachusetts 02635 Group, Inc. since 1996; Chairman
and Chief Executive Officer,
China Enterprise Management
Corporation from 1993 to 1996;
Chairman, Berkshire Corporation
since 1980; Partner, Squire,
Sanders & Dempsey from 1990 to
1993.
Herbert I. London(1)(2)........... 57 Dean, Gallatin Division of New 1987 0 0
113-115 University Place York University from 1978 to 1993;
New York, New York 10003 John M. Olin Professor of
Humanities, New York University
since 1993 and Professor thereof
since 1980; Distinguished
Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to
1985; Trustee, Hudson Institute
since 1980; Overseer, Center for
Naval Analyses from 1983 to
1993; Director, Damon
Corporation from 1991 to 1993;
Limited Partner, Hypertech L.P.
since 1996.
Joseph L. May(1)(2)............... 67 Attorney in private practice since 1987 1,000 ** 1,000**
424 Church Street 1984; President, May and Athens
Suite 200 Hosiery Mills Division,
Nashville, Tennessee 32719 Wayne-Gossard Corporation from
1954 to 1983; Vice President,
Wayne-Gossard Corporation from
1972 to 1983; Chairman, The May
Corporation (personal holding
company) from 1972 to 1983;
Director, Signal Apparel Co.
from 1972 to 1989.
</TABLE>
4
<PAGE> 8
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON
THE RECORD DATE
PRINCIPAL OCCUPATION ------------------
DURING PAST FIVE YEARS DIRECTOR INCOME CAPITAL
NAME AND ADDRESS AGE AND PUBLIC DIRECTORSHIPS(1) SINCE SHARES SHARES
- ---------------------------------- --- ---------------------------------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
TO BE ELECTED BY THE HOLDERS OF
CAPITAL SHARES
Robert R. Martin(1)(2)............ 69 Chairman and Chief Executive 1993 0 0
513 Grand Hill Officer, Kinnard Investments, Inc.
St. Paul, Minnesota 55102 from 1990 to 1993; Executive
Vice President, Dain Bosworth
from 1974 to 1989; Director,
Carnegie Capital Management from
1977 to 1985 and Chairman
thereof in 1979; Director,
Securities Industry Association
from 1981 to 1982 and Public
Securities Association from 1979
to 1980; Chairman of the Board,
WTC Industries, Inc. from 1994
to 1996; Trustee, Northland
College since 1992.
Arthur Zeikel(1)*................. 64 President of MLAM (which term 1985 0 0
P.O. Box 9011 includes its corporate
Princeton, New Jersey predecessors) since 1977;
08543-9011 President of Fund Asset
Management, L.P. ("FAM", which
term includes its corporate
predecessors) since 1977;
President and Director of
Princeton Services, Inc.
("Princeton Services") since
1993; Executive Vice President
of Merrill Lynch & Co., Inc.
("ML&Co.") since 1990; Director
of Merrill Lynch Funds
Distributor, Inc. ("MLFD") since
1977.
TO BE ELECTED BY THE HOLDERS OF
INCOME SHARES
Terry K. Glenn(1)*................ 56 Executive Vice President of MLAM 1985 0 0
P.O. Box 9011 and FAM since 1983; Executive
Princeton, New Jersey Vice President and Director of
08543-9011 Princeton Services since 1993;
President of MLFD since 1986 and
a Director thereof since 1991;
President of Princeton
Administrators, L.P. since 1988.
</TABLE>
5
<PAGE> 9
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED ON
THE RECORD DATE
PRINCIPAL OCCUPATION ------------------
DURING PAST FIVE YEARS DIRECTOR INCOME CAPITAL
NAME AND ADDRESS AGE AND PUBLIC DIRECTORSHIPS(1) SINCE SHARES SHARES
- ---------------------------------- --- ---------------------------------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Andre F. Perold(1)(2)............. 44 Professor, Harvard Business School 1985 0 0
Morgan Hall since 1989 and Associate
Soldiers Field Professor from 1983 to 1989;
Boston, Massachusetts 02163 Trustee, The Common Fund since
1989; Director, Quantec Limited
since 1991.
</TABLE>
- ---------------
(1) Each of the nominees is a director, trustee or member of an advisory board
of certain other investment companies for which MLAM or its affiliate, FAM,
acts as investment adviser. See "Compensation of Directors and Officers"
below.
(2) Member of the Audit Committee of the Board of Directors.
* Interested person, as defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act"), of the Company.
** Represents less than 0.01% of the shares of the class outstanding.
Committees and Board of Directors' Meetings. The Board of Directors has a
standing Audit Committee, which consists of the Directors who are not
"interested persons" of the Company within the meaning of the Investment Company
Act. The principal purpose of the Audit Committee is to review the scope of the
annual audit conducted by the Company's independent auditors and the evaluation
by such auditors of the accounting procedures followed by the Company. The
non-interested Directors have retained independent legal counsel to assist them
in connection with these duties. The Board of Directors does not currently have
a nominating committee. If the proposal to convert the Company to open-end
status is approved, however, the Audit Committee will also serve as the
Nominating Committee.
During the fiscal year ended December 31, 1995, the Board of Directors held
five meetings and the Audit Committee held four meetings. Each of the Directors
then in office attended at least 75% of the aggregate of the total number of
meetings of the Board of Directors held during the last fiscal year and the
total number of meetings of the Audit Committee held during such period.
Compliance with Section 16(a) of the Securities Exchange Act of
1934. Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers, directors and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with
the Securities and Exchange Commission (the "SEC") and the New York Stock
Exchange (the "NYSE"). Officers, directors and greater than ten percent
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its fiscal year
ended December 31, 1995, and written representations from certain reporting
persons that they were not required to file Form 5 with respect to the most
recent fiscal year, the Company believes that all of its officers, directors,
greater than ten percent beneficial owners and other persons subject to Section
16 of the Exchange Act because of the requirements of Section 30 of the
Investment Company Act (i.e., any advisory board member, investment adviser or
affiliated person of the Company's investment adviser) have complied with all
filing requirements applicable to them with respect to transactions during the
Company's most recent fiscal year.
6
<PAGE> 10
Interested Persons. The Company considers Messrs. Zeikel and Glenn to be
"interested persons" of the Company within the meaning of Section 2(a)(19) of
the Investment Company Act because of the positions they hold with MLAM and its
affiliates. Mr. Zeikel is the President and a Director of the Company and the
President of MLAM and FAM. Mr. Glenn is the Executive Vice President and a
Director of the Company and the Executive Vice President of MLAM and FAM.
Compensation of Directors and Officers. MLAM, the Company's investment
adviser, pays all compensation of all officers of the Company and all Directors
of the Company who are affiliated with ML&Co. or its subsidiaries. The Company
pays each Director not affiliated with MLAM (each a "non-affiliated Director") a
fee of $5,000 per year plus $500 per regular Board meeting attended, together
with such Director's actual out-of-pocket expenses relating to attendance at
Board and Audit Committee meetings. The Company also pays each member of its
Audit Committee, which consists of all of the non-affiliated Directors, a fee of
$1,000 per year plus $250 per Audit Committee meeting attended. Fees and
expenses paid to the non-affiliated Directors for the fiscal year ended December
31, 1995 aggregated $41,796.
The following table sets forth for the year ended December 31, 1995
compensation paid by the Company to the non-affiliated Directors and, the
aggregate compensation paid by all registered investment companies advised by
MLAM and its affiliate, FAM ("MLAM/FAM Advised Funds"), to the non-affiliated
Directors.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM COMPANY AND
RETIREMENT BENEFITS MLAM/FAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART FUNDS PAID TO
DIRECTOR FROM COMPANY OF COMPANY EXPENSES DIRECTORS(1)
- --------------------------------------- ------------ ------------------- ----------------
<S> <C> <C> <C>
James H. Bodurtha...................... $5,000 None $157,500*
Herbert I. London...................... $9,000 None $157,500
Robert R. Martin....................... $9,000 None $157,500
Joseph L. May.......................... $9,000 None $157,500
Andre F. Perold........................ $9,000 None $157,500
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
portfolios).
* $157,500 represents the amount Mr. Bodurtha would have received if he had
been a Director for the entire calendar year ended December 31, 1995. Mr.
Bodurtha was elected to the Company's Board of Directors effective June 23,
1995.
7
<PAGE> 11
Officers of the Company. The Board of Directors has elected eight officers
of the Company. The following table sets forth information concerning each of
these officers:
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
----------------------------------------------- -------------------------- --- -------
<S> <C> <C> <C>
Arthur Zeikel.................................. President 64 1985
President of MLAM since 1977; President of
FAM since 1977; President and Director of
Princeton Services since 1993; Executive
Vice President of ML&Co. since 1990;
Director of MLFD since 1977.
Terry K. Glenn................................. Executive Vice President 56 1985
Executive Vice President of MLAM and FAM
since 1983; Executive Vice President and
Director of Princeton Services since 1993;
President of MLFD since 1986 and Director
thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
N. John Hewitt................................. Senior Vice President 61 1993
Senior Vice President of MLAM since 1976;
Manager of the Fixed Income Mutual Fund
and Insurance Portfolio Groups of MLAM;
Senior Vice President of Princeton
Services since 1993.
Vincent T. Lathbury, III....................... Vice President and 56 1985
Vice President and Portfolio Manager of MLAM Portfolio Manager
since 1982.
Barton A. Vogel................................ Vice President 61 1990
Vice President of MLAM since 1990.
Donald C. Burke................................ Vice President 36 1993
Vice President and Director of Taxation of
MLAM since 1990; Employee of Deloitte &
Touche LLP from 1982 to 1990.
Gerald M. Richard.............................. Treasurer 47 1985
Senior Vice President and Treasurer of FAM
and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since
1993; Vice President of MLFD since 1981
and Treasurer thereof since 1984.
Mark B. Goldfus................................ Secretary 50 1985
Vice President of FAM and MLAM since 1985.
</TABLE>
8
<PAGE> 12
Stock Ownership. At the Record Date, the Directors and officers of the
Company as a group (13 persons) owned an aggregate of less than 1% of either the
Capital Shares or the Income Shares of the Company outstanding at such date. At
such date, Messrs. Zeikel and Glenn, Directors and officers of the Company, and
the other officers of the Company owned an aggregate of less than 1% of the
outstanding shares of common stock of ML&Co.
ITEM 2. RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of the Company, including a majority of the
Directors who are not interested persons of the Company, has selected the firm
of Deloitte & Touche LLP ("D&T"), independent auditors, to examine the financial
statements of the Company for the current fiscal year. The Company knows of no
direct or indirect financial interest of D&T in the Company. Such appointment is
subject to ratification or rejection by the stockholders of the Company. Unless
a contrary specification is made, the accompanying proxy will be voted in favor
of ratifying the selection of such auditors.
D&T also acts as independent auditors for ML&Co. and all of its
subsidiaries and for most other investment companies for which MLAM or FAM acts
as investment adviser. The fees received by D&T from these other entities are
substantially greater, in the aggregate, than the total fees received by it from
the Company. The Board of Directors of the Company considered the fact that D&T
has been retained as the independent auditors for ML&Co. and the other entities
described above in its evaluation of the independence of D&T with respect to the
Company.
Representatives of D&T are expected to be present at the Meeting and will
have the opportunity to make a statement if they so desire and to respond to
questions from stockholders.
9
<PAGE> 13
The following four proposals are linked in that each is necessary to effect
the proposal to convert the Company to an open-end investment company:
- Item 3 -- conversion of the Company to an open-end investment company by
amendment and restatement of the Company's Current Charter in the form of
the Amended Charter,
- Item 4 -- adoption of change in investment objective and policies,
- Item 5 -- adoption of amended fundamental investment restrictions, and
- Item 6 -- amendment of the Investment Advisory Agreement to make it
applicable to an open-end fund.
The Company will not convert to open-end status unless the required favorable
vote of the holders of the Company's Capital Shares is obtained on all four of
the open-ending proposals. If any of the four proposals is rejected, the Company
will continue to operate as a closed-end investment company pending
consideration by the Board of Directors of the other alternatives set forth in
the Company's Current Charter. The Company's Current Charter provides that if
the required vote is not received on the open-ending proposals, the Company's
Board must consider other alternatives and the Company will continue to operate
as a closed-end fund pending such determination. One of the alternatives which
the Board may elect is to have the Company tender to acquire the outstanding
Capital Shares. Tendering stockholders would receive for their shares an amount
equal to the net asset value of the shares. If pursuant to such tender offer,
holders of Capital Shares do not receive payment for their shares by May 31,
1998, or the Board decides against proceeding with a tender offer, then on July
31, 1998, without further action by the Board or the stockholders, the Company's
assets would be liquidated and the proceeds would be distributed pro rata to the
holders of Capital Shares.
If the tender offer is completed and provision is made for the tendering
holders of Capital Shares to receive payment for their shares, then the Company
will have the power, in addition to any other powers it may possess, to continue
operation as a closed-end fund or to effect any merger, consolidation or other
reorganization with another corporation. CONVERSION TO AN OPEN-END INVESTMENT
COMPANY MAY ONLY OCCUR AFTER THE INCOME SHARES HAVE BEEN REDEEMED ON JULY 31,
1997, AS PROVIDED IN THE COMPANY'S CURRENT CHARTER. AS A RESULT, ONLY THE
HOLDERS OF CAPITAL SHARES ARE ENTITLED TO VOTE ON ANY OF THE OPEN-ENDING
PROPOSALS.
ITEM 3. APPROVAL OR DISAPPROVAL OF CONVERSION OF
THE COMPANY FROM A CLOSED-END INVESTMENT COMPANY
TO AN OPEN-END INVESTMENT COMPANY AND
AMENDMENT AND RESTATEMENT OF THE
COMPANY'S CURRENT CHARTER
The following is a proposal to convert the Company from a closed-end
investment company to an open-end investment company. As explained in more
detail below, the primary effect of the proposed conversion of the Company is
that stockholders will be permitted to redeem their shares for cash at any time
at the net asset value of such shares next determined after initial receipt of
proper notice of redemption. The Company will also continuously offer its shares
to the public and will be operated so as to accommodate such sales and
redemptions. In connection with the conversion to an open-end investment
company, the Company is proposing to change its investment objective and
policies and to amend its fundamental investment restrictions.
10
<PAGE> 14
See Item 4. "Approval of Change in Investment Objective and Policies" and Item
5. "Adoption of Fundamental Investment Restrictions". Conversion to open-end
status will only occur if and when all the Income Shares have been redeemed on
July 31, 1997. As provided in the Company's Current Charter, because only the
holders of Capital Shares will be stockholders of the Company at such time as
the conversion to open-end status shall be consummated, only the holders of
Capital Shares are entitled to vote on the open-ending proposals.
The Company's Current Charter provides that if the required vote is not
received on the open-ending proposals, the Company's Board must consider other
alternatives and the Company will continue to operate as a closed-end fund
pending such determination. One of the alternatives which the Board may elect is
to have the Company tender to acquire the outstanding Capital Shares. Tendering
stockholders would receive for their shares an amount equal to the net asset
value of the shares. If pursuant to such tender offer, holders of Capital Shares
did not receive payment for their shares by May 31, 1998, or the Board decided
against proceeding with a tender offer, then on July 31, 1998, without further
action by the Board or the stockholders, the Company's assets would be
liquidated and the proceeds would be distributed pro rata to the holders of
Capital Shares.
If the tender offer is completed and provision is made for the tendering
holders of Capital Shares to receive payment for their shares, then the Company
will have the power, in addition to any other powers it may possess, to continue
operation as a closed-end fund or to effect any merger, consolidation or other
reorganization with another corporation.
The Company's Current Charter provides that all of the outstanding Income
Shares will be redeemed on July 31, 1997 (the "Redemption Date") at $9.30 per
share plus an amount equal to any accumulated and unpaid dividends up to and
including the Redemption Date (the "Redemption Price"). From and after the
Redemption Date, holders of Income Shares shall cease to have the rights of
stockholders, except the right to receive the Redemption Price, and such shares
will no longer be deemed outstanding. In the event the Income Shares are not
redeemed by the Company substantially as provided in the Company's Current
Charter, then on September 1, 1997, without any vote of the Board or the
stockholders, the assets of the Company will be liquidated and the proceeds
distributed to stockholders.
The Company's Current Charter further provides that not later than October
1, 1997 (unless the Company shall have been liquidated and the proceeds
distributed as provided in the Current Charter), the Board shall either (1)
advise each holder of Capital Shares that such holder may notify the Company not
later than November 1, 1997 that such holder elects to have all or part of such
holder's Capital Shares acquired by the Company or (2) call a special meeting of
the holders of Capital Shares, to be held not later than January 1, 1998, either
(a) to consider a proposal for voluntary dissolution and liquidation of the
Company or (b) to vote on a proposal that the Company become an open-end
investment company. The proposal to convert the Company to open-end status is
being presented to stockholders at the Meeting (which has been called in
compliance with the notice and other formalities of stockholders' meetings under
the Maryland corporate law) in accordance with the provisions of the Current
Charter. These matters and certain other proposals related to conversion of the
Company to an open-end investment company are discussed in more detail below.
If the proposed conversion of the Company is approved and consummated,
stockholders of the Company after it has converted to open-end status will be
permitted to redeem their shares for cash at any time (except
11
<PAGE> 15
in certain circumstances authorized by the Investment Company Act) at the net
asset value of such shares next determined after the tender for redemption. Upon
converting to an open-end investment company, the Company also would commence a
continuous offering of its shares and would no longer list its shares on the
NYSE. These changes in the manner of offering and repurchase of Company shares
may result in certain modifications in management of the Company, including
greater expenses. For example, if cash in-flows are not sufficient, the Company
may hold a greater percentage of its assets in temporary investments or may be
required to liquidate portfolio securities in order to meet redemption requests.
In such circumstances, the performance of the Company may be affected. The
Company's investment objective and investment policies are proposed to be
changed but only in conjunction with the conversion to an open-end investment
company. See Item 4. "Approval of Change in Investment Objective and Policies".
Also see Item 5. "Adoption of Amended Fundamental Investment Restrictions" for
the Company's proposal to amend its fundamental investment restrictions.
BACKGROUND OF THE PROPOSAL
When the Company was organized in 1985, it was determined that using a
closed-end investment company structure, rather than an open-end structure, was
the most appropriate form of organization for the Company. As a dual purpose
fund, the Company's Income Shares may be deemed to be preferred shares or
"senior securities" as defined under the Investment Company Act. Open-end
investment companies are prohibited under the Investment Company Act from
issuing senior securities but this prohibition does not extend to closed-end
funds. In addition, closed-end investment companies differ from open-end
investment companies in that closed-end investment companies have a permanent
capital base, while open-end investment companies issue securities redeemable at
net asset value at any time at the option of the stockholder and typically
engage in a continuous offering of their shares. Accordingly, open-end
investment companies are subject to periodic asset in-flows and out-flows that
can complicate portfolio management, especially in the early years of operation.
Conversely, closed-end investment companies do not face the prospect of having
to maintain cash positions or liquidate portfolio holdings to meet redemptions.
At the time the Company was organized, it was recognized that income shares
of dual purpose funds historically traded at a premium over their net asset
value while capital shares traded at a discount from their net asset value, at
least until the fund approached the date on which the fund is to redeem the
income shares and consider liquidation.
In March 1992, the Company, pursuant to a vote of its stockholders, amended
its charter to permit the Company to repurchase its Capital Shares and Income
Shares on any national securities exchange. The Board determines the frequency
and amount of such repurchases subject to the conditions contained in an
exemptive order issued by the SEC to the Company. Generally, the Board considers
repurchases at a time when the aggregate market price of a unit consisting of an
Income Share and a Capital Share is less than the net asset value of the unit.
The purpose of this amendment was to address the existence of a trading discount
for the Capital Shares. It was also noted at that time that the Capital Shares
and Income Shares on a combined basis traded at a discount to net asset value.
The net asset value of an Income Share is equal to the lower of (a) $9.30 plus
accumulated and unpaid net income per share or (b) the total net assets of the
Company divided by the number of Income Shares outstanding. The net asset value
of a Capital Share is equal to the net assets of the Company minus net assets
attributable to Income Shares, divided by the number of Capital Shares
outstanding.
12
<PAGE> 16
The following table for each of the periods indicated shows the high and
low sale prices of the Company's Income Shares and Capital Shares on the NYSE
Composite Tape, the corresponding net asset value per share and the premium or
discount to net asset value per share at which the Company's shares were
trading.
INCOME SHARES
<TABLE>
<CAPTION>
PREMIUM
(DISCOUNT) TO NET
ASSET
MARKET PRICE NET ASSET VALUE VALUE
------------------- ----------------- -----------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------------------------- ------- ------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
March 31, 1994................. $11.375 $10.625 $ 9.60 $ 9.33 19.61% 13.28%
June 30, 1994.................. 11.125 10.625 9.62 9.34 16.40 11.14
September 30, 1994............. 11.00 10.125 9.61 9.34 15.81 6.88
December 31, 1994.............. 10.50 9.875 9.61 9.30 10.37 3.08
March 31, 1995................. 10.375 10.00 9.58 9.32 9.39 5.49
June 30, 1995.................. 10.50 9.875 9.61 9.35 9.33 5.22
September 30, 1995............. 10.50 10.00 10.25 9.35 10.37 6.33
December 31, 1995.............. 10.375 9.875 9.64 9.32 8.01 4.28
March 31, 1996................. 10.125 10.00 9.62 9.32 7.54 3.95
June 30, 1996.................. 10.125 9.75 9.66 9.35 5.71 2.97
September 30, 1996............. 9.75 9.625 9.61 9.49 2.09 0.16
</TABLE>
CAPITAL SHARES
<TABLE>
<CAPTION>
PREMIUM (DISCOUNT)
TO NET ASSET
MARKET PRICE NET ASSET VALUE VALUE
------------------- ----------------- -------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ---------------------------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1994.............. $10.875 $ 9.375 $13.63 $12.52 (19.80)% (28.12)%
June 30, 1994............... 10.625 9.00 12.57 11.58 (22.28) (25.43)
September 30, 1994.......... 9.625 8.875 12.49 11.59 (20.94) (24.94)
December 31, 1994........... 9.625 8.875 12.00 10.85 (15.90) (21.08)
March 31, 1995.............. 10.125 9.00 12.06 11.25 (11.97) (18.89)
June 30, 1995............... 11.125 9.875 13.24 12.13 (15.05) (18.77)
September 30, 1995.......... 12.125 11.00 14.38 13.54 (14.25) (18.22)
December 31, 1995........... 12.125 11.50 14.25 13.43 (13.44) (17.14)
March 31, 1996.............. 12.375 11.50 14.25 13.43 (11.55) (14.75)
June 30, 1996............... 13.25 12.25 14.98 14.43 (8.18) (13.97)
September 30, 1996.......... 13.50 12.75 14.99 14.23 (9.94) (11.33)
</TABLE>
On July 31, 1997, as required by the Company's Current Charter, the Company
will redeem all of its outstanding Income Shares. After considering the options
available as provided in the Current Charter (i.e., to offer to acquire the
outstanding Capital Shares or to submit a proposal to stockholders either to
liquidate or to convert to open-end status), the Board of Directors decided that
submitting to stockholders a proposal to convert to open-end status was the
appropriate alternative and in the best interests of the Company and its
13
<PAGE> 17
stockholders. The Board believes that as an open-end company, holders of Capital
Shares of the Company will have an ongoing opportunity to realize the value of
their investment. At the same time, the Board of Directors believes that
operating the Company as an open-end investment company would be beneficial to
the Company and its stockholders. Through the continuous offering of its shares
the Company would have an ongoing source of new capital available for
investment. Depending on the level of new share purchases as compared with share
redemptions, and certain other factors, Company assets may increase as a result
of such purchases. Such asset growth could enable the Company to achieve certain
expense reductions attributable to economies of scale, although there is no
assurance that expense reductions will result. It is also possible, however,
that after the conversion, Company assets may decrease and/or Company expenses
may increase (see "Changes in Company Operations as a Result of Conversion to an
Open-End Investment Company -- (d) Expenses; Potential Net Redemptions" below).
At the meeting held on September 27, 1996, the Board of Directors,
including the Directors who are not interested persons of the Company (the
"Independent Directors"), determined that conversion of the Company to an
open-end investment company is in the best interests of the Company and its
stockholders at this time and was the better option of the three options
provided in the Company's Current Charter. In addition, at such meeting, the
Board of Directors adopted a resolution setting forth an amendment to the
Company's Current Charter in the form of the Amended Charter and declared such
amendment to be advisable and directed that the Amended Charter be submitted for
consideration by the holders of Capital Shares at the Meeting. As described
further below, at that meeting, the Directors, including the Independent
Directors, also considered and approved new arrangements for the management,
distribution and operation of the Company as an open-end investment company,
including certain changes to the Company's investment objective, investment
policies and investment restrictions. Holders of the Company's Capital Shares
are now being asked to approve the conversion of the Company to an open-end
investment company along with those additional matters.
CHANGES IN COMPANY OPERATIONS AS A RESULT OF CONVERSION TO AN OPEN-END
INVESTMENT COMPANY
The Company is currently registered as a closed-end investment company
under the Investment Company Act. Except under certain specified circumstances,
closed-end investment companies do not redeem their outstanding shares of stock.
In addition, while it is theoretically possible for such companies to engage in
a continuous offering of their shares, the existence of market discounts often
make such offerings impracticable. Thus, closed-end investment companies
generally operate with a relatively fixed capitalization. The stock of
closed-end investment companies is normally bought and sold on national
securities exchanges. The Company's Capital Shares and Income Shares are
currently traded on the NYSE. The Company's Capital Shares will be delisted from
the NYSE, however, if the Company's conversion to an open-end investment company
is approved and consummated. The Company's Income Shares will be delisted from
the NYSE following their redemption.
In contrast, open-end investment companies, commonly referred to as "mutual
funds," issue redeemable securities. The holders of redeemable securities have
the right to surrender those securities to the company and receive an amount
approximately equal to the net asset value of the shares. Open-end investment
companies (including the Company, if the proposed conversion is effected) also
typically continuously issue new shares of stock to investors based on the net
asset value of such shares next computed after receipt of a valid purchase
order.
14
<PAGE> 18
Some of the other legal and practical differences between the Company's
present operation as a closed-end investment company and its likely operation as
an open-end investment company are as follows:
(a) Acquisition and Disposition of Shares. Stockholders presently pay
brokerage commissions in connection with the purchase and sale of the
Company's Income Shares and Capital Shares on the NYSE. If the Company were
to be converted into an open-end investment company, investors wishing to
acquire shares of the Company's common stock would be able to purchase such
shares either through securities dealers or agents who have entered into
selected dealer agreements with MLFD, which would be the Company's
principal underwriter (the "Distributor"), or directly from Merrill Lynch
Financial Data Services, Inc. ("MLFDS"), which would become the Company's
transfer agent (the "Transfer Agent"). Such shares would be purchased at
their net asset value plus any applicable initial sales charge.
Stockholders desiring to realize the value of their shares would be able to
do so by exercising their right to have such shares redeemed by the Company
at the then current net asset value of the shares or at such net asset
value less any applicable contingent deferred sales charge ("CDSC") as may
be fixed by the Board of Directors. The Company's net asset value per share
is calculated by dividing (i) the value of its portfolio securities plus
all cash and other assets (including accrued interest and dividends
received but not collected) less all liabilities (including accrued
expenses) by (ii) the number of outstanding shares of the Company.
Reference is made to "Implementation of the Merrill Lynch Select
Pricing(SM) System" in Item 7 for a description of the Select Pricing
System, including the proposed sales charges, pursuant to which investors
in the Company may select one of the alternative sales charge arrangements
upon the purchase of shares. Holders of Capital Shares will not incur any
sales charges upon conversion nor will such shares be subject to any
ongoing account maintenance or distribution fees.
The Board of Directors also reserves the right to redeem Company
shares in kind if, in the opinion of MLAM, such a redemption would be
advisable. If redemptions are made in kind, a stockholder would incur
transaction costs in disposing of any securities received. The Board has no
current intention to redeem Company shares in kind.
(b) Stockholder Meetings. Stockholders will have fewer voting
opportunities if the Company converts to open-end status, since the Company
ordinarily will not hold annual stockholder meetings. As discussed above,
the Company's Shares are presently listed on the NYSE in order to provide a
liquid trading market for Company Shares. Exchange rules generally provide
for annual meetings of the stockholders of listed companies for the
election of directors. The Company's Current Charter presently provides for
two directors to be elected by the holders of Income Shares, two directors
to be elected by the holders of Capital Shares and the remaining directors
to be elected by the holders of Income Shares and Capital Shares voting
together as a single class. All Directors are elected for a term of office
of one year. If the Company's Income Shares are redeemed and the proposal
to convert the Company to an open-end investment company is approved, the
Company's Shares will be delisted and voting for the election of directors
will be determined solely by reference to the Company's Amended Charter,
the Investment Company Act and Maryland corporate law.
Under the Investment Company Act, the Company would be required to
hold a stockholder meeting if the number of Directors elected by the
stockholders were less than a majority of the total number of Directors, or
if a change were sought in the fundamental investment policies of the
Company, in the Investment Advisory Agreement or in a distribution plan
adopted pursuant to Rule 12b-1 under the Investment Company Act (where such
change involved a material increase in Company expenses).
15
<PAGE> 19
Maryland corporate law provides that, if the articles of incorporation
or by-laws of either an open-end or closed-end investment company
registered under the Investment Company Act so provides, the company is not
required to hold an annual stockholder meeting in any year in which the
election of directors is not required to be acted upon under the Investment
Company Act. The Company's Current Charter and By-Laws do not presently so
provide. However, the Board of Directors has approved amended By-Laws,
which will go into effect if the proposal to convert the Company to an
open-end investment company is approved and consummated, which provide that
the Company will not be required to hold an annual meeting in any year in
which the election of directors is not required to be acted upon under the
Investment Company Act. Thus, the Company does not intend to hold annual
meetings in any year in which it is not so required. By not holding annual
stockholder meetings, the Company would save the costs of preparing proxy
materials and soliciting stockholders' votes on the usual proposals
contained therein. Based on the number of outstanding shares and
stockholders as of the Record Date, such costs would aggregate
approximately $65,000 (unaudited) per year.
While, as described above, Maryland corporate law would not require
the Company to hold annual meetings of stockholders, such law requires the
directors to call a special meeting of stockholders when requested in
writing to do so by the stockholders entitled to cast at least 25% of all
the votes entitled to be cast at the special meeting; provided, however,
that, unless requested by stockholders entitled to cast a majority of all
the votes entitled to be cast at the special meeting, a special meeting
need not be called to consider any matter which is substantially the same
as a matter voted on at any special meeting of the stockholders held during
the preceding twelve months. The By-Laws that will go into effect if the
Company converts to an open-end investment company reduce the Maryland
corporate law requirement that stockholders entitled to cast at least 25%
of the votes entitled to be cast at the special meeting request a meeting
to at least 10% of the votes entitled to be cast request a meeting.
The holders of the Company's Capital Shares will continue to have one
vote on each matter submitted to a vote of stockholders if the Company
converts to open-end status. Under Maryland corporate law and the Amended
Charter, the Board of Directors would have the authority to increase the
number of shares of any class the Company is authorized to issue and may
reclassify unissued shares into additional classes of stock and may also
reclassify issued shares into additional classes (provided such
reclassification of issued shares does not substantially adversely affect
the rights of holders of such issued shares) and, accordingly, these
matters need not be submitted to a vote of the stockholders. As discussed
in "Implementation of the Merrill Lynch Select Pricing(SM) System" in Item
7 herein, the Board of Directors has approved the Select Pricing System, a
multi-class distribution system involving the issuance of four classes of
shares bearing different expenses specifically related to the distribution
of shares of each class. The four classes will have the same rights except
that each class will vote separately as a class with respect to any
distribution plan applicable to such class.
(c) Determination of Net Asset Value. The net asset value of the
Company presently is determined as of fifteen minutes after the close of
business on the NYSE (generally 4:00 p.m., New York time), on the last
business day in each week. SEC regulations under the Investment Company Act
generally require open-end investment companies to value their assets on
each business day in order to determine the current net asset value on the
basis of which their shares may be redeemed by stockholders or purchased by
investors. Net asset values of most such companies are published daily by
leading
16
<PAGE> 20
financial publications. It is anticipated that the net asset value of the
Company will be similarly published.
(d) Expenses; Potential Net Redemptions. The Company's expenses may
increase upon conversion to an open-end investment company, either as a
result of the cost of additional services typically available to an
open-end company or because of higher operating costs. For example,
transfer agency costs will likely increase as a result of the processing of
ongoing purchase and redemption requests. In addition, conversion to
open-end status could result in immediate, substantial redemptions and,
consequently, a marked reduction in the size of the Company. As a result of
that decrease in size, the Company could experience an increase in its
expense ratio, i.e., the Company's ratio of operating costs to average net
assets. On the other hand, this result could be offset by new sales of the
Company's shares and reinvestment of dividends and capital gains
distributions in shares of the Company. All other things being equal, if
the Company's asset base were to decrease, producing an increase in the
expense ratio, the Company may experience a lower return than is currently
being produced. For the fiscal year ended December 31, 1995, the Company's
total expenses aggregated 0.79% of its average net assets. For the period
from January 1, 1996 to September 30, 1996, total expenses aggregated 0.79%
(unaudited) of the Company's average net assets on an annualized basis. In
addition, the Company might be required to sell portfolio securities in
order to meet redemptions, thereby resulting in realization of gains (or
losses) and in brokerage and other transactional expenses.
Significant net redemptions could also cause the Company to become too
small to be considered economically viable. In that event, the Board of
Directors would consider alternatives to continuing the Company's
operations, ranging from merger of the Company with another investment
company to liquidation of the Company.
(e) Elimination of Discount or Premium. The fact that stockholders
who wish to realize the value of their shares will be able to do so by
redemption will eliminate any market discount from net asset value. It will
also eliminate any possibility that the Company's shares will trade at a
premium over net asset value. If the proposal to convert the Company to an
open-end investment company is approved by the stockholders, the discount
may be reduced prior to the date of such conversion to the extent
purchasers of shares in the open market are willing to accept less of a
discount in anticipation of the prospect of the Company becoming an
open-end company.
(f) Dividends. The Company intends to provide the opportunity for
stockholders to elect to receive dividends and capital gains distributions
in cash or, at no charge to stockholders, in shares of the Company. There
are no sales charges imposed upon dividend reinvestments. Effective upon
conversion to an open-end investment company, such reinvestments in shares
would be made at net asset value. At the time of conversion, stockholders
will automatically be enrolled in the dividend reinvestment plan unless the
Company receives instructions that the investor wishes to receive his or
her distributions and dividends in cash. New stockholders may elect on the
purchase application either to participate in the dividend reinvestment
plan or to receive their dividends and distributions in cash. If no choice
is made on the application, dividends and distributions will be
automatically reinvested.
(g) Portfolio Management. Unlike open-end investment companies,
closed-end investment companies are not subject to redemptions at the
option of its stockholders which might cause them to sell portfolio
securities at disadvantageous times or to maintain adequate reserves of
cash or cash equivalents
17
<PAGE> 21
in order to meet such redemptions. (The Company, however, is subject to the
provision in its Current Charter that all Income Shares be redeemed on July
31, 1997.) The sale of portfolio securities could increase transaction
costs, taxable distributions and portfolio turnover. The absence of
redemptions also enables closed-end companies to be more fully invested
than open-end companies by obviating the need to maintain such cash
reserves. Similarly, the additional reserves of cash that may be maintained
by open-end companies to meet anticipated net redemptions could reduce the
Company's investment flexibility and the scope of its investment
opportunities. On the other hand, a positive cash flow resulting from
ongoing sales could potentially better enable the Company to take advantage
of investment opportunities. The Company's investment objective and
policies are proposed to be amended, see Item 4. "Approval of Change in
Investment Objective and Policies". The Company is also submitting for
stockholder approval, as part of the proposal to convert to open-end
status, the approval of amended fundamental investment restrictions. See
Item 5. "Adoption of Amended Fundamental Investment Restrictions".
(h) Illiquid Securities. An open-end investment company is subject to
the Investment Company Act requirement that no more than 15% of its net
assets may be invested in securities that are not readily marketable. The
Company's investment restrictions currently limit investment in "restricted
securities" to 10% of total assets. Therefore, if the Company is converted
to an open-end investment company, the limitation on its purchase of
"restricted securities" will be increased.
(i) Senior Securities and Borrowings. The Investment Company Act
prohibits open-end investment companies from issuing "senior securities"
representing indebtedness (i.e., bonds, debentures, notes and other similar
securities), except that such companies may borrow from banks where there
is an asset coverage of at least 300% for all borrowings. Similarly,
open-end investment companies may not issue preferred stock. Closed-end
investment companies, on the other hand, are permitted to issue senior
securities representing indebtedness if an asset coverage of 300% is met.
Closed-end companies may incur such indebtedness with respect to any type
of lender; they are not limited to bank borrowings. In addition, closed-end
investment companies may issue "senior securities" representing stock, such
as preferred stock, where there is an asset coverage of at least 200% and
certain other requirements are met. This ability to issue senior securities
may give closed-end companies more flexibility than open-end companies in
"leveraging" their stockholders' investments. The Company presently is
subject to an investment restriction that it may not borrow amounts in
excess of 10% of its total assets taken at market value and then only from
banks as a temporary measure for extraordinary or emergency purposes. The
Income Shares, which will be redeemed on July 31, 1997, serve to leverage
the Capital Shares as a "senior security" representing stock.
The Company intends to be unleveraged after conversion to open-end
status. Accordingly, although the amended fundamental investment
restrictions being submitted to stockholders at the Meeting provide in
restriction (6) that the Company may borrow money from a bank in an amount
up to 33 1/3% of its total assets (an increase over the current restriction
which limits borrowings to 10% of total assets), proposed non-fundamental
investment restriction (i) further restricts such borrowings. Such
non-fundamental investment restriction permits only borrowings from a bank
as a temporary measure for extraordinary or emergency purposes or to meet
redemptions in amounts not exceeding 33 1/3% of total assets and permits
short-term credit as necessary for the clearance of purchases and sales of
portfolio securities. As an open-end fund the Company is required to meet
redemptions on a daily basis, and the ability to borrow when
18
<PAGE> 22
necessary may assist the Company from time to time in meeting redemptions
when otherwise it might be required to liquidate portfolio investments
under disadvantageous circumstances. See Item 5. "Adoption of Amended
Fundamental Investment Restrictions".
(j) Stockholder Services. If this proposal is approved and the
Company becomes an open-end investment company, stockholders will have
access to various services that are often available to stockholders in such
a company. These will include participation in an exchange privilege which
allows stockholders of the Company to exchange their shares for shares of
certain other mutual funds advised by FAM or MLAM, the use of the Company
for retirement plans, and the facility for stockholders to effect various
transactions by telephone. Details of such services will be disclosed in
the Company's prospectus and statement of additional information. The cost
of such services would normally be borne by the Company rather than by
individual stockholders.
(k) Distribution Plans. An open-end investment company is permitted
to finance the distribution of its shares by adopting a plan of
distribution pursuant to Rule 12b-1 under the Investment Company Act. If
the Company is converted to an open-end investment company, and
implementation of the Select Pricing System is approved, the Company
intends to adopt distribution plans pursuant to Rule 12b-1 with respect to
the new classes of shares of the Company in order to pay for the costs
incurred in distributing such shares and providing ongoing stockholder
account maintenance. Capital Shares of the Company currently outstanding
will be designated Class A shares under the Select Pricing System and will
not be subject to such a Rule 12b-1 fee. See "Implementation of the Merrill
Lynch Select Pricing(SM) System" below in Item 7.
(l) Minimum Investment. If the Company is converted to an open-end
investment company, it will adopt requirements that an initial investment
in Company shares and any subsequent investment must be in a specified
minimum amount in order to reduce the administrative burdens incurred in
monitoring numerous small accounts. The Company expects that the minimum
initial investment requirement will be $1,000 and the minimum subsequent
investment requirement will be $50. The Company may waive or reduce the
minimum for certain retirement and employee savings plans or custodial
accounts for the benefit of minors. Any such minimum investment requirement
will not apply to existing stockholders at the time of conversion, except
with respect to minimums for subsequent investments.
(m) Qualification as a Regulated Investment Company. The Company
intends to continue to qualify for treatment as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"),
after conversion to open-end status, so that it will continue to be
relieved of federal income tax on that part of its investment company
taxable income and net capital gain that is distributed to its
stockholders. To qualify for this treatment the Company must currently meet
several requirements, one of which is that less than 30% of the Company's
gross income in each taxable year be derived from the sale or other
disposition of securities, options or futures contracts held for less than
three months. MLAM anticipates that the Company will continue to be able to
meet this requirement after the conversion. No assurance exists, however,
that this requirement will be met under all possible circumstances,
particularly if the Company is required to sell recently acquired portfolio
securities because of unexpectedly large net redemptions or large influxes
of cash followed within a short time by significant redemptions of Company
shares.
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(n) Stock Certificates. If Items 3 and 7, are approved, currently
issued and outstanding Capital Shares will be classified as "Class A
shares" under the Select Pricing System. If Item 3 is approved, but Item 7
is not, currently issued and outstanding Capital Shares will be classified
as Common Stock. In either case, each certificate representing Capital
Shares of the Company as a closed-end investment company will automatically
represent the same number of shares of the Company as an open-end
investment company.
CHANGING THE COMPANY'S SUB-CLASSIFICATION TO AN OPEN-END INVESTMENT COMPANY
If the proposed conversion to open-end status is approved, the Board will
take such other actions as are necessary to effect the conversion. Since shares
of an open-end investment company are offered to the public on a continuous
basis, the Company will enter into a Distribution Agreement with the Distributor
with respect to its shares in a form approved by the Directors, including a
majority of the Independent Directors (and, if the Select Pricing System is
approved, will enter into a separate Distribution Agreement with respect to each
of Class A, Class B, Class C and Class D shares). A registration statement under
the Securities Act of 1933, as amended, covering the offering of the shares of
the Company and appropriate state securities law filings will be made, and, if
conversion is approved, immediately prior to the Effective Time, the Company
will file the Amended Charter with the State Department of Assessments and
Taxation of Maryland. Conversion is not, however, conditioned upon prior or
simultaneous receipt of regulatory approvals or entry into contractual
arrangements regarding the sale of Company shares. In any event, all of the
above actions and the effectiveness thereof will be contingent upon the
completion of the redemption of Income Shares in accordance with the Current
Charter.
Although management will use all practicable measures to keep costs at a
minimum, certain costs will be incurred, many of which will be nonrecurring, in
connection with the change from a closed-end to an open-end investment company,
including costs associated with the seeking of necessary government clearances,
the preparation of a registration statement and prospectuses as required by
federal securities laws (including printing and mailing costs) and the payment
of necessary filing fees under the securities laws of various states. The
Company estimates that these additional costs, which will be paid by the
Company, will range from approximately $200,000 (unaudited) to $260,000
(unaudited), or between $.017 (unaudited) and $.022 (unaudited) per Capital
Share based on the current number of Capital Shares outstanding. Management
anticipates that substantially all of these costs will be incurred by the
Company prior to the effective date of the conversion.
In the opinion of Brown & Wood LLP, counsel to the Company, neither the
Company nor its stockholders will realize any gain or loss for tax purposes as a
result of the Company's conversion. Such opinion is based upon the view that the
conversion does not, for federal income tax purposes, involve the exchange or
disposition of a stockholder's holdings in the Company, or even if the
conversion were to be deemed an exchange of a stockholder's holdings in the
Company for federal income tax purposes, such exchange would not be a taxable
event pursuant to Section 1036 of the Code. However, the stockholders will
recognize a gain or loss if they later redeem their shares to the extent that
the redemption proceeds are greater or less than the respective adjusted tax
bases of their shares.
Payment for any such redemption will be made within seven days after
receipt of a proper request for redemption (in accordance with redemption
procedures as will be specified in the prospectus). Such payment may be
postponed or the right of redemption suspended at times (a) when the NYSE is
closed for other than
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customary weekends and holidays, (b) when trading on the NYSE is restricted, (c)
when an emergency exists as a result of which disposal by the Company of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Company fairly to determine the value of its net assets, or
(d) during any other period when the SEC, by order, so permits; provided that
applicable rules and regulations of the SEC shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
APPROVAL OF THE COMPANY'S AMENDED CHARTER
Approval of amendments to the Company's Current Charter in the form of the
Amended Charter includes approval of conversion to open-end status, approval of
an increase in the number of authorized shares of capital stock and approval of
the change of name to Merrill Lynch Convertible Fund, Inc., each of which is
provided for in various sections of the Amended Charter.
It is intended that if the proposed conversion to open-end status is
approved, the Company will be organized as set forth in the Company's Amended
Charter in the form approved by the Board of Directors at their meeting on
September 27, 1996 and included as Exhibit A hereto. The Amended Charter renames
the Company as "Merrill Lynch Convertible Fund, Inc.", provides for an increase
in the number of authorized shares of capital stock and authorizes the issuance
of securities redeemable at the option of the stockholders at net asset value.
In connection with such Amended Charter, the Board of Directors has adopted new
By-Laws, which will go into effect upon conversion to an open-end company,
reflecting the necessary conforming changes. The Amended Charter differs
substantially from the Company's Current Charter. The differences are
attributable for the most part to the fact that the Amended Charter is prepared
for an open-end fund which, among other things, extends to stockholders the
option to redeem their shares at net asset value and provides the Board with the
flexibility to issue multiple classes of shares and to classify and reclassify
such shares (whether issued or unissued) without stockholder action while the
Current Charter reflects the Company's organization as a dual purpose closed-end
fund authorized to issue Income Shares and Capital Shares.
The Company's Current Charter provides that the vote of at least two-thirds
of the shares of each class, voting separately as a class, is required for the
adoption of (a) any amendment to the Current Charter that would alter or change
the rights or preferences of that class of shares adversely, or would increase
or decrease the amount of authorized shares of that class or change the par
value, or (b) any proposal for voluntary or involuntary dissolution, or (c) any
proposal for a merger or consolidation or share exchange or sale of
substantially all of the Company's assets.
The Amended Charter provides for an increase in authorized capital stock
from 30,000,000 shares to 400,000,000 shares. Thereafter, under the Amended
Charter and Maryland corporate law the Company's Board of Directors will have
the authority to increase the number of shares the Company is authorized to
issue as well as the number of shares of any class and may classify unissued
shares into additional classes of stock and may also reclassify issued shares
into additional classes (provided such reclassification of issued shares does
not substantially adversely affect the rights of holders of such issued shares)
and, accordingly, these matters need not be submitted to a vote of the
stockholders.
As noted above, the Current Charter requires a greater than majority vote
of shareholders (i.e., a two-thirds vote) for approval of a merger or
consolidation. Pursuant to the terms of the Amended Charter and the provisions
of Maryland corporate law, a merger or consolidation might not be subject to a
stockholder vote at
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all depending on the structure of the transaction, and in any case would, under
the Amended Charter, require only the affirmative vote of a majority of the
shares entitled to vote on the transaction. Under Maryland corporate law, a
merger or consolidation of registered open-end investment companies does not
require the vote of the shareholders of the surviving or acquiring corporation.
Therefore, following conversion to open-end status, the Company's stockholders
would not have an opportunity to consider or vote on any proposed reorganization
if the Company were to be the acquiring or surviving corporation.
VOTE REQUIRED
The proposal regarding a change in the Company's subclassification under
the Investment Company Act from a closed-end investment company to an open-end
investment company, and approval of the Amended Charter, each requires the
affirmative vote of two-thirds of the outstanding Capital Shares, voting in
person or by proxy. The Board of Directors recommends a vote "FOR" Item 3.
IF THE REQUIRED FAVORABLE VOTE IS NOT ALSO OBTAINED ON ANY OF ITEMS 4, 5
AND 6 (THE OTHER OPEN-ENDING PROPOSALS), THE COMPANY WILL NOT CONVERT TO
OPEN-END STATUS AND THE BOARD OF DIRECTORS WILL HAVE TO CONSIDER OTHER
ALTERNATIVES INCLUDING A COMPANY TENDER OFFER FOR THE CAPITAL SHARES OR
LIQUIDATION OF THE COMPANY.
ITEM 4. APPROVAL OF CHANGE IN INVESTMENT OBJECTIVE AND POLICIES
The Company currently has a dual investment objective (a) long-term capital
appreciation and (b) current and long-term growth of income. The Company seeks
to achieve its objectives by investing primarily in convertible debt securities
and convertible preferred stocks. Such convertible securities may or may not be
rated by a national rating agency. Under normal conditions, the Company invests
at least 70% of its total assets in such securities. The Company may also invest
up to 20% of its assets in money market instruments (including certificates of
deposit, commercial paper, bankers' acceptances and repurchase agreements) and
up to 10% of its assets in common stocks when deemed appropriate by MLAM, the
Company's investment adviser, subject to review by the Board of Directors of the
Company, in light of the dividend return and potential capital appreciation
offered by particular stocks. For temporary defensive purposes, the Company may
invest a higher percentage of its assets in money market instruments.
The designation of the Company's capital stock into Income Shares and
Capital Shares reflected the Company's dual purpose of current and long-term
growth of income and long-term capital appreciation, respectively. If the
Company's Income Shares are redeemed as provided in the Current Charter and the
proposal to convert the Company to an open-end investment company is approved
and consummated, the Board has determined to change the Company's investment
objective and policies to provide greater flexibility. Generally the investment
objective of the Company is a fundamental policy of the Company that may be
changed only by stockholder vote. The investment policies of the Company, on the
other hand, are non-fundamental and may not be changed unless and until (i) the
Board of Directors of the Company explicitly authorizes, by resolution, a change
in the investment policy and (ii) the prospectus of the Company is amended to
reflect the change in policy and, if appropriate, to include additional
disclosure. The Board recommends revision of the Company's fundamental
investment objective, among other things, to permit the Company to invest on an
international basis. It is therefore proposed that the stockholders consider
changing the Company's investment objective to permit the Company to seek high
total return from a combination of capital appreciation and investment income.
The Company will seek to achieve its objective by investing
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primarily in a portfolio of convertible debt securities, convertible preferred
stocks and "synthetic" convertible securities consisting of a combination of
debt securities or preferred stock and warrants or options. Under normal
circumstances, the Company will invest at least 65% of its assets in convertible
securities and synthetic convertible securities. Such convertible securities and
synthetic convertible securities can be issued by both United States and
non-United States issuers.
The Company is currently classified as a diversified investment company
under the Investment Company Act. As an open-end investment company the Company
intends to be classified as a non-diversified investment company, which means
that the Company will not be limited by the Investment Company Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Company may invest a greater proportion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities. The Company,
however, intends to comply with the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended, for qualification as a regulated
investment company. To qualify as a regulated investment company, the Company
will comply with certain requirements, including limiting its investments so
that at the close of each quarter of the taxable year (i) not more than 25% of
the market value of the Company's total assets will be invested in the
securities of a single issuer and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer, and the Company will not
own more than 10% of the outstanding voting securities of a single issuer. A
company which elects to be classified as "diversified" under the Investment
Company Act must satisfy the foregoing 5% and 10% requirements with respect to
75% of its total assets. To the extent that the Company assumes large positions
in the securities of a small number of issuers, the Company's net asset value
may fluctuate to a greater extent than that of a diversified company as a result
of changes in the financial condition or in the market's assessment of the
issuers, and the Company may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
VOTE REQUIRED
The proposal to change the Company's investment objective and policies
requires the affirmative vote of a majority of the Company's outstanding Capital
Shares (which for this purpose and under the Investment Company Act means the
lesser of (i) 67% or more of the Capital Shares present at the Meeting, if more
than 50% of the outstanding Capital Shares are present or represented by proxy,
or (ii) more than 50% of the outstanding Capital Shares). The Board of Directors
recommend a vote "FOR" Item 4.
IF THE REQUIRED FAVORABLE VOTE IS NOT ALSO OBTAINED ON ANY OF ITEMS 3, 5
AND 6 (THE OTHER OPEN-ENDING PROPOSALS), THE COMPANY WILL NOT CONVERT TO
OPEN-END STATUS AND THE BOARD OF DIRECTORS WILL HAVE TO CONSIDER OTHER
ALTERNATIVES INCLUDING A COMPANY TENDER OFFER FOR THE CAPITAL SHARES OR
LIQUIDATION OF THE COMPANY.
ITEM 5. ADOPTION OF AMENDED FUNDAMENTAL INVESTMENT RESTRICTIONS
Each of the FAM/MLAM Advised Funds has adopted investment restrictions that
govern generally the operations of the fund. Investment restrictions that are
deemed fundamental may not be changed without a vote of the outstanding shares
of the Company, while non-fundamental investment restrictions may be changed by
the Company's Board of Directors if it deems it in the best interest of the
Company and its stockholders to do so. In addition to investment restrictions,
the Company operates pursuant to investment objectives and policies that govern
the investment activities of the Company and further limit its ability to
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invest in certain types of securities or engage in certain types of
transactions. The investment objective and policies are also proposed to be
changed (see Item 4 herein). You should note that certain of the proposed
fundamental investment restrictions are stated in terms of "to the extent
permitted by applicable law". Applicable law can change over time and may become
more or less restrictive as a result. The restrictions have been drafted in this
manner so that a change in law would not require the Company to seek a
stockholder vote to amend the restriction to conform to applicable law, as
revised.
In 1994 MLAM created a set of standard fundamental investment restrictions
which were approved by the stockholders of each of the FAM/MLAM Advised Funds
utilizing the Select Pricing System (the "Select Pricing Funds"). These
restrictions, which are proposed to be adopted by the Company, are designed to
provide the Company with as much investment flexibility as possible under the
Investment Company Act, help promote operational efficiencies and facilitate
monitoring of compliance.
Adoption of the proposed investment restrictions is not expected to affect
materially the current operations of the Company. In this regard, the Board of
Directors proposes in connection with its conversion to open-end status, that
the Company adopt, as described below, the proposed investment restrictions.
The proposed fundamental investment restrictions restate many of the
fundamental restrictions currently in effect for the Company. In some instances,
certain fundamental or non-fundamental restrictions have been modified or
eliminated in accordance with developments in applicable laws and regulations or
in the securities markets since the inception of the Company. In other
instances, certain restrictions previously deemed fundamental have been
redesignated non-fundamental. Fundamental investment restrictions may not be
changed without a vote of the stockholders of the Company, and the costs of
stockholder meetings for these purposes generally are borne by the Company and
its stockholders. Once the Company converts to an open-end fund, annual
stockholder meetings will no longer be required. See "Changes in Company
Operations as a Result of Conversion to an Open-End Investment Company -- (b)
Stockholder Meetings" in Item 3. By making certain restrictions non-fundamental,
the Board may amend a restriction as it deems appropriate and in the best
interest of the Company and its stockholders, without incurring the costs of
seeking a stockholder vote.
The Company's current investment restrictions are set forth in Exhibit B
hereto.
Set forth below is each proposed restriction, followed by a commentary
describing the proposed restriction and detailing the significance, if any, of
the proposed changes for the Company. No commentary follows a restriction where
the restriction is substantially identical to the existing restriction.
Under the proposed fundamental investment restrictions, the Company may
not:
1. Invest more than 25% of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities).
Commentary: Currently the U.S. Government and its agencies and
instrumentalities are not explicitly excluded from the definition of
industry. However, such entities have not been considered to constitute
"industries" for purposes of concentration and therefore explicit
reference to such entities in the proposed restriction does not change
the Company's concentration policy.
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2. Make investments for the purpose of exercising control or
management. Investments by the Company in wholly-owned investment entities
created under the laws of certain countries will not be deemed to be the
making of investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Company may invest in securities directly or
indirectly secured by real estate or interests therein or issued by
companies that invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances and repurchase agreements and purchase and
sale contracts and any similar instruments shall not be deemed to be the
making of a loan, and except further that the Company may lend its
portfolio securities, provided that the lending of portfolio securities may
be made only in accordance with applicable law and the guidelines set forth
in this prospectus and the statement of additional information, as they may
be amended from time to time.
Commentary: This combines two of the Company's current restrictions.
With regard to making loans to other persons, the proposed restriction
virtually restates the current restriction. The proposed restriction
regarding lending portfolio securities is also virtually identical to
the Company's current restriction which prohibits the Company from
lending securities in excess of 33 1/3% of its total assets. The
proposed restriction prohibits lending portfolio securities except in
accordance with applicable law. Applicable law generally permits the
lending of portfolio securities in an amount up to 33 1/3% of the
Company's total assets, provided such loans are made in accordance with
prescribed guidelines which are typically set forth in the statement of
additional information.
5. Issue senior securities to the extent such issuance would violate
applicable law.
Commentary: As a closed-end fund the Company was not prohibited from
issuing senior securities. The proposed restriction includes a
limitation on the issuance of senior securities based upon applicable
law. Applicable law currently prohibits the issuance of senior
securities, defined as any bond, debenture, note or similar obligation
or instrument evidencing indebtedness, and any stock of any class having
priority as to any other class as to distribution of assets or payment
of dividends, but not including (i) bank borrowings provided that
immediately thereafter the Company has 300% asset coverage for all
borrowings, or (ii) any note or other evidence of indebtedness
representing a loan made to the Company for temporary purposes (i.e., to
be repaid in 60 days without extension or renewal) in an amount not
exceeding 5% of the Company's total assets when the loan is made.
Certain other investment techniques, which involve leverage or establish
a prior claim to the Company's assets, may be considered senior
securities, absent appropriate segregation of assets or exemptive
relief. These techniques include standby commitment agreements,
contracts for the purchase of securities on a delayed delivery basis
(i.e., firm commitment agreements), reverse repurchase agreements,
engaging in financial futures and options thereon, forward foreign
currency contracts, put and call options, the purchase of securities on
a when-issued basis and short sales. The manner and extent to which the
Company can issue senior securities is governed by applicable law, must
be set forth in the Company's prospectus and statement of additional
information and may be changed only upon resolution of the Board.
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6. Borrow money, except that the Company (i) may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Company may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, (iii) may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) may purchase securities on margin to the
extent permitted by applicable law. The Company may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Company's investment policies as set forth in its prospectus and statement
of additional information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
Commentary: The Company currently has several express limitations on
various forms of borrowing (see Exhibit B, restrictions 7, 11 and 12)
which are more restrictive than the limitations set forth in proposed
fundamental restriction 6 and non-fundamental restriction (d).
For example, under its current restrictions, the Company may not borrow
amounts in excess of 10% of its total assets, taken at market value, and
then only from banks, as a temporary measure for extraordinary or
emergency purposes.
With regard to purchases on margin, under currently applicable law, the
Company may not establish or use a margin account with a broker for the
purpose of effecting securities transactions on margin, except that the
Company may obtain such short-term credit as necessary for the clearance
of transactions. This is therefore essentially identical to the
Company's current restriction on margin borrowings. However, the Company
may pay initial or variation margin in connection with futures and
related options transactions, as set forth in investment restriction (8)
below, without regard to this prohibition.
7. Underwrite securities of other issuers, except insofar as the
Company technically may be deemed an underwriter under the Securities Act
of 1933, as amended (the "Securities Act"), in selling portfolio
securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent the Company may do so in accordance with applicable law and the
Company's prospectus and statement of additional information, as they may
be amended from time to time, and without the Company registering as a
commodity pool operator under the Commodity Exchange Act.
Commentary: The Company currently prohibits as a fundamental policy,
purchase or sale of commodities or contracts on commodities. In general,
the Company currently does not anticipate investment directly in
tangible commodities other than currency and would be greatly restricted
from making such direct investments by the current provisions of the
Federal tax laws; however, the Company may invest in financial
instruments linked to commodities as described below. Adoption of the
proposed restrictions will enable the Company to invest in commodities
only in accordance with applicable law and with the Company's investment
policies as stated in the Company's prospectus and statement of
additional information.
Certain funds advised by MLAM have obtained an exemptive order from the
SEC which, among other things, permits investment in the commodities
markets to the extent such investment is limited
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to financial futures and options thereon for hedging purposes only. The
terms of the exemptive order are slightly more restrictive than
currently applicable law.
Regulations of the Commodity Futures Trading Commission applicable to
the Company provide that futures trading activities, as described in the
Company's prospectus and statement of additional information, will not
result in the Company being deemed a "commodity pool operator" as
defined under such regulations if the Company adheres to certain
restrictions. In particular, the Company may, as a matter of investment
policy, purchase and sell futures contracts and options thereon (i) for
bona fide hedging purposes and (ii) for non-hedging purposes, if the
aggregate initial margin and premiums required to establish positions in
such contracts and options do not exceed 5% of the liquidation value of
the Company's portfolio, after taking into account unrealized profits
and unrealized losses on any such contracts and options. In addition,
the Company may invest in securities whose potential investment returns
are based on the change in value of specific commodities.
Additional non-fundamental investment restrictions proposed to be adopted
by the Company, which may be changed by the Directors without stockholder
approval, provide that the Company may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently allows the Company to purchase the securities of other investment
companies only if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Company, (ii) 5%
of the Company's total assets, taken at market value, would be invested in
any one such company, (iii) 10% of the Company's total assets, taken at
market value, would be invested in such securities, and (iv) the Company,
together with other investment companies having the same investment adviser
and companies controlled by such companies, owns not more than 10% of the
total outstanding stock of any one closed-end investment company.
Investments by the Company in wholly-owned investment entities created
under the laws of certain countries will not be deemed an investment in
other investment companies.
Commentary: As a fundamental investment restriction the Company is
currently prohibited from investing in other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization. The proposed restriction is non-fundamental and
prohibits investment in other investment companies except as permitted
by applicable law. The provisions of applicable law are set forth in
this non-fundamental restriction (a).
b. Make short sales of securities or maintain a short position except
to the extent permitted by applicable law.
Commentary: The Company's current restriction is fundamental and
prohibits short sales or maintaining a short position "unless at all
times when a short position is open the Company owns, or has the right
to acquire without payment of any further consideration, an equal amount
of such securities" which is essentially a short sale "against the box".
The Company is currently restricted with respect to short sales "against
the box" to up to 15% of total assets, taken at market value.
Under currently applicable law, short sales are considered to involve
the creation of senior securities. A fund that includes short sales in
its investment policies must secure its obligation to replace the
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borrowed security by depositing collateral in a segregated account in
compliance with SEC guidelines which are described in such fund's
prospectus.
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions, or which cannot otherwise be marketed,
redeemed, put to the issuer or to a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Company
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
(each, a "Rule 144A Security") and determined to be liquid by the Board of
Directors are not subject to the limitations set forth in this investment
restriction (c).
Commentary: As a fundamental restriction, the Company is presently
limited to investing in "restricted securities" only up to 10% of its
total assets, whereas, under the proposed non-fundamental restrictions,
the Company could invest as much as 15% of its net assets in "restricted
securities".
Under current SEC interpretations, a fund may purchase, without regard
to the percentage limitation set forth in the investment restriction
regarding "restricted securities", securities which are not registered
under the Securities Act provided that they are determined to be liquid
pursuant to guidelines and procedures established by the Board. Included
among such securities are foreign securities traded in a foreign
securities market and Rule 144A Securities which can be offered and sold
to "qualified institutional buyers". Currently, if the Company invests
in Rule 144A Securities, such securities will be included in the 10% of
its total assets which may be invested in "restricted securities" under
the Company's current investment restrictions.
The proposed investment restriction would increase the Company's
flexibility with respect to the amount of securities deemed illiquid in
which the Company may invest up to the current SEC limit, assuming that
the Fund is not otherwise limited with respect to investment in illiquid
securities.
d. Notwithstanding fundamental investment restriction (6) above,
borrow money or pledge its assets, except that the Company (a) may borrow
from a bank as a temporary measure for extraordinary or emergency purposes
or to meet redemptions in amounts not exceeding 33 1/3% (taken at market
value) of its total assets and pledge its assets to secure such borrowings,
(b) may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities and (c) may purchase
securities on margin to the extent permitted by applicable law. However, at
the present time, applicable law prohibits the Company from purchasing
securities on margin. The deposit or payment by the Company of initial or
variation margin in connection with financial futures contracts or options
transactions is not considered to be the purchase of a security on margin.
The purchase of securities while borrowings are outstanding will have the
effect of leveraging the Company. Such leveraging or borrowing increases
the Company's exposure to capital risk, and borrowed funds are subject to
interest costs which will reduce net income. The Company will not purchase
securities while borrowings exceed 5% of its total assets.
Elimination of Certain Restrictions. The Company's current investment
restriction relating to investment in foreign securities has been eliminated
from the proposed investment restrictions. Certain funds that commenced
operations more than 10 years ago were required by state blue sky regulations
then in effect to
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<PAGE> 32
include an investment restriction limiting or prohibiting investment in foreign
securities. More recently, funds are no longer required to state this policy as
an investment restriction but instead include investment policies with respect
to foreign securities in their prospectus and statements of additional
information. As noted in Item 4 above, the securities in which the Company
intends to invest as an open-end investment company may be issued by both United
States and non-United States issuers and it is anticipated that at times a
substantial portion of the Company's portfolio may be invested in securities of
non-United States issuers.
The Company is currently prohibited from writing, purchasing or selling
puts, calls or combinations thereof. The amended fundamental and non-fundamental
restrictions contain no such prohibition. Open-end investment companies are
commonly permitted to write, purchase or sell puts, calls, straddles, spreads or
combinations thereof. The Company's prospectus and statement of additional
information will contain disclosure about the extent the Company will engage in
such investments.
The Company currently is classified as a diversified investment company
under the Investment Company Act and its current investment restriction (1) (see
Exhibit B) prohibits it from investing in securities inconsistent with its
classification as diversified under the Investment Company Act. As an open-end
investment company, the Company intends to be classified as a non-diversified
investment company. See Item 4 "Approval of Change in Investment Objective and
Policies" herein.
VOTE REQUIRED
The proposal to amend the Company's fundamental investment restrictions
requires the affirmative vote of a majority of the Company's outstanding Capital
Shares (which for this purpose and under the Investment Company Act means the
lesser of (i) 67% or more of the Capital Shares present at the Meeting, if more
than 50% of the outstanding Capital Shares are present or represented by proxy,
or (ii) more than 50% of the outstanding Capital Shares). The Board of Directors
recommends a vote "FOR" Item 5.
IF THE REQUIRED FAVORABLE VOTE IS NOT ALSO OBTAINED ON ANY OF ITEMS 3, 4
AND 6 (THE OTHER OPEN-ENDING PROPOSALS), THE COMPANY WILL NOT CONVERT TO
OPEN-END STATUS AND THE BOARD OF DIRECTORS WILL HAVE TO CONSIDER OTHER
ALTERNATIVES INCLUDING A COMPANY TENDER OFFER FOR THE CAPITAL SHARES OR
LIQUIDATION OF THE COMPANY.
ITEM 6. APPROVAL OR DISAPPROVAL OF AN
AMENDED INVESTMENT ADVISORY AGREEMENT
On July 22, 1985, the Company entered into an investment advisory agreement
(the "Investment Advisory Agreement"), pursuant to which MLAM serves as the
investment adviser to the Company (the "Investment Adviser"), and the Board of
Directors of the Company approved the Investment Advisory Agreement to remain in
effect for a period ending March 31, 1987. The Investment Advisory Agreement was
approved by the sole stockholder of the Company on July 22, 1985. Most recently,
on June 23, 1995, the Board of Directors of the Company, including a majority of
the Independent Directors, approved the continuation of the Investment Advisory
Agreement for a period of one year. In their consideration of this matter, the
Directors received information relating to, among other things, alternatives to
the present arrangements, the nature, quality and extent of the advisory and
other services provided to the Company by MLAM and comparative data with respect
to the advisory and management arrangements of other investment companies. The
Directors also received information as to the profitability of MLAM for
providing such services.
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<PAGE> 33
At the Meeting, holders of the Company's Capital Shares are being asked to
consider amending the Investment Advisory Agreement to reflect the Company's
status as an open-end company. If stockholders approve the Company's conversion
to open-end status and the conversion is consummated, the Investment Advisory
Agreement will be amended as proposed (and as amended will be referred to herein
as "the Amended Advisory Agreement"). If stockholders approve the Company's
conversion and the conversion is consummated, the Amended Advisory Agreement
will remain in effect for so long as it is approved annually by Directors
(including a majority of the Independent Directors) as described above and is
not otherwise terminated. See "Duration and Termination" below. If, however, the
Company does not convert to open-end status, the current Investment Advisory
Agreement will continue in effect for the period previously approved by the
Directors and thereafter, for so long as it is approved annually by such
Directors.
TERMS OF INVESTMENT ADVISORY AGREEMENT
The current Investment Advisory Agreement provides that, subject to the
direction of the Board of Directors of the Company, MLAM is responsible for the
actual management of the Company's portfolio and for the review of the Company's
holdings in light of its own research analysis and analyses from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with MLAM, subject to review by the Board of
Directors. MLAM provides the portfolio managers for the Company, who consider
analyses from various sources, make the necessary investment decisions and place
transactions accordingly. MLAM is also obligated to perform certain
administrative and management services for the Company and is obligated to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Investment Advisory Agreement.
Investment Advisory Fee. The Investment Advisory Agreement provides that
as compensation for its services to the Company, MLAM receives from the Company
a quarterly fee at the annual rate of 0.60% of the average weekly net assets of
the Company ("average weekly net assets" is determined at the end of each fiscal
quarter on the basis of the average net assets of the Company for each week
during the quarter). The assets for each weekly period are determined by
averaging the net assets at the end of a week with the net assets at the end of
the prior week. The Investment Advisory Agreement provides that if the Company
fails to meet the Minimum Income Rate Objective (defined in the Investment
Advisory Agreement and discussed below) as of the close of any fiscal quarter,
the investment advisory fee for such quarter will be reduced by 25% of such fee
payable for that quarter.
The Company has a stated objective (a "Minimum Income Rate Objective") of
obtaining a minimum rate of income return (dividend, interest and other
income -- other than realized gains, stock dividends and other capital
items -- before expenses for the prior twelve months divided by average
month-end total net assets for the prior twelve months) equal to 85% of the
yield of the Value Line Convertible Index calculated on the same basis. The
Company's Board of Directors believed that such an income goal would give a
reasonable current return to holders of Income Shares and, at the same time,
permit the Investment Adviser to make investments in convertible securities
taking into account the potential for long-term capital appreciation. In
determining whether the Minimum Income Rate Objective has been achieved, the
most recent Value Line Convertible Index data published during each quarter will
be utilized. The Value Line Convertible Index is an index comprised of
approximately 585 convertible stocks and debt securities. If, at the end of any
quarter, the Minimum Income Rate Objective has not been met, the Investment
Adviser's fee payable in that quarter will be reduced by 25% of the fee.
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<PAGE> 34
For the fiscal year ended December 31, 1995, the investment advisory fee
paid by the Company to MLAM aggregated $1,570,010, based upon average weekly net
assets of approximately $264.0 million. At August 31, 1996 the Company had net
assets of approximately $276.4 million. Assuming all Income Shares had been
redeemed on that date, the remaining $166.0 million would represent the
outstanding Capital Shares. At this asset level the Company's annual investment
advisory fee under the Investment Advisory Agreement would aggregate
approximately $1.0 million, all of which would be attributable to the Capital
Shares.
Payment of Expenses. The Investment Advisory Agreement obligates MLAM to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Company connected with the
investment and economic research, trading and investment management of the
Company, as well as the fees of all Directors of the Company who are affiliated
persons of MLAM or any of its affiliates. The Company pays all other expenses
incurred in the operation of the Company, including, among other things,
expenses for legal and auditing services, taxes, costs of printing proxies,
stock certificates and shareholder reports, charges of the custodian, any
sub-custodian and Transfer Agent, SEC fees, fees and expenses of unaffiliated
Directors, accounting and pricing costs, insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses and other expenses
properly payable by the Company. Accounting services are provided to the Company
by MLAM, and the Company reimburses MLAM for its costs in connection with such
services. For the fiscal year ended December 31, 1995, the Company reimbursed
$110,397 to MLAM for such accounting services.
Duration and Termination. The Investment Advisory Agreement will continue
in effect from year to year if approved annually (a) by the Board of Directors
of the Company, or by a majority of the outstanding shares of the Company, and
(b) by the vote of a majority of the Directors who are not parties to such
agreement or interested persons (as defined in the Investment Company Act) of
any such party who shall be present in person at a meeting called for the
purpose of voting on such approval. Such agreement is not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by a vote of the majority of the stockholders of the Company.
THE AMENDED ADVISORY AGREEMENT
On September 27, 1996, a majority of the Board of Directors, including a
majority of the Independent Directors, approved the Amended Advisory Agreement
between the Company and MLAM subject to the approval by the stockholders of the
conversion of the Company to an open-end investment company and consummation of
the conversion. The terms of the Amended Advisory Agreement are essentially the
same as the terms of the Investment Advisory Agreement currently in effect,
except as discussed below. Upon effectiveness of the conversion the current
Investment Advisory Agreement will be terminated and the Amended Advisory
Agreement will become effective. The terms of the current Investment Advisory
Agreement are described above. The form of Amended Advisory Agreement (with
deletions from the current Investment Advisory Agreement shown in brackets and
additions to that contract shown by underscoring) appears as Exhibit C to this
Proxy Statement.
Under the Amended Advisory Agreement, the advisory fee payable to MLAM by
the Company will be accrued daily and paid monthly at the annual rate of 0.60%
of the Company's average daily net assets. The rate of the advisory fee under
the Amended Advisory Agreement (0.60%) is the same as the rate under the current
Investment Advisory Agreement except that the method of calculating the fee
differs. Under the
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<PAGE> 35
current Investment Advisory Agreement, MLAM is paid at the end of each quarter a
fee based upon the Company's average weekly net assets. Under the Amended
Advisory Agreement, the fee is accrued daily and is calculated based upon the
Company's average daily net assets. Under the Amended Advisory Agreement, MLAM
will continue to provide the Company with accounting services, and the Company
will reimburse MLAM for its costs in connection with such services.
In addition, the Amended Advisory Agreement contains certain provisions not
found in the current Investment Advisory Agreement that accommodate (i) the
continuous offering of the classes of shares of common stock of the Company, and
(ii) the adoption of distribution plans pursuant to Rule 12b-1 under the
Investment Company Act. See "Implementation of the Merrill Lynch Select
Pricing(SM) System" below in Item 7. Under the Amended Advisory Agreement, the
Company will continue to pay for all expenses incurred in the operation of the
Company, as detailed above in "Terms of the Investment Advisory Agreement --
Payment of Expenses", except that the Distributor will pay certain of the
expenses of the Company incurred in connection with the continuous offering of
Company shares.
VOTE REQUIRED
The proposal to approve the Amended Advisory Agreement requires the
affirmative vote of a majority of the Company's outstanding Capital Shares
(which for this purpose and under the Investment Company Act means the lesser of
(i) 67% or more of the Capital Shares present at the Meeting, if more than 50%
of the outstanding Capital Shares are present or represented by proxy, or (ii)
more than 50% of the outstanding Capital Shares). The Board of Directors
recommends a vote "FOR" Item 6.
IF THE REQUIRED FAVORABLE VOTE IS NOT ALSO OBTAINED ON ANY OF ITEMS 3, 4
AND 5 (THE OTHER OPEN-ENDING PROPOSALS), THE COMPANY WILL NOT CONVERT TO
OPEN-END STATUS AND THE BOARD OF DIRECTORS WILL HAVE TO CONSIDER OTHER
ALTERNATIVES INCLUDING A COMPANY TENDER OFFER FOR THE CAPITAL SHARES OR
LIQUIDATION OF THE COMPANY.
INFORMATION CONCERNING MLAM AND FAM
MLAM, located at 800 Scudders Mill Road, Plainsboro, New Jersey, is a
limited partnership of which ML&Co. is the sole limited partner and Princeton
Services is the sole general partner. FAM, located at 800 Scudders Mill Road,
Plainsboro, New Jersey, is a limited partnership of which ML&Co. is the sole
limited partner and Princeton Services is the sole general partner. ML&Co. is a
financial services holding company and the parent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"). ML&Co. and Princeton Services are
"controlling persons" of MLAM as defined under the Investment Company Act
because of their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies. The address of ML&Co. is
World Financial Center, North Tower, 250 Vesey Street, New York, NY 10281. The
address of Princeton Services, Inc. is P.O. Box 9011, Princeton, New Jersey
08543-9011.
MLAM or FAM acts as the investment adviser for more than 130 registered
investment companies and offers portfolio management and portfolio analysis
services to individuals and institutions. As of September 30, 1996, MLAM and FAM
had a total of approximately $214.1 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
MLAM.
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<PAGE> 36
The following table sets forth information relating to the registered
investment companies with the investment objective of high total return for
which MLAM or FAM acts as the investment adviser.
<TABLE>
<CAPTION>
MANAGEMENT FEE
--------------------------------------------------
ANNUAL EFFECTIVE
NET ASSETS AT ANNUAL RATE FIRST FEE RATE AT
AUGUST 31, 1996 (PERCENTAGE OF BREAKPOINT IN AUGUST 31,
INVESTMENT COMPANY(1) (IN MILLIONS)($) NET ASSETS)(%) MILLIONS($)(2) 1996(%)(3)
- --------------------------------------- ---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Merrill Lynch Asset Builder Program,
Inc. -- Global Opportunity
Portfolio............................ 34.3 0.75 0 0.28
Merrill Lynch Asset Growth Fund,
Inc. ................................ 11.2 0.75 0 0
Merrill Lynch Capital Fund, Inc. ...... 8,958.5 0.50 250 0.40
Merrill Lynch Global Allocation Fund,
Inc. ................................ 11,370.9 0.75 2,500 0.67
Merrill Lynch Global Bond Fund for
Investment and Retirement............ 512.3 0.60 0 0.60
Merrill Lynch Global Convertible Fund,
Inc. ................................ 68.8 0.65 0 0.65
Merrill Lynch Global Holdings, Inc. ... 423.0 0.65 0 0.65
</TABLE>
- ---------------
(1) MLAM is the investment adviser for each investment company listed in the
table.
(2) The term "breakpoint" refers to the level of net assets at which the
management fee rate is reduced. The breakpoint indicated is the lowest net
asset level at which the fee is reduced, either pursuant to the fund's
management or investment advisory agreement or applicable fee waivers, if
any.
(3) The effective fee rate is the annual management fee rate, taking into
account any applicable breakpoints, payable at the net asset level at August
31, 1996. The annual management fee payable at the August 31, 1996 net asset
level can be obtained by multiplying the effective fee rate by the net
assets at such date. In certain instances, the actual effective fee
indicated is lower than the rate that would apply under the fund's
management or investment advisory agreement, because all or a portion of the
management fee is waived either voluntarily or pursuant to applicable
expense limitations.
Securities held by the Company may also be held by or be appropriate
investments for other FAM/MLAM Advised Funds or by investment advisory clients
of MLAM or FAM. Because of different investment objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the security. If purchases or sales of securities for the
Company or other investment company or advisory clients arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective investment companies and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of FAM or MLAM during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
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<PAGE> 37
Set forth below is the name, address and principal occupation of the
principal executive officer and each director or partner of MLAM. In addition,
Mr. Zeikel is President of substantially all of the FAM/MLAM Advised Funds,
including those listed above. The address of each of Princeton Services and
Arthur Zeikel is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
ML&Co. is World Financial Center, North Tower, 250 Vesey Street, New York, New
York 10281. The officers and directors of the Company are listed above in Item
1. "Election of Directors".
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
NAME MLAM OR EMPLOYMENT
- ------------------------- ------------------ -------------------------------------------------
<S> <C> <C>
ML&Co. .................. Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services....... General Partner General Partner of FAM
Arthur Zeikel............ President President of FAM; President and Director of
Princeton Services; Director of MLFD; Executive
Vice President of ML&Co.
</TABLE>
ITEM 7. IMPLEMENTATION OF THE MERRILL LYNCH SELECT PRICING(SM) SYSTEM
In connection with the conversion of the Company to an open-end investment
company, MLAM and the Distributor propose the implementation of the Select
Pricing System which will permit the Company to provide investors with several
different distribution alternatives. At the Meeting, holders of the Company's
Capital Shares are being asked to consider implementation of the Select Pricing
System. If the proposal to convert the Company to open-end status is approved
and the proposal to implement the Select Pricing System is also approved, the
Company will be able to offer shares utilizing alternative sales arrangements
which permit each investor to choose the method of purchasing shares that is
most beneficial given the amount of the investor's purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. If the
proposal to have the Company convert to open-end status is approved, but
implementation of the Select Pricing System is not also approved, the Company
will offer and sell only one class of shares of common stock having an initial
sales charge but no ongoing distribution or account maintenance fee, until such
time as stockholder approval of the implementation of the Select Pricing System
or another multi-class distribution system is obtained. Neither Maryland law nor
the Investment Company Act require that a stockholder vote be obtained on the
Select Pricing System prior to its implementation. The Board of Directors of the
Company believes, however, that in connection with the vote on the open-ending
proposals described above it would be appropriate to solicit stockholder
approval of the Select Pricing System along with the other votes being solicited
at the upcoming Meeting.
In April 1994, the SEC issued an order (the "Multi-Class Order") permitting
new and existing FAM/ MLAM Advised Funds which are distributed by MLFD to issue
multiple classes of shares. Subsequent to the issuance of the Multi-Class Order,
the SEC adopted a rule containing conditions substantially the same as those in
the Multi-Class Order permitting open-end investment companies to issue multiple
classes of shares and permitting funds that previously relied on an order to
rely on the rule. The rule permits the Company to create an unlimited number of
classes of shares offering alternative sales charge arrangements to investors.
The Select Pricing System has been adopted by over 50 registered investment
companies advised by FAM or MLAM. Pursuant to the SEC rule and if the proposal
to convert the Company to an open-end investment
34
<PAGE> 38
company and the proposal to implement the Select Pricing System are approved and
consummated, MLAM proposes to implement the Select Pricing System with respect
to the Company, under which shareholders may choose from four sales charge
alternatives, as described below.
Class A: Class A shares will incur an initial sales charge when they are
purchased and will bear no ongoing distribution or account maintenance
fees. Class A shares of the Company will be offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that own Class A shares of the
Company in a shareholder account will be entitled to purchase
additional Class A shares of the Company in that account. Other
eligible investors will include certain retirement plans and
participants in certain fee-based programs. In addition, Class A
shares will be offered at net asset value to ML&Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect
to ML&Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML&Co.) and their directors
and employees and to members of the Boards of FAM/MLAM Advised Funds.
The maximum initial sales charge will be 5.25%, which will be reduced
for purchases of $25,000 and over, and waived for purchases by certain
retirement plans and participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with redemptions to fund participation in certain fee-based programs.
Sales charges also are reduced under a right of accumulation which
takes into account the investor's holdings of all classes of all
Select Pricing Funds.
Class B: Class B shares will not incur a sales charge when they are purchased,
but they will be subject to an ongoing account maintenance fee of
0.25% and an ongoing distribution fee of 0.75%, of average net assets
of the Company attributable to Class B shares, and a CDSC if they are
redeemed within four years of purchase. The CDSC may be modified in
connection with redemptions to fund certain fee-based programs.
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Company, which are subject to
the same account maintenance fee of 0.25% but no distribution fee;
Class B shares of certain other Select Pricing Funds into which
exchanges may be made convert into Class D shares automatically after
approximately ten years. If Class B shares of the Company are
exchanged for Class B shares of another Select Pricing Fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, (as will the Class D account maintenance fee of
the acquired fund upon the conversion) and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares.
Class C: Class C shares will not incur a sales charge when they are purchased,
but they will be subject to an ongoing account maintenance fee of
0.25%, and an ongoing distribution fee of 0.75%, of average net assets
of the Company attributable to Class C shares. Class C shares will
also be subject to a 1.0%
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<PAGE> 39
CDSC if they are redeemed within one year after purchase. Such Class C CDSC may
be waived in connection with redemptions to fund participation in certain
fee-based programs. Although Class C shares will be subject to a CDSC for only
one year (as compared to four years for Class B), Class C shares will
have no conversion feature and, accordingly, an investor that purchases
Class C shares will be subject to distribution fees that will be imposed
on Class C shares for an indefinite period subject to annual approval by
the Company's Board of Directors and regulatory limitations.
Class D: Class D shares will incur an initial sales charge when they are
purchased and will be subject to an ongoing account maintenance fee of
0.25% of average net assets of the Company attributable to Class D
shares. Class D shares will not be subject to an ongoing distribution
fee or any CDSC when they are redeemed. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but, if the initial
sales charge is waived, such purchases may be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Such
CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. The schedule of initial
sales charges and reductions for the Class D shares is the same as the
schedule for Class A shares, except that there is no waiver for
purchases by retirement plans in connection with certain fee-based
programs. Class D shares also will be issued upon conversion of Class
B shares as described above under "Class B".
The Amended Charter provides for an increase in the Company's authorized
shares from the present 30,000,000 shares to 400,000,000 shares which, if
implementation of the Select Pricing System is approved and consummated, will be
designated 100,000,000 Class A shares, 100,000,000 Class B shares, 100,000,000
Class C shares and 100,000,000 Class D shares. Under the proposed Amended
Charter annexed hereto as Exhibit A, the Board may in the future authorize an
increase in the Company's authorized shares and classify and reclassify both
issued and unissued shares into multiple classes of shares without a stockholder
vote. Because the shares of an open-end fund are in continuous distribution, a
larger number of authorized shares is necessary. If the proposal to convert the
Company to open-end status is approved but implementation of the Select Pricing
System is not also approved, then the Company will have authority to issue only
one class of shares.
THE IMPLEMENTATION OF THE SELECT PRICING SYSTEM WILL NOT AFFECT THE NET
ASSET VALUE OF A CURRENT STOCKHOLDER'S INVESTMENT IN THE COMPANY. If the
conversion to open-end status and implementation of the Select Pricing System
are approved and consummated, the currently issued and outstanding Capital
Shares will be classified as Class A shares and will not be subject to any sales
charge as a result of the classification. A current holder of Capital Shares of
the Company will, as a result of the conversion, hold Class A shares of the
Company in his or her stockholder account and will be eligible to purchase
additional Class A shares of the Company in that stockholder account only. If a
current holder of Capital Shares wishes to purchase shares of the Company in any
other stockholder account, he or she may purchase Class A shares, if eligible to
purchase Class A shares in that account, otherwise he or she may purchase either
Class B, Class C or Class D shares, as he or she so chooses, in which case the
applicable charges will apply.
Each Class A, Class B, Class C and Class D share will represent identical
interests in the investment portfolio of the Company except that (i) each class
would bear the expenses of the differing Rule 12b-1 plan payments and account
maintenance fees, expenses of deferred sales arrangements and stockholder
servicing costs attributable solely to a particular class and any other
incremental expenses subsequently identified that should be properly allocated
to such class; (ii) the stockholders of each class subject to a Rule 12b-1 plan
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<PAGE> 40
would have exclusive voting rights with respect to the Rule 12b-1 plan pursuant
to which, in conjunction with any CDSC, deferred charges would be paid; and
(iii) pursuant to the terms of the exchange privilege with other Select Pricing
Funds, the classes would have different exchange privileges as described in the
Company's prospectus and statement of additional information.
On September 27, 1996, the Directors of the Company approved the use of the
Select Pricing System by the Company, and the Company's Amended Charter is
designed to enable the Company to issue different classes of shares and
implement the Select Pricing System.
VOTE REQUIRED
The proposal regarding implementation of the Select Pricing System requires
the affirmative vote of a majority of the outstanding Capital Shares voting in
person or by proxy. The Board of Directors recommends a vote "FOR" Item 7.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing by the Company of the
enclosed form of proxy and accompanying Notice and Proxy Statement in connection
with the matters to be considered at the Meeting will be borne by the Company.
The Company will reimburse banks, brokers and others for their reasonable
expenses in forwarding proxy solicitation material to the beneficial owners of
the shares of the Company. The Company has retained at its expense Tritech
Services, an affiliate of ML&Co. with offices at 4 Corporate Place, Piscataway,
New Jersey, to aid in the solicitation of proxies from holders of shares held in
nominee or "street" name at a cost of $4,000, plus out-of-pocket expenses.
In order to obtain the necessary quorum at the Meeting (i.e., a majority of
the Capital Shares and a majority of the Income Shares entitled to vote at the
Meeting, present in person or by proxy), supplementary solicitation may be made
by mail, telephone, telegraph or personal interview by officers of the Company.
It is anticipated that the cost of such supplementary solicitation, if any, will
be nominal.
All shares represented by properly executed proxies, unless such proxies
have previously been revoked, will be voted at the Meeting in accordance with
the directions on the proxies; if no direction is indicated, the shares will be
voted "FOR" the Director nominees, "FOR" the ratification of D&T as independent
auditors for the Company "FOR" the conversion of the Company to an open-end
investment company including approval of the Amended Charter, "FOR" adoption of
the amended investment objective and policies, "FOR" adoption of the amended
fundamental investment restrictions, "FOR" approval of the Amended Advisory
Agreement and "FOR" implementation of the Select Pricing System.
Election of the Company's Board of Directors (Item 1) is by class vote, two
Directors being elected by the holders of Income Shares voting separately as a
class, two Directors being elected by the holders of Capital Shares voting
separately as a class and three Directors being elected by the holders of Income
Shares and Capital Shares, voting together as a single class. At a meeting at
which a quorum is duly constituted the affirmative vote in person or by proxy of
a majority of the votes cast by the holders of Income Shares, by the holders of
Capital Shares and by the holders of Income Shares and Capital Shares voting
together as a single class, as the case may be, is required for the election of
that class of Directors. The proposal to ratify the selection of the Company's
independent auditors (Item 2) may be approved at a meeting at which a quorum is
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duly constituted by the affirmative vote of a majority of the votes cast by the
Company's stockholders, voting in person or by proxy. The proposal to convert
the Company to an open-end investment company and approve the Amended Charter
(Item 3) may be approved at a meeting at which a quorum is duly constituted by
the affirmative vote of two-thirds of the outstanding Capital Shares voting in
person or by proxy. The proposal to change the Company's investment objective
and policies (Item 4), the proposal to adopt the amended fundamental investment
restrictions (Item 5) and the proposal to approve the Amended Advisory Agreement
(Item 6) may be approved at a meeting at which a quorum is duly constituted by
the affirmative vote of a majority of the Company's outstanding Capital Shares
(which for these purposes and under the Investment Company Act means the lesser
of (i) 67% or more of the Capital Shares present at the Meeting, if more than
50% of the outstanding Capital Shares are present or represented by proxy, or
(ii) more than 50% of the outstanding Capital Shares). The proposal to implement
the Select Pricing System (Item 7) may be approved at a meeting at which a
quorum is duly constituted by the affirmative vote of a majority of the
outstanding Capital Shares, voting in person or by proxy.
THE COMPANY WILL NOT CONVERT TO AN OPEN-END INVESTMENT COMPANY UNLESS THE
REQUIRED FAVORABLE VOTE OF THE HOLDERS OF THE COMPANY'S CAPITAL SHARES IS
OBTAINED ON EACH OF ITEMS 3, 4, 5 AND 6, COLLECTIVELY THE OPEN-ENDING PROPOSALS.
IF ANY OF THE FOUR PROPOSALS IS NOT APPROVED, THE COMPANY WILL CONTINUE TO
OPERATE AS A CLOSED-END INVESTMENT COMPANY PENDING THE BOARD'S CONSIDERATION OF
THE OTHER ALTERNATIVES SET FORTH IN THE COMPANY'S CURRENT CHARTER.
The Company's Current Charter provides that if the required vote is not
received on the open-ending proposals, the Company's Board must consider other
alternatives and the Company will continue to operate as a closed-end fund
pending such determination. One of the alternatives which the Board may elect is
to have the Company tender to acquire the outstanding Capital Shares. Tendering
stockholders would receive for their shares an amount equal to the net asset
value of the shares. If pursuant to such tender offer, holders of Capital Shares
do not receive payment for their shares by May 31, 1998, or the Board decides
against proceeding with a tender offer, then on July 31, 1998, without further
action by the Board or the stockholders, the Company's assets will be liquidated
and the proceeds will be distributed pro rata to the holders of Capital Shares.
If the tender offer is completed and provision is made for the tendering
holders of Capital Shares to receive payment for their shares, then the Company
will have the power, in addition to any other powers it may possess, to continue
operation as a closed-end fund or to effect any merger, consolidation or other
reorganization with another corporation.
Broker-dealer firms, including Merrill Lynch, holding Company shares in
"street name" for the benefit of their customers and clients, will request the
instructions of such customers and clients entitled to vote thereon on how to
vote their shares on each Item before the Meeting. The Company understands that,
under the rules of the NYSE, such broker-dealer firms may, without instructions
from their customers and clients, grant authority to the proxies designated to
vote on the election of Directors (Item 1), ratification of the selection of
independent auditors (Item 2) and implementation of the Select Pricing System
(Item 7), if no instructions have been received prior to the date specified in
the broker-dealer firm's request for voting instructions. Broker-dealer firms,
including Merrill Lynch, will not be permitted to grant voting authority without
instructions with respect to the proposal to convert the Company from a
closed-end investment company to an open-end investment company and approval of
the Amended Charter (Item 3), the proposal to change the Company's investment
objective and policies (Item 4), the proposal to amend the Company's fundamental
investment restrictions, (Item 5) or the proposal to approve the Amended
Advisory Agreement (Item 6). The
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Company will include shares held of record by broker-dealers as to which such
authority has been granted in its tabulation of the total number of votes
present for purposes of determining whether the necessary quorum of stockholders
exists. Proxies which are returned but which are marked "abstain" or on which a
broker-dealer has declined to vote on any proposal ("broker non-votes") will be
counted as present for the purpose of a quorum. Merrill Lynch has advised that
it intends to exercise discretion over shares held in its name for which no
instructions are received by voting such shares on Items 1, 2 and 7 (but not on
Items 3, 4, 5 or 6) in the same proportion as it has voted shares for which it
has received instructions. However, abstentions and broker non-votes will not be
counted as votes cast. Abstentions and broker non-votes will not have an effect
on the vote on Item 1 or Item 2; however, abstentions and broker non-votes will
have the same effect as a vote against Items 3, 4, 5, 6 and 7.
ADDRESS OF INVESTMENT ADVISER
The principal office of MLAM is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
ANNUAL REPORT DELIVERY
The Company will furnish, without charge, a copy of its annual report for
the fiscal year ended December 31, 1995, and a copy of its report for the six
months ended June 30, 1996, to any stockholder upon request. Such requests
should be directed to Convertible Holdings, Inc., P.O. Box 9011, Princeton, New
Jersey 08543-9011, Attention: Mark B. Goldfus or to 1-800-456-4587 ext. 123.
STOCKHOLDER PROPOSALS
A stockholder proposal intended to be presented at any subsequent meeting
of stockholders of the Company must be received by the Company in a reasonable
time before the Board of Directors solicitation relating to such meeting is to
be made in order to be considered in the Company's proxy statement and form of
proxy relating to the meeting.
By Order of the Board of Directors
MARK B. GOLDFUS
Secretary
Dated: November , 1996
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EXHIBIT A
CONVERTIBLE HOLDINGS, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
CONVERTIBLE HOLDINGS, INC., a Maryland corporation (the "Corporation"),
does hereby certify to the State Department of Assessments and Taxation of
Maryland that:
FIRST: The name of the Corporation is Convertible Holdings, Inc. The
Corporation desires to amend and restate its charter as currently in effect. The
original Articles of Incorporation were filed with the State Department of
Assessments and Taxation of Maryland on May 24, 1985.
SECOND: These Articles of Amendment and Restatement contain a provision
changing the name of the Corporation from "Convertible Holdings, Inc." to
"Merrill Lynch Convertible Fund, Inc."
THIRD: Pursuant to Section 2-609 of the Maryland Corporations and
Associations Code, these Articles of Amendment and Restatement restate and amend
the provisions of the Articles of Incorporation of the Corporation.
FOURTH: The text of the charter of the Corporation is hereby restated to
read in its entirety as follows:
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MERRILL LYNCH CONVERTIBLE FUND, INC.
ARTICLE I
NAME
The name of the corporation is MERRILL LYNCH CONVERTIBLE FUND, INC.
ARTICLE II
PURPOSES AND POWERS
The purpose or purposes for which the Corporation is formed, the powers,
rights and privileges that the Corporation shall be authorized to exercise and
enjoy, and the business or objects to be transacted, carried on and promoted by
it are as follows:
(1) To conduct and carry on the business of an investment company of
the management type.
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts
and on such terms and conditions, for such purposes and for such amount or
kind of consideration now or hereafter permitted by the General Laws of the
State of Maryland and by these Articles of Incorporation, as its Board of
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Directors may determine; provided, however, that the value of the
consideration per share to be received by the Corporation upon the sale or
other disposition of any shares of its capital stock shall not be less than
the net asset value per share of such capital stock outstanding at the time
of such event.
(4) To exchange, classify, reclassify, change the designation of,
convert, rename, redeem, purchase or otherwise acquire, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its issued or unissued capital
stock, in any manner and to the extent now or hereafter permitted by the
General Laws of the State of Maryland and by these Articles of
Incorporation.
(5) To do any and all such further acts or things and to exercise any
and all such further powers or rights as may be necessary, incidental,
relative, conducive, appropriate or desirable for the accomplishment,
carrying out or attainment of all or any of the foregoing purposes or
objects.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
General Laws of the State of Maryland now or hereafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post office address of the resident agent is 32 South Street, Baltimore,
Maryland 21202.
ARTICLE IV
CAPITAL STOCK
(1) The total number of shares of capital stock which the Corporation shall
have authority to issue is Four Hundred Million (400,000,000) shares, of the par
value of Ten Cents ($.10) per share, and of the aggregate par value of Forty
Million Dollars ($40,000,000). The capital stock initially is classified into
one class, consisting of Four Hundred Million (400,000,000) shares of Common
Stock.
(2) The Board of Directors may classify and reclassify any unissued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series.
(3) The Board of Directors may classify and reclassify any issued shares of
capital stock into one or more additional or other classes or series as may be
established from time to time by setting or changing in any one or more respects
the designations, preferences, conversion or other rights, voting powers,
restrictions,
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limitations as to dividends, qualifications or terms or conditions of redemption
of such shares of stock and pursuant to such classification or reclassification
to increase or decrease the number of authorized shares of any existing class or
series; provided, however, that any such classification or reclassification
shall not substantially adversely affect the rights of holders of such issued
shares. The Board's authority pursuant to this paragraph shall include, but not
be limited to, the power to vary among all of the holders of a particular class
or series (a) the length of time shares must be held prior to reclassification
to shares of another class or series (the "Holding Period(s)"), (b) the manner
in which the time for such Holding Period(s) is determined and (c) the class or
series into which the particular class or series is being reclassified;
provided, however, that, subject to the first sentence of this section, with
respect to holders of the Corporation's shares issued on or after the date of
the Corporation's first effective prospectus which sets forth Holding Period(s),
the Holding Period(s), the manner in which the time for such Holding Period(s)
is determined and the class or series into which the particular class or series
is being reclassified shall be disclosed in the Corporation's prospectus or
statement of additional information in effect at the time such shares, which are
the subject of the reclassification, were issued.
(4) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series. Dividends on a class or series may be declared or paid
only out of the net assets of that class or series. Expenses related to the
distribution of, and other identified expenses that should properly be allocated
to, the shares of a particular class or series of capital stock may be charged
to and borne solely by such class or series and the bearing of expenses solely
by a class or series of capital stock may be appropriately reflected (in a
manner determined by the Board of Directors) and cause differences in the net
asset value attributable to, and the dividend, redemption and liquidation rights
of, the shares of each class or series of capital stock.
(5) Unless otherwise expressly provided in the charter of the Corporation,
including those matters set forth in Article II, Section (4) hereof and
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that (a) as to
any matter with respect to which a separate vote of any class or series is
required by the Investment Company Act of 1940, as amended, and in effect from
time to time, or any rules, regulations or orders issued thereunder, or by the
Maryland General Corporation Law, such requirement as to a separate vote by that
class or series shall apply in lieu of a general vote of all classes and series
as described above, (b) in the event that the separate vote requirements
referred to in (a) above apply with respect to one or more classes or series,
then, subject to paragraph (c) below, the shares of all other classes and series
not entitled to a separate class vote shall vote as a single class and (c) as to
any matter which does not affect the interest of a particular class or series,
such class or series shall not be entitled to any vote and only the holders of
shares of the affected classes and series, if any, shall be entitled to vote.
(6) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the
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Corporation is hereby authorized (subject to the requirements of the Investment
Company Act of 1940, as amended, and in effect from time to time, and any rules,
regulations and orders issued thereunder) to take such action upon the
concurrence of a majority of the votes entitled to be cast by holders of capital
stock of the Corporation (or a majority of the votes entitled to be cast by
holders of a class or series entitled to vote thereon as a separate class or
series).
(7) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation applicable to that
class or series.
(8) Any fractional shares shall carry proportionately all of the rights of
a whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(9) The presence in person or by proxy of the holders of shares entitled to
cast one-third of the votes entitled to be cast shall constitute a quorum at any
meeting of stockholders, except with respect to any matter which requires
approval by a separate vote of one or more classes of stock, in which case the
presence in person or by proxy of the holders of shares entitled to cast
one-third of the votes entitled to be cast by each class entitled to vote as a
separate class shall constitute a quorum.
(10) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of the charter and the By-Laws of the
Corporation. As used in the charter of the Corporation, the terms "charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
(1) The number of directors of the Corporation shall be six (6), which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three (3). The names of the directors who shall act until the
next annual meeting and until their successors are duly elected and qualify are:
Arthur Zeikel
James H. Bodurtha
Herbert I. London
Robert R. Martin
Joseph L. May
Andre F. Perold
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(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether now
or hereafter authorized, for such consideration as the Board of Directors may
deem advisable, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the General
Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
by the Corporation to the full extent permitted by the General Laws of the State
of Maryland, subject to the requirements of the Investment Company Act of 1940,
as amended. No amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided to directors and
officers under this provision in connection with any act or omission that
occurred prior to such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State of
Maryland, subject to the requirements of the Investment Company Act of 1940, as
amended, no director or officer of the Corporation shall be personally liable to
the Corporation or its security holders for money damages. No amendment of these
Articles of Incorporation or repeal of any provision hereof shall limit or
eliminate the benefits provided to directors and officers under this provision
in connection with any act or omission that occurred prior to such amendment or
repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act of 1940, as amended.
(7) The Board of Directors of the Corporation from time to time may change
the Corporation's name, without the vote or consent of the stockholders of the
Corporation, in any manner and to the extent now or hereafter permitted by the
General Laws of the State of Maryland and by these Articles of Incorporation.
ARTICLE VI
REDEMPTION
Each holder of shares of capital stock of the Corporation shall be entitled
to require the Corporation to redeem all or any part of the shares of capital
stock of the Corporation standing in the name of such holder on the books of the
Corporation, and all shares of capital stock issued by the Corporation shall be
subject to redemption by the Corporation, at the redemption price of such shares
as in effect from time to time as may be determined by the Board of Directors of
the Corporation in accordance with the provisions hereof, subject to the right
of the Board of Directors of the Corporation to suspend the right of redemption
of shares of capital stock of the Corporation or postpone the date of payment of
such redemption price in accordance with provisions of applicable law. The
redemption price of shares of capital stock of the Corporation shall be the net
asset value thereof as determined by the Board of Directors of the Corporation
from time to time in accordance with the provisions of applicable law, less such
redemption fee or other charge, if any, as may be
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fixed by resolution of the Board of Directors of the Corporation. Payment of the
redemption price shall be made in cash by the Corporation at such time and in
such manner as may be determined from time to time by the Board of Directors of
the Corporation.
ARTICLE VII
DETERMINATION BINDING
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserve
or charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which such reserves
or charges shall have been created, shall have been paid or discharged or shall
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities "short,"
or an underwriting or the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations shall be
binding as aforesaid. No provision of these Articles of Incorporation shall be
effective to (a) require a waiver of compliance with any provision of the
Securities Act of 1933, as amended, or the Investment Company Act of 1940, as
amended, or of any valid rule, regulation or order of the Securities and
Exchange Commission thereunder or (b) protect or purport to protect any director
or officer of the Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
ARTICLE VIII
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE IX
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in any manner now or
hereafter prescribed by statute, including any amendment which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
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FIFTH: The authorized capital stock of the Corporation has been increased
by these Articles of Amendment and Restatement. Immediately before the amendment
effected by these Articles of Amendment and Restatement, the Corporation had the
authority to issue Thirty Million (30,000,000) shares of capital stock, divided
into 15,000,000 (Fifteen Million) Income Shares, par value of Ten Cents ($.10)
per share and 15,000,000 (Fifteen Million) Capital Shares, par value of Ten
Cents ($.10) per share with an aggregate par value of Three Million Dollars
($3,000,000). The shares formerly designated Capital Shares and the shares
formerly designated Income Shares are now designated by the Articles of
Amendment and Restatement as "Common Stock".
The Corporation effected, in the manner and by the vote required by the
Corporation's charter and the laws of the State of Maryland, an increase in the
total number of authorized shares of the Corporation.
After this increase in the number of authorized shares of capital stock of
the Corporation, the Corporation will have authority to issue Four Hundred
Million (400,000,000) shares of Common Stock, par value of Ten Cents ($.10) per
share with an aggregate par value of Forty Million Dollars ($40,000,000).
SIXTH: These Articles of Amendment and Restatement have been effected in
the manner and by the vote required by the Corporation's charter and the laws of
the State of Maryland. Pursuant to Section 2-604 of the Maryland Corporations
and Associations Code, these Articles of Amendment and Restatement were advised
by the Board of Directors of the Corporation and approved by the stockholders.
SEVENTH: These Articles of Amendment and Restatement shall be effective at
a.m. E.D.S.T. on , 1997.
IN WITNESS WHEREOF, CONVERTIBLE HOLDINGS, INC. has caused these presents to
be signed in its name and on its behalf by its Executive Vice President and
attested to by its Secretary as of the day of , 1997.
<TABLE>
<S> <C>
CONVERTIBLE HOLDINGS, INC.
ATTEST: (a Maryland corporation)
By:
- -------------------------------------------- --------------------------------------------
Mark B. Goldfus Terry K. Glenn
Secretary Executive Vice President
</TABLE>
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THE UNDERSIGNED, Executive Vice President of CONVERTIBLE HOLDINGS, INC., a
Maryland corporation, who executed on behalf of the Corporation the foregoing
Articles of Amendment and Restatement of which this certificate is made a part,
hereby acknowledges in the name and on behalf of the Corporation the foregoing
Articles of Amendment and Restatement to be the corporate act of the Corporation
and hereby certifies that to the best of his knowledge, information and belief
the matters and facts set forth therein with respect to the authorization and
approval thereof are true in all material respects under the penalties for
perjury.
------------------------------------
Terry K. Glenn
Executive Vice President
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EXHIBIT B
CURRENT INVESTMENT RESTRICTIONS
The Company has adopted the following restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of each
class of the Company's outstanding voting securities (which for this purpose and
under the Investment Company Act means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares). The Company may
not:
1. Invest in securities of any one issuer (other than the United
States or its agencies or instrumentalities), if immediately after and as a
result of such investment more than 5% of the total assets of the Company,
taken at market value, would be invested in the securities of such issuer,
or more than 10% of the outstanding securities, or more than 10% of the
outstanding voting securities, of such issuer would be owned by the
Company.
2. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry.
3. Make investments for the purpose of exercising control or
management.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
5. Purchase or sell real estate; provided that the Company may invest
in securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
6. Purchase or sell commodities or commodity contracts.
7. Purchase any securities on margin, except that the Company may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
8. Make short sales of securities or maintain a short position, unless
at all times when a short position is open the Company owns, or has the
right to acquire without payment of any further consideration, an equal
amount of such securities, and only up to 15% of total assets, taken at
market value.
9. Make loans to other persons (except as provided in (10) and (13)
below); provided that for purposes of this restriction the acquisition of a
portion of an issue of publicly distributed bonds, debentures, or other
corporate securities and investment in United States Government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements shall not be deemed to be the making
of a loan (the acquisition of bonds, debentures or other corporate debt
securities which are not publicly distributed is considered to be the
making of a loan under the Investment Company Act).
10. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value, provided that such loans shall be made in
accordance with the guidelines set forth below.
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11. Borrow amounts in excess of 10% of its total assets, taken at
market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes. The Company will not purchase
securities during periods when it has outstanding borrowings in excess of
5% of its total assets.
12. Mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (10) above), as security for indebtedness, any securities owned
or held by the Company except as may be necessary in connection with
borrowings mentioned in (11) above, and then such mortgaging, pledging or
hypothecating may not exceed 10% of the Company's total assets, taken at
market value.
13. Invest in "restricted securities" or other securities which cannot
be readily resold to the public because of legal or contractual
restrictions or for which no readily available market exists, in repurchase
agreements maturing in more than seven days or in securities of issuers
having a record, together with predecessors, of less than three years of
continuous operation if, regarding all such securities, more than 10% of
its total assets, taken at market value, would be invested in such
securities.
14. Underwrite securities of other issuers except insofar as the
Company may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
15. Write, purchase or sell puts, calls or combinations thereof.
16. Invest in securities of foreign issuers if at the time of
acquisition more than 5% of its total assets, taken at market value, would
be invested in such securities.
17. Purchase or sell interests in oil, gas or other mineral
exploration or development programs.
18. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Company, the Investment Adviser or
any subsidiary thereof each owning beneficially more than 1/2 of 1% of the
securities of such issuer own in the aggregate more than 5% of the
securities of such issuer.
B-2
<PAGE> 53
[REVISIONS ARE REFLECTED BY UNDERSCORING ADDITIONS AND BRACKETING DELETIONS]
EXHIBIT C
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this [22nd] day of [July, 1985], 1997, by and between [ML
CONVERTIBLE SECURITIES, INC.,] MERRILL LYNCH CONVERTIBLE FUND, INC., a Maryland
corporation (hereinafter referred to as the "Company"), and MERRILL LYNCH ASSET
MANAGEMENT, [INC.,] L.P., a Delaware [corporation] limited partnership
(hereinafter referred to as the "Investment Adviser").
W I T N E S S E T H :
WHEREAS, the Company is engaged in business as an [closed-end] open-end
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
[investment advisory and management services] management and investment advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940[;], as amended; and
WHEREAS, the Company desires to retain the Investment Adviser to [provide]
render [certain investment advisory and management services] management and
investment advisory services to the Company in the manner and on the terms
hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide [such investment
advisory and management services] management and investment advisory services to
the Company on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the [premises] promises and the
covenants hereinafter contained, the Company and the Investment Adviser hereby
agree as follows:
ARTICLE I
DUTIES OF THE INVESTMENT ADVISER
The Company hereby employs the Investment Adviser to act as [an investment
adviser and manager] a manager and investment adviser of the Company and to
furnish or arrange for affiliates to furnish, the management and investment
advisory services described below, subject to policies of, review by and overall
control of the Board of Directors of the Company (the "Directors"), for the
period and on the terms and conditions set forth in this Agreement. The
Investment Adviser hereby accepts such employment and agrees during such period,
at its own expense, to render, or arrange for the rendering of, such services
and to assume the obligations herein set forth for the compensation provided for
herein. The Investment Adviser and its affiliates shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Company in
any way or otherwise be deemed an agent of the Company.
[Management Services]Management and Administrative Services. The
Investment Adviser shall perform (or arrange for the performance by affiliates
of) the management and administrative services necessary for the operation of
the Company including administering shareholder accounts and handling
shareholder relations. The Investment Adviser shall provide the Company with
office space, equipment and facilities and
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<PAGE> 54
such other services as the Investment Adviser, subject to review by the [Board
of Directors of the Company] Directors, shall from time to time determine to be
necessary or useful to perform its obligations under this Agreement. The
Investment Adviser shall also, on behalf of the Company, conduct relations with
custodians, depositories, transfer agents, dividend disbursing agents, other
shareholder servicing agents, accountants, attorneys, underwriters, brokers and
dealers, corporate fiduciaries, insurers, banks and such other persons in any
such other capacity deemed to be necessary or desirable. The Investment Adviser
shall generally monitor the Company's compliance with investment policies and
restrictions as set forth [in filings make by the Company under the Federal
securities laws.] in the currently effective prospectus and statement of
additional information relating to the shares of the Company under the
Securities Act of 1933, as amended (the "Prospectus" and "Statement of
Additional Information", respectively). The Investment Adviser shall make
reports to the [Board of Directors of the Company] Directors of its performance
of obligations hereunder and furnish advice and recommendations with respect to
such other aspects of the business and affairs of the Company as it shall
determine to be desirable.
Investment Advisory Services. The Investment Adviser shall provide (or
arrange for affiliates to provide) the Company with such investment research,
advice and supervision as the latter may from time to time consider necessary
for the proper supervision of the assets of the Company, shall furnish
continuously an investment program for the Company and shall determine from time
to time which securities shall be purchased, sold or exchanged and what portion
of the assets of the Company shall be held in the various securities in which
the Company invests, options, futures, options on futures or cash, subject
always to the restrictions set forth in the Articles of Incorporation and
By-Laws of the Company, as amended from time to time, the provisions of the
Investment Company Act and the statements relating to the Company's investment
objectives, investment policies and investment restrictions as the same are set
forth in the Prospectus and Statement of Additional Information. The Investment
Adviser [and] shall also make decisions for the Company as to the [sale of
option on] manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Company's portfolio securities [,subject
always to the restrictions of the Articles of Incorporation and By-Laws of the
Company, as amended from time to time, the provisions of the Investment Company
Act and the statements relating to the Company's investment objectives,
investment policies and investment restrictions as the same are set forth in
filings made by the Company under the Federal securities laws. The Investment
Adviser shall make decisions for the Company as to the manner in which voting
rights, rights to consent to corporate action and any other rights pertaining to
the Company's portfolio securities] shall be exercised. Should the [Board of
Directors of the Company] Directors at any time, however, make any definite
determination as to investment policy and notify the Investment Adviser thereof
in writing, the Investment Adviser shall be bound by such determination for the
period, if any, specified in such notice or until similarly notified that such
determination has been revoked. The Investment Adviser shall take, on behalf of
the Company, all actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place all orders for
the purchase or sale of portfolio securities for the Company's account with
brokers or dealers selected by it, and to that end, the Investment Adviser is
authorized as the agent of the Company to give instructions to the Custodian of
the Company as to deliveries of securities and payments of cash for the account
of the Company. In connection with the selection of such brokers or dealers and
the placing of such orders with respect to assets of the Company, the Investment
Adviser is directed at all times to seek to obtain execution and price within
the policy guidelines determined by the [Board of Directors of the Company]
Directors as set forth in [filings made by the Company under the Federal
securities laws.] the Prospectus and Statement of Additional
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<PAGE> 55
Information. Subject to this requirement and the provisions of the Investment
Company Act, the Securities Exchange Act of 1934, as amended, and other
applicable provisions of law, the Investment Adviser may select brokers or
dealers with which it or the Company is affiliated.
(c) Notice Upon Change in Partners of Investment Adviser. The Investment
Adviser is a limited partnership of which Merrill Lynch & Co., Inc. is the sole
limited partner and Princeton Services, Inc. is the sole general partner. The
Investment Adviser will notify the Company of any change in the membership of
the partnership within a reasonable time after such change.
ARTICLE II
ALLOCATION OF CHARGES AND EXPENSES
(a) The Investment Adviser. The Investment Adviser assumes and shall pay
for maintaining the staff and personnel necessary to perform its obligations
under this Agreement, and shall[,] at its own expense, provide the office space,
equipment and facilities which it is obligated to provide under Article I
hereof, and shall pay all compensation of officers of the Company and all
[directors of the Company] Directors who are affiliated persons of the
Investment Adviser.
(b) The Company. The Company assumes and shall pay or cause to be paid all
other expenses of the Company (except for the expenses paid by the Distributor),
including, without limitation: [taxes, expenses for legal and auditing services,
costs of printing proxies, stock certificates and shareholder reports, charges
of the Custodian, any Sub-Custodian and the Transfer Agent, Securities and
Exchange Commission fees,] redemption expenses, expenses of portfolio
transactions, expenses of registering shares under federal and state securities
laws, pricing costs (including the daily calculation of net asset value),
expenses of printing shareholder reports, stock certificates, prospectuses and
statements of additional information, Securities and Exchange Commission fees,
interest, taxes, custodian and transfer agency fees, fees and actual
out-of-pocket expenses of [directors] Directors who are not affiliated persons
of the Investment Adviser, [accounting and pricing costs (including the
calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses,] fees for legal
and auditing services, litigation expenses, costs of printing proxies and other
expenses related to shareholder meetings, and other expenses properly payable by
the Company. It is also understood that the Company will reimburse the
Investment Adviser for its costs in providing accounting services to the
Company. The Distributor will pay certain of the expenses of the Company
incurred in connection with the continuous offering of Company shares.
ARTICLE III
COMPENSATION OF THE INVESTMENT ADVISER
(a) [Investment Advisory Fee] Management Fee. For the services rendered,
the facilities furnished and expenses assumed by the Investment Adviser, the
Company shall pay to the Investment Adviser at the end of each [of the company's
fiscal quarters] calendar month a fee [at the annual rate of .60 of 1.00% (.60%)
of the average weekly] based upon the average daily value of the net assets of
the Company, [commencing on the day following effectiveness hereof (hereinafter
referred to as the "Investment Advisory Fee"). For purpose of this calculation,
average weekly net assets are determined at the end of each fiscal quarter on
the basis of the average net assets of the Company for each week during the
quarter. The assets for each weekly period are determined by averaging the net
assets at the end of a week with the net assets at the end of the prior week.]
C-3
<PAGE> 56
as determined and computed in accordance with the description of the
determination of net asset value contained in the Prospectus and Statement of
Additional Information, at the annual rate of 0.60% of the average daily net
assets of the Company, commencing on the day following effectiveness hereof. If
this Agreement becomes effective subsequent to the first day of a month or shall
terminate before the last day of a month, compensation for that part of the
month this Agreement is in effect shall be prorated in a manner consistent with
the calculation of the fee as set forth above. Subject to the provisions of
subsection (b) hereof, payment of the Investment Adviser's compensation for the
preceding month shall be made as promptly as possible after completion of the
computations contemplated by subsection (b) hereof. During any period when the
determination of net asset value is suspended by the [Board of Directors of the
Company] Directors, the [average] net asset value of a share [for the last week]
as of the last business day prior to such suspension shall for this purpose be
deemed to be the net asset value at the close of each succeeding [week] business
day until it is again determined.
[The Company has a stated objective (a "Minimum Income Rate Objective") of
obtaining a minimum rate of return (calculated as described in the Prospectus)
equal to 85% of the yield of the Value Line Convertible Index. If, at the end of
any calendar quarter beginning with the quarter ending October 31, 1986, the
Company's Minimum Income Rate Objective has not been met, the Investment
Advisory Fee for such quarter shall be reduced by 25% of the fee payable for
that quarter. In determining whether the Minimum Income Rate Objective has been
met, the most recent Value Line Convertible Index data published during each
quarter will be utilized. The Investment Adviser understands that the Board of
Directors of the Company may determine to base the Minimum Income Rate Objective
on a different index, either because of a change in the methodology underlying
such Index or if such Index is for any reason not maintained. If required to
approve an index other than the Value Line Convertible Index, the Board of
Directors of the Company will seek to identify the broadest available index of
convertible securities. To the extent required by the Investment Company Act,
any such change will be submitted to the shareholders of the Company for their
approval.]
(b) Expense Limitations. In the event the operating expenses of the
Company, including amounts payable to the Investment Adviser pursuant to
subsection (a) hereof, for any fiscal year ending on a date on which this
Agreement is in effect exceed the expense limitations applicable to the Company
imposed by applicable state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Investment Adviser
shall reduce its management fee by the extent of such excess and, if required
pursuant to any such laws or regulations, will reimburse the Company in the
amount of such excess; provided, however, to the extent permitted by law, there
shall be excluded from such expenses the amount of any interest, taxes,
brokerage commissions, distribution fees and extraordinary expenses (including
but not limited to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Company. Whenever the
expenses of the Company exceed a pro rata portion of the applicable annual
expense limitations, the estimated amount of reimbursement under such
limitations shall be applicable as an offset against the monthly payment of the
management fee due to the Investment Adviser. Should two or more such expense
limitations be applicable as at the end of the last business day of the month,
that expense limitation which results in the largest reduction in the Investment
Adviser's fee shall be applicable.
C-4
<PAGE> 57
ARTICLE IV
LIMITATION OF LIABILITY OF THE INVESTMENT ADVISER
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Company, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Company contemplated hereby and
directors, officers and employees of the Investment Adviser and such affiliates.
ARTICLE V
ACTIVITIES OF THE INVESTMENT ADVISER
The services of the Investment Adviser to the Company are not to be deemed
to be exclusive, and the Investment Adviser and any person controlled by or
under common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") [being] is free to render services to others. It is
understood that [directors] Directors, officers, employees and shareholders of
the Company are or may become interested in the Investment Adviser and its
affiliates, as directors, officers, employees[,partners] and shareholders or
otherwise and that directors, officers, employees[,partners] and shareholders of
the Investment Adviser and its affiliates are or may become similarly interested
in the Company, and that the Investment Adviser and directors, officers,
employees, partners and shareholders of its affiliates may become interested in
the Company as shareholder or otherwise.
ARTICLE VI
DURATION AND TERMINATION OF [THIS AGREEMENT] THIS CONTRACT
This Agreement shall become effective as of the date [first above written]
of the commencement of operations of the Company as an open-end investment
company and shall remain in force until [March 31,1987], 1999 and thereafter,
but only so long as such continuance is specifically approved at least annually
by (i) the [Board of Directors of the Company] Directors, or by the vote of a
majority of the outstanding voting securities of the Company, and (ii) a
majority of those [directors] Directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the [Board of Directors of the Company] Directors or by vote of a
majority of the outstanding voting securities of the Company, or by the
Investment Adviser, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its assignment.
C-5
<PAGE> 58
ARTICLE VII
AMENDMENTS OF THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the vote of a majority of outstanding voting
securities of the Company, and (ii) a majority of those [directors] Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
ARTICLE VIII
DEFINITIONS OF CERTAIN TERMS
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act [of 1940] and the Rules and Regulations thereunder, subject,
however, to such exemptions as may be granted by the Securities and Exchange
Commission under [said] the Investment Company Act.
ARTICLE IX
GOVERNING LAW
This Agreement shall be construed in accordance with laws of the State of
New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the [date] day and year first above written.
[ML CONVERTIBLES SECURITIES
MERRILL LYNCH CONVERTIBLE FUND, INC.
By
------------------------------------------------
Title:
MERRILL LYNCH ASSET MANAGEMENT, [INC.] L.P.
By
------------------------------------------------
Title:
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<PAGE> 59
PRELIMINARY COPY
INCOME SHARES
CONVERTIBLE HOLDINGS, INC.
P. O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn
and Mark B. Goldfus, as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse hereof, all of the Income Shares of
Convertible Holdings, Inc. (the "Company") held of record by the
undersigned on October 18, 1996 at the annual meeting of stockholders
of the Company to be held on December 16, 1996, or any adjournment
thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
(Continued and to be signed on the reverse side)
1. To consider and act upon a proposal to elect the following persons as
Directors of the Company:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the contrary for all nominees
below) / / listed below / /
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
James H. Bodurtha, Terry K. Glenn, Herbert I. London, Joseph L. May,
Andre F. Perold
2. To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP as the independent auditors of the Company to
serve for the current fiscal year.
FOR / / AGAINST / / ABSTAIN / /
3. In the discretion of such proxies, upon such other business as
properly may come before the meeting or any adjournment thereof.
<PAGE> 60
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney-in-fact or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated: , 1996
-------------------------
X
------------------------------------
Signature
X
------------------------------------
Signature, if held jointly
PLEASE MARK BOXES [FILL] OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN
THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 61
PRELIMINARY COPY
CAPITAL SHARES
CONVERTIBLE HOLDINGS, INC.
P. O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn
and Mark B. Goldfus, as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse hereof, all of the Capital Shares of
Convertible Holdings, Inc. (the "Company") held of record by the
undersigned on October 18, 1996 at the annual meeting of stockholders
of the Company to be held on December 16, 1996, or any adjournment
thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4, 5, 6 and 7.
(Continued and to be signed on the reverse side)
1. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the contrary for all nominees
below) / / listed below / /
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
James H. Bodurtha, Herbert I. London, Robert R. Martin, Joseph L. May,
Arthur Zeikel
2. To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP as the independent auditors of the Company to
serve for the current fiscal year.
FOR / / AGAINST / / ABSTAIN / /
3. To consider and act upon a proposal to convert the Company from a
closed-end investment company to an open-end investment company and
approve the Amended and Restated Articles of Incorporation.
FOR / / AGAINST / / ABSTAIN / /
<PAGE> 62
4. To consider and act upon a proposal to change the Company's investment
objective and policies.
FOR / / AGAINST / / ABSTAIN / /
5. To consider and act upon a proposal to amend the Company's fundamental
investment restrictions.
FOR / / AGAINST / / ABSTAIN / /
6. To consider and act upon a proposal to approve an Amended Investment
Advisory Agreement between the Company and Merrill Lynch Asset
Management, L.P.
FOR / / AGAINST / / ABSTAIN / /
================================================================================
Conversion of the Company to open-end status
requires approval of Items 3,4,5 and 6.
================================================================================
7. To consider and act upon a proposal to implement the Merrill Lynch
Select Pricing(SM) System.
FOR / / AGAINST / / ABSTAIN / /
8. In the discretion of such proxies, upon such other business as
properly may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney-in-fact or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated: , 1996
-------------------------
X
------------------------------------
Signature
X
------------------------------------
Signature, if held jointly
PLEASE MARK BOXES [FILL] OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN
THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
