AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1996
INVESTMENT COMPANY ACT FILE NO. 811-07703
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
/x/ Registration Statement Under The Investment Company Act of 1940
/ / Amendment No.
(check appropriate box or boxes)
SOMERSET EXCHANGE FUND
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (609) 282-2000
TERRY K. GLENN
SOMERSET EXCHANGE FUND
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
COPIES TO:
PHILIP L. KIRSTEIN, ESQ. COUNSEL FOR THE FUND
MERRILL LYNCH ASSET MANAGEMENT BROWN & WOOD LLP
BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
ATTENTION: JOHN A. MACKINNON
PART A
INFORMATION REQUIRED IN A PROSPECTUS
ITEM 1. OUTSIDE FRONT COVER.
Not Applicable.
ITEM 2. INSIDE FRONT AND OUTSIDE BACK COVER PAGE.
Not Applicable.
ITEM 3. FEE TABLE AND SYNOPSIS.
Not Applicable.
ITEM 4. FINANCIAL HIGHLIGHTS.
Not Applicable.
ITEM 5. PLAN OF DISTRIBUTION.
Not Applicable.
ITEM 6. SELLING SHAREHOLDERS.
Not Applicable.
ITEM 7. USE OF PROCEEDS.
Not Applicable.
ITEM 8. GENERAL DESCRIPTION OF THE REGISTRANT.
1. General. Somerset Exchange Fund (the "Fund") is a Delaware
business trust formed on February 4, 1996 and registered under the
Investment Company Act of 1940 (the "Investment Company Act") as a
diversified, closed-end, management investment company. The address of the
Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and
its telephone number is (609) 282-2000. The Fund closed a private
placement of shares of beneficial interest, without par value ("Shares") on
July 11, 1996. At that time, it issued 153,700.844 shares in exchange for
equity securities and cash contributed to the Fund by investors.
2. Investment Objective and Policies. The investment objective of
the Fund is to generate long-term returns measured on an after-tax basis
(i.e., taking into account Shareholders' taxes due upon the receipt of
investment income and the realization of capital gains by the Fund) from
a diversified portfolio of equity securities. The Fund seeks to emphasize
the accumulation of unrealized capital gains, which will not give rise to
Shareholder tax obligations so long as the gains remain unrealized.
The Fund seeks to maintain a portfolio of high quality
publicly-traded equity securities that is broadly diversified across
different industries and sectors of the market. The Fund also invested
from 20% to 25% of its assets in investment-grade preferred stocks not
listed on any stock exchange that are expected to be income
producing (the "Preferred Stock"). The Fund may engage in certain
investment techniques, such as equity swaps, purchased put options and
covered short sales. The Fund may invest up to 25% of its total assets in
the preferred stock of any single issuer. Other than with respect to the
Preferred Stock, the Fund does not plan to invest more than 5% of its total
assets in the securities of a single issuer or more than 15% of its total
assets in the securities of issuers in the same industry group. To the
extent the Fund holds publicly-traded equity securities of an issuer, it
will limit its investment in the Preferred Stock of such issuer so that, at
the time of investment, not more than 25% of the total assets of the Fund
are comprised of the securities of such issuer, including both common and
preferred stock.
Cash held by the Fund may be invested in short-term nonconvertible
debt obligations of investment grade issuers, obligations of the U.S.
government and its respective agencies and instrumentalities, bank
deposits and bank obligations (including certificates of deposit, time
deposits and bankers' acceptances), commercial paper, and
repurchase agreements with respect to such securities.
The Investment Adviser does not plan or intend to sell the
Preferred Stock or acquire additional readily marketable securities at any
time during the life of the Fund if such sale or acquisition would cause
the Fund to have more than 80% of the value of its assets (based upon the
fair market value of such assets without regard to restrictions as to
disposition and excluding cash and nonconvertible debt obligations) in
readily marketable securities.
If the Fund is required to sell securities to meet financial
obligations or for any other purpose not relating to a particular
security, the Investment Adviser will sell securities in a manner that
attempts to minimize and, to the extent practicable, equalize the capital
gains to be recognized by each Shareholder per Share held. In the event
the Fund sells securities to meet its financial obligations, it will, to the
extent permitted under the Fund's credit facility described herein, make
a pro rata distribution of cash to the Shareholders in an amount equal
to at least 30% of the net long-term capital gains realized by
Shareholders on such sales of securities (excluding precontribution gains
realized in an extraordinary event specific to a particular contributed
security).
The Fund may under certain circumstances be required to redeem
Shares based upon events outside the control of the Fund and its
shareholders in accordance with the terms of the Investment Company Act and
the Fund's Second Amended and Restated Declaration of Trust (the
"Declaration of Trust").
The Fund has entered into a revolving credit facility (the
"Credit Facility") with Merrill Lynch International Bank Limited, a
wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch & Co."), which provided funds in order to purchase the Preferred
Stock and pay selling commissions and offering and organizational
expenses. The Credit Facility may also be utilized to meet any short-term
liquidity needs of the Fund or for other Fund purposes. The interest rate
on the borrowed funds is reset at regular intervals based on a fixed and
predetermined spread referenced to LIBOR. Interest on the amount of
outstanding borrowings and a commitment fee on the unused amount of the
loan commitment is payable periodically.
The Fund may enter into equity swaps to hedge against adverse
price changes in securities held by the Fund and to participate in the
price movements and investment returns of other securities or indices
without direct investment. The Fund may make short sales of a security
provided that at all times when a short position is open, the Fund owns
an equal amount of such security or a security convertible into or
exchangeable for an equal amount of the security sold short without
payment of further compensation (a short sale against the box or covered
short sale).
The Fund may purchase listed or over-the-counter put options
on securities held by the Fund, on baskets of such securities or on
stock market indices to hedge against declines in the value of portfolio
securities or the overall market. The Fund will apply credit quality
standards and exposure limits to option writers comparable to those set
forth above for swap agreement counterparties. The limits on the Fund's
permitted exposure to swap counterparties also apply to the writers of
over-the-counter options. At the time of purchasing an option, the Fund
will limit its credit exposure to the writer of the option to 5% or less of
the investment assets held by the Fund and the total credit exposure to all
such private contractual agreements to 20% or less of the Fund's investment
assets, with swaps, purchased options and other private contractual
commitments being aggregated in determining exposure to the counterparty
and private contract counterparties in the aggregate.
The Fund may write (sell) listed or over-the-counter call options
on securities held by the Fund, on baskets of such securities or on
stock market indices representative of the Fund's overall portfolio. The
Fund will write only covered call options. The Fund may also buy and
sell futures contracts on stock and bond market instruments and
indices. The Fund intends that any use of futures contracts would be
primarily as a vehicle to hedge against adverse movements in interest rates
and the stock market. The Fund may also use futures contracts for
non-hedging purposes, but only in conjunction with and to complement other
hedging activities of the Fund.
In order to hedge the value of the Preferred Stock against interest
rate fluctuations, the Fund may enter into various hedging transactions,
such as interest rate swaps and the purchase or sale of interest rate caps
and floors. The Fund intends to use these transactions as a hedge and not
as a speculative investment.
The Fund has adopted a number of 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 the Fund's outstanding voting securities (which for this
purpose and under the Investment Company Act means the lesser of (i) 67% of
the Fund's shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). The Fund may not:
1. Make any investment inconsistent with the Fund's classification
as a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value,
in the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control
or management.
4. Purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in securities
directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein.
5. 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, repurchase agreements or
any similar instruments shall not be deemed to be the making of a loan,
and except further that the Fund may lend its portfolio securities, provided
that the lending of portfolio securities may be made only in accordance with
applicable law.
6. Borrow money or issue senior securities except as permitted by
the Investment Company Act.
7. Underwrite securities of other issuers except insofar as
the Fund 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 that the Fund may do so in accordance with
applicable law and without registering as a commodity pool operator under
the Commodity Exchange Act.
In addition to the fundamental policies, the Fund has adopted
the following non-fundamental policies, which may be changed by the
Board of Trustees, without obtaining the approval of Shareholders. The Fund
may not:
a. Purchase securities of other investment companies, except to
the extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short
position, except to the extent permitted by applicable law. The Fund
currently does not intend to engage in short sales, except short sales
"against the box."
c. Purchase or retain the securities of any issuer, if
those individual officers and trustees of the Fund, the officers and
general partner of the Investment Adviser, the directors of such general
partner or the officers and directors of any subsidiary thereof each
owning beneficially more than one-half of one percent of the securities of
such issuer own in the aggregate more than 5% of the securities of such
issuer.
d. Invest in real estate limited partnership interests or
interests in oil, gas or other mineral leases, or exploration or
development programs, except that the Fund may invest in securities issued
by companies that engage in oil, gas or other mineral exploration or
development activities.
3. Risk Factors (a) General
a. Tax Risks. The contributions of appreciated securities to the
Fund might be held to be taxable transactions, notwithstanding the opinion
of tax counsel to the Fund to the contrary. No rulings have been
requested or received from the Internal Revenue Service as to such
contributions. In addition, the Fund (a) might recognize gain by
selling securities earlier than the contributing Shareholder would have
if he or she had continued to hold the securities, with such
contributing Shareholder being allocated any precontribution gain
(and without a compensating special distribution by the Fund); and (b)
might be treated by the Internal Revenue Service as an association
taxable as a corporation, notwithstanding the opinion of tax counsel to
the Fund that it will be treated as a partnership. In addition, state,
local or foreign laws applicable to certain Shareholders might treat
contributions to the Fund as a taxable event and/or might not treat the
Fund as a partnership for tax purposes, even though, in the opinion of tax
counsel to the Fund, federal income tax law does not treat such
contributions as taxable events and the Fund will be treated as a
partnership for federal income tax purposes.
b. Investment Risk. The future performance of a security
contributed to the Fund might be superior to that of the Fund as a whole.
Due to the low tax basis of contributed securities and the restrictions
on sales of Restricted Securities, the Fund will follow certain
unconventional investment strategies. Unlike most mutual funds which buy
and sell securities to increase returns, the Fund will generally retain the
securities contributed at the closing of the Fund.
c. Unconventional Investment Strategies. The Investment Adviser
may, from time to time, employ a number of unconventional investment
strategies, including, without limitation, using covered short sales,
equity swaps, purchased put options, index futures and other instruments to
hedge the Fund's exposure to declines in the value of portfolio securities
without selling the securities. Equity swaps and over-the-counter
options are private contracts in which there is a risk of loss in the
event of a default on an obligation to pay by the counterparty. Derivative
instruments may be difficult to value, may be illiquid and may be subject
to wide swings in valuation caused by changes in the price of a security
or index underlying the derivative.
It is anticipated that the Fund will not acquire additional
readily marketable equity securities for its portfolio unless, after giving
effect to such acquisition, at least 20% of the value of the Fund's total
assets (based upon the fair market value of such assets without regard to
restrictions as to disposition and excluding cash and
nonconvertible debt obligations) is represented by Preferred Stock. As a
result, the Fund may be required to accumulate a substantial cash
position prior to acquiring additional portfolio securities so that it
may coordinate purchases of acceptable preferred and common stock in the
appropriate proportions. Such an accumulation of cash may reduce the
return on the Fund's portfolio relative to more fully invested portfolios.
d. Leverage. The borrowing of funds to purchase the Preferred
Stock exposes the Fund to the risk that, contrary to the Fund's objective,
the returns achieved on the Preferred Stock will be less than the cost of
borrowing and that the leveraging of the Fund to buy the Preferred Stock
will diminish the returns to be achieved by the Fund as a whole. In
addition, there is a risk that the availability of financing will be
interrupted at some future time, either as a result of covenant restrictions
or otherwise.
e. Restrictions on Transferability of Shares; Lack of Liquidity.
The Fund's shares (the "Shares") have not been and will not be registered
under the Securities Act and may not be resold unless an exemption from such
registration is available. Transfer of the Shares is also subject to
restrictions set forth in the Declaration of Trust and transfers will
be permitted only with the consent of the Adviser Trustee, which consent
may be withheld in its sole discretion.
Shares of the Fund will not be listed on an exchange and there will
be no regular trading market for the Shares. Furthermore, the Fund does
not expect to provide liquidity through periodic tender offers for Shares.
Therefore, as long as the Fund remains a closed-end investment
company, Shareholders will likely be unable to liquidate their Shares. An
investment in the Fund will be illiquid until such time as the Shareholders
vote to convert the Fund from a closed-end fund to an open-end fund (or, if
appropriate, an interval fund, which is a closed-end investment company
which makes scheduled periodic repurchase offers). It is anticipated that
such a vote will not be submitted to Shareholders prior to the fifth
anniversary of the Fund. There is no assurance that the Fund will be able
to obtain the vote of Shareholders and obtain the alternative financing that
may be necessary to convert from a closed-end to an open-end investment
company.
f. Certain Risks of Investment in Preferred Stock. The issuers
of Preferred Stock currently held by the Fund are organized outside of the
United States and, as a result, involve certain risks not present in
Preferred Stock issued by companies organized in the United States.
Such risks include future political and economic developments,
different legal systems and the existence or possible imposition of
exchange controls or other foreign or U.S. governmental laws or
restrictions applicable to such investments.
Foreign issuers of the Preferred Stock may not be subject to
the reporting requirements of the U.S. securities laws. Accordingly,
there may be less publicly available information about such an issuer
than would be available about a U.S. company, and it may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. companies are subject. There may
be less government supervision and regulation of issuers in foreign
countries than there is in the United States. For example, there may be
no comparable provisions under certain foreign laws to insider trading and
similar investor protection securities laws.
In order to hedge the value of the Preferred Stock against interest
rate fluctuations, the Fund may enter into various hedging transactions,
such as interest rate swaps and the purchase or sale of interest rate caps
and floors. The use of interest rate transactions is a highly specialized
activity which involves investment techniques and risks different from
those associated with ordinary portfolio securities transactions.
g. Errors of the Trustees. The Declaration of Trust provides that
the Trustees (including the Adviser Trustee), in the absence of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
Trustee's duties, will not be liable to the Shareholders or the Trust and
also provides for the indemnification of the Trustees and certain other
persons. The Declaration of Trust also provides that the Trustees will
not be liable to the Trust or any Shareholder by reason of (i) any tax
liabilities incurred by the Shareholders as a result of their contribution
of securities to the Fund in exchange for Shares, (ii) any failure to
withhold income tax under federal or state tax laws with respect to income
allocated to the Shareholders or (iii) any change in the federal or state
tax laws or regulations or in the interpretations thereof as they apply to
the Fund or the Shareholders, whether such change or interpretation
occurs through legislative, judicial or administrative action.
h. Regulation. The Fund is registered under the Investment
Company Act, which imposes numerous restrictions on the activities of the
Fund including restrictions on the nature of its investments and its use of
leverage. If the number of Shareholders in the Fund is reduced below
100, the Fund could withdraw its registration under the Investment
Company Act.
i. Short-Swing Profit Liability. A Shareholder who is a
statutory insider could incur short-swing profit liability as a result of
either the contribution of equity securities of such issuer in exchange for
Shares or, if the Fund converts to an open-end fund, the receipt of such
securities in fulfillment of a redemption request.
j. Conflicts of Interest. Situations could arise in which
the interests of the Fund, and hence of the Shareholders, and those of the
Investment Adviser and its affiliates could conflict.
(b) Effect of Leverage. Not Applicable.
4. Other Policies. See "2. Investment Objective and Policies" above.
5. Share Price Data. Not applicable.
6. Business Development Companies. Not applicable.
ITEM 9. MANAGEMENT.
1. General
a. Board of Trustees. The Trustees of the Fund presently consist
of four individuals, three of whom are not "interested persons" of the
Fund as defined in the Investment Company Act, and the Adviser Trustee.
The Trustees are responsible for the overall supervision of the operations
of the Fund and the Trustees that are individuals perform various duties
imposed on the directors of investment companies by the Investment Company
Act. The individual Trustees and executive officers of the Fund, their
ages and their principal occupations for at least the last five years are
set forth below.
Terry K. Glenn (54)--Trustee and President (1)(2)--Executive
Vice President of the Investment Adviser (which term as used in this Item
includes its corporate predecessors and Fund Asset Management, L.P., an
affiliate of the Investment Adviser ("FAM") (which term as used in this
Item includes its corporate predecessors) since 1983; Executive Vice
President and Director of Princeton Services, Inc. ("Princeton Services")
since 1993; President of Merrill Lynch Funds Distributor, Inc. ("MLFD")
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. (including its corporate predecessor) since 1988.
Jack B. Sunderland (68)--Trustee (2)--P.O. Box 7, West
Cornwall, Connecticut 06796. President and Director of American
Independent Oil Company, Inc. (an energy company) since 1987; Member of
Council on Foreign Relations since 1971.
Stephen B. Swensrud (63)--Trustee (2)--24 Federal Street,
Boston, Massachusetts 02110. Principal of Fernwood Associates (Financial
Consultant).
J. Thomas Touchton (57)--Trustee (2)--Suite 3405, One Tampa
City Center, Tampa, Florida 33602. Managing Partner of The
Witt-Touchton Company and its predecessor, The Witt Co. (a private
investment partnership) since 1972; Trustee Emeritus of Washington and Lee
University; Director of TECO Energy, Inc. (an electric utility
holding company).
Norman R. Harvey (62)--Senior Vice President (1)(2)--Senior
Vice President of the Investment Adviser and FAM since 1982; Senior Vice
President of Princeton Services since 1993.
Eric S. Mitofsky (41)--Vice President (1)(2)--Vice President of
the Investment Adviser since 1992; Vice President of an affiliate of the
Investment Adviser from 1987 to 1992.
Donald C. Burke (36)--Vice President (1)(2)--Vice President
and Director of Taxation of the Investment Adviser since 1990; employee of
Deloitte & Touche LLP from 1982 to 1990.
Gerald M. Richard (47)--Treasurer (1)(2)--Senior Vice President
and Treasurer of the Investment Adviser and FAM since 1984; Senior Vice
President of Princeton Services since 1993; Treasurer of MLFD since 1984 and
Vice President of MLFD since 1981.
Robert E. Putney, III (36)--Secretary (1)(2)--Vice President of
MLAM since 1994; associated with MLAM since 1991; attorney in private
practice from 1985 to 1991. _________________
(1) Interested person, as defined in the Investment Company Act, of the
Fund; address is c/o
Merrill Lynch Asset Management, 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
(2) Such Trustee or officer is a director or officer of certain
other investment companies for which the Investment Adviser or FAM acts as
investment adviser.
The Fund pays each Trustee not affiliated with Merrill Lynch
Asset Management, L.P. (the "Investment Adviser") an annual fee of $2,500
per year plus $250 per meeting attended, together with such Trustee's
actual out-of-pocket expenses relating to attendance at meetings. The Fund
also pays members of its audit committee, which consists of all of the
Trustees not affiliated with the Investment Adviser an annual fee of $1,000.
The following table sets forth estimated compensation to be paid by
the Fund to the non-interested Trustees, projected through the end of the
Fund's first fiscal year, and the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM
Advised Funds") to the non-interested Trustees for the year ended December
31, 1996.
<TABLE>
<CAPTION> AGGREGATE COMPENSATION
PENSION OR RETIREMENT FROM FUND
BENEFITS AND MLAM/FAM ADVISED
COMPENSATION FROM ACCRUED AS PART OF FUNDS PAID TO
NAME OF TRUSTEE FUND FUND EXPENSE TRUSTEES/(1)/
<S> <C> <C> <C>
Jack B. Sunderland . . . . . . . . . $4,500 None $134,600
Stephen B. Swensrud . . . . . . . . . $4,500 None $153,883
J. Thomas Touchton . . . . . . . . . $4,500 None $134,600
</TABLE>
- ----------
(1) The Trustees serve on the boards of other MLAM/FAM Advised Funds as
follows: Mr. Sunderland (20 registered investment companies consisting of
29 portfolios); Mr. Swensrud (46 registered investment companies and 47
portfolios); and Mr. Touchton (20 registered investment companies consisting
of 29 portfolios).
b. Investment Advisory Services. The Investment Adviser, which is a
subsidiary of Merrill Lynch & Co., a financial services holding company and
the parent of Merrill Lynch, will provide the Fund with investment advisory
services. The Investment Adviser or FAM acts as the investment adviser for
more than 125 registered investment companies. The Investment Adviser also
offers investment advisory services to individuals and institutions. The
Investment Adviser is a limited partnership, the partners of which are
Merrill Lynch & Co. and Princeton Services, Inc. The principal business
address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
The Declaration of Trust provides that the Adviser Trustee is
responsible for the management of the Fund's portfolio, subject to the
supervision of the individual Trustees, and authorizes the entry into the
investment advisory agreement (the "Investment Advisory Agreement") with the
Adviser Trustee. Pursuant to the Investment Advisory Agreement, the
responsibility for making decisions to buy, sell or hold a particular
security rests with the Investment Adviser, subject to review by the
Trustees. In connection with its responsibilities under the Investment
Advisory Agreement, the Investment Adviser will consider analyses from
various sources, make the necessary investment decisions, and place orders
for any transactions accordingly.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay the Investment Adviser a quarterly fee
equal to, on an annual basis, 0.60 of 1% of the Fund's average weekly net
assets. For this purpose, "average weekly net assets" means the average
weekly value of the total assets of the Fund minus the sum of (i) accrued
liabilities of the Fund, and (ii) any accrued and unpaid interest on
outstanding borrowings. For purposes of this calculation, average weekly
net assets is determined at the end of each quarter on the basis of the
average net assets of the Fund for each week during the quarter. The assets
for each weekly period are determined by averaging the net assets at the
last business day of a week with the net assets at the last business day of
the prior week. Unless earlier terminated as described below, the
Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Trustees of the Fund or by a majority
of the outstanding shares of the Fund and (b) by a majority of the Trustees
who are not parties to such contract or interested persons (as defined in
the Investment Company Act) of any such party. Such contract is not
assignable and may be terminated without penalty on 60 days' written notice
at the option of either party thereto or by the vote of the shareholders of
the Fund.
c. Portfolio Management. The Portfolio Manager for the Fund is Eric S.
Mitofsky. Information regarding Mr. Mitofsky is set forth above.
d. Administrator. Under the terms of an administration agreement with
the Fund (the "Administration Agreement"), Merrill Lynch Asset Management,
L.P. (in such capacity, the "Administrator") will provide or arrange for the
provision of, administrative, accounting, transfer agency, custody, tax
reporting and other services, including the calculation of the Fund's net
asset value per Share, preparation of information for inclusion in periodic
account statements, and preparation of shareholder reports, semi-annual
reports containing unaudited financial statements and annual reports
containing audited financial statements and annual tax reporting statements
on IRS Form 1065, Schedule K-1.
For the administrative services rendered to the Fund, the Fund will pay
the Administrator a quarterly fee equal to, on an annual basis, 0.20 of 1%
of the Fund's average weekly net assets determined in the same manner as the
fee payable by the Fund under the Investment Advisory Agreement. Any third
party utilized by the Administrator, in respect of its duties under the
Administration Agreement is compensated directly by the Administrator out of
its fee at no additional cost to the Fund.
The Administrator has retained United States Trust Company of New York
to act as sub-administrator (in such capacity, the "Sub-Administrator") for
the Fund. The Sub-Administrator may provide information to the Investment
Adviser in connection with the risk management of the Fund, including, if
the Investment Adviser elects to reduce the Funds's exposure to adverse
price movements by engaging in hedging transactions, reviewing such
transactions to ensure that they are consistent with the investment
objective and policies of the Fund. The Sub-Administrator may also review
the methodology used to value any securities that may be used to hedge the
Fund's investment portfolio. In addition, the Sub-Administrator assists the
Administrator in valuing restricted securities held in the Fund's portfolio
for the purpose of determining the Fund's net asset value. For such
services the Administrator pays the Sub-Administrator a quarterly fee equal
to, on an annual basis, 0.05 of 1% of the Fund's average weekly net assets.
The Sub- Administrator will be compensated directly by the Administrator out
of the Administrator's fee at no additional cost to the Fund. The
Sub-Administrator will also distribute to Shareholders, or arrange for the
distribution to Shareholders of, periodic account statements, shareholder
reports and semi-annual and annual reports and annual tax reporting
statements, as well as provide, or arrange for the provision of, general
assistance and services in connection with the Fund pursuant to a
shareholder servicing agreement between the Investment Adviser and the
Sub-Administrator. For such services, the Investment Adviser pays United
States Trust Company of New York a quarterly fee equal to, on an annual
basis, 0.15% of the Fund's average weekly net assets attributable to
Shareholders who purchased their shares through UST Financial Services Corp.
at no additional cost to the Fund.
e. Custodians. The Chase Manhattan Bank, N.A., 770 Broadway, New York,
New York 10003-9598, acts as the transfer agent, dividend paying agent and
custodian for the Fund, and is compensated for such services directly by the
Administrator out of its fee at no additional cost to the Fund.
f. Expenses. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, expenses for legal and
auditing services, taxes, if any, costs of printing proxies and shareholder
reports, Securities and Exchange Commission fees, state Blue Sky filing
fees, fees and expenses with respect to borrowing, fees and expenses of
unaffiliated Trustees, insurance, interest, brokerage costs, litigation and
other extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund. The organizational expenses of the Fund are
being amortized over a five-year period.
g. Affiliated Brokerage. An affiliated person of the Fund may serve as
its broker in connection with portfolio transactions. See Item 21.
2. Non-resident Managers. Not applicable.
3. Control Persons. None.
ITEM 10. CAPITAL STOCK, LONG-TERM DEBT AND OTHER SECURITIES.
The Fund is authorized to issue an unlimited number of shares of
beneficial interest. The Fund has issued and outstanding one class of
capital stock: common shares of beneficial interest, without par value.
Shareholders will have no control of the Fund's business but may exercise
the rights and powers of a Shareholder under the Declaration of Trust,
including, without limitation, voting, approval, consent and similar rights
required under the Investment Company Act for voting security holders.
Meetings of the Shareholders, if any, will generally be held only when
necessary to comply with the requirements of the Investment Company Act.
Each Shareholder will have one vote for each Share held by him or her, and a
fractional vote for each fractional Share so held. Holders may vote in
person or by proxy. The presence in person or by proxy of Shareholders
holding more than 50% of the Shares constitutes a quorum at any meeting.
The liability of Shareholders will, except as otherwise provided by law,
be limited to the amount of their respective capital contributions.
All Shareholders will receive annual reports containing financial
statements audited by the Fund's independent certified public accountants,
consisting of a balance sheet, a statement of operations and a statement of
cash flows together with a list of the Fund's investment portfolio. In
addition, on or about March 15 of each year, Shareholders will receive from
the Administrator, or its agent, federal tax information, including an IRS
Form 1065, Schedule K-1, for use in the preparation of Shareholders' federal
income tax returns. Unaudited semi-annual reports will also be furnished to
the Shareholders.
Distributions of cash from investment income will be made quarterly in
such amounts as the Trustees, in their sole discretion, may determine.
Distributions of cash from realized capital gains will be made at least once
annually in years in which such gains are realized. The Trustees intend to
make distributions to Shareholders of at least 50% of the Fund's net
investment income, 50% of net realized short-term capital gains and 30% of
net realized long-term capital gains, if any. Such distributions will be
reduced to the extent foreign tax credits are allocated to Shareholders with
respect to such year.
No transfer by a Shareholder of his or her Shares shall be effective
unless made in accordance with the provisions of the Declaration of Trust.
No transfer of Shares may be made without the consent of the Adviser
Trustee, which consent may be withheld in its sole discretion for any reason
or for no reason. In addition, no transfer of Shares may be made unless, in
the opinion of counsel for the Fund, such transfer would not result in a
termination of the Fund for purposes of Section 708 of the Internal Revenue
Code. The Declaration of Trust authorizes the Trustees to impose additional
restrictions on transfers of interest in the Fund or redemptions in order to
ensure that the Fund will not be classified as a publicly traded partnership
subject to tax as a corporation.
Shares may be sold, transferred, assigned or otherwise disposed of by a
Shareholder only if, in the opinion of counsel, such transfer or assignment
would not violate federal securities laws or state securities or "blue sky"
laws (including investor suitability standards). The Declaration of Trust
provides, however, that a Shareholder who is a natural person may assign his
or her beneficial interest in the Shares to a spouse, child, parent or other
close relative or to any non-profit organization which qualifies under
Section 501(c)(3) of the Internal Revenue Code, or to a trust of which such
a person or entity is the beneficiary, and that such beneficial interest in
the Shares may be transferred by operation of law to the estate of a
deceased Shareholder without the consent of the Adviser Trustee; provided
that, in the absence of the foregoing consents, such assignee or estate will
be entitled only to the transferor Shareholder's economic interest in the
profits, losses and capital of the Fund, but will not be entitled to the
corresponding voting rights of such Shareholder. An assignment of a
Shareholder's interest in accordance with and subject to the foregoing will
be recognized by the Fund when it has received written notice of such
assignment in form satisfactory to the Adviser Trustee, signed by both
parties, and a representation from the parties that the assignment was
lawful. Such an assignment will be effective as of the first day of the
quarter following the fiscal quarter in which such notice is filed with the
Fund. In no event shall all or any part of a Shareholder's Shares be
assigned to a minor or an incompetent, unless in trust for the benefit of
such person.
The following table sets forth the authorized shares of the Fund, the
number of shares held by the Fund for its own account and the total number
of shares outstanding as of July 31, 1996:
Amount held by Fund Amount Outstanding
Amount for own as of
Class of Shares Authorized account July 31, 1996
- --------------- ---------- ----------------- -------------------
Common Shares of
Beneficial Interest, unlimited none 153,700.844
without par value
ITEM 11. DEFAULTS AND ARREARS ON SENIOR SECURITIES.
Not Applicable.
ITEM 12. LEGAL PROCEEDINGS.
None.
ITEM 13. TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.
Not Applicable.
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
ITEM 14. COVER PAGE.
Not Applicable.
ITEM 15. TABLE OF CONTENTS.
Not Applicable.
ITEM 16. GENERAL INFORMATION AND HISTORY.
Not Applicable.
ITEM 17. INVESTMENT OBJECTIVES AND POLICIES.
See Item 8.
ITEM 18. MANAGEMENT.
See Item 9.
ITEM 19. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
None.
ITEM 20. INVESTMENT ADVISORY AND OTHER SERVICES.
See Item 9.
ITEM 21. BROKERAGE ALLOCATION AND OTHER PRACTICES.
Subject to policies established by the Trustees of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment
Adviser seeks to obtain the best results for the Fund, taking into account
such factors as price (including the applicable fee, commission or spread),
size of order, difficulty of execution and operational facilities of the
firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive fee or
commission rates, the Fund does not necessarily pay the lowest commission or
spread available.
The Fund has no obligation to deal with any bank, broker or dealer in
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms which provided supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Information so received will
be in addition to and not in lieu of the services required to be performed
by the Investment Adviser under the Investment Advisory Agreement and the
expenses of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information.
ITEM 22. TAX STATUS.
It is the Fund's tax counsel's opinion, based on certain representations
made to tax counsel by the Adviser Trustee, that the Fund will be classified
as a partnership and not as a corporation, and each Shareholder will be
treated as a partner in the Fund for federal income tax purposes upon his or
her admission to the Fund. This conclusion is based on representations made
to tax counsel by the Adviser Trustee regarding the interest in the Fund to
be retained by the Adviser Trustee.
The Fund will file a federal partnership information return, but the
Fund will not, as an entity, be subject to federal income tax liability.
Each Shareholder will be required to report on his or her personal federal
income tax return his or her allocable share of the Fund's income, gains,
losses, deductions and other tax items, even if no cash or other property is
distributed to a Shareholder.
Partnership income will generally be allocated to all Shareholders based
on the number of Shares held by each of them. Allocation of the taxable
gain or loss on a sale of securities, including securities contributed by
the Shareholders, is subject to special rules. Each Shareholder will
include his or her share of the Fund's taxable income for its full taxable
year that ends within or with such Shareholder's taxable year.
The Fund will furnish annually to each Shareholder a report containing
an IRS Form 1065, Schedule K-l that indicates such Shareholder's
distributive share for such year of the Fund's taxable income or loss and
other tax items for use in the preparation of the Shareholder's personal
income tax return.
The Fund intends to refrain from taxable sales or dispositions of
contributed securities to the extent it is prudent to do so.
Upon a taxable sale or other taxable disposition of contributed
securities, the Fund will recognize taxable gain equal to the difference
between the amount realized and the Fund's tax basis in the securities
disposed of. The tax basis of securities contributed to the Fund will be
the same as the contributing Shareholder's tax basis in such securities
increased by any gain recognized by the Shareholder on the contribution.
Section 704(c) of the Internal Revenue Code specifies rules for the
allocation of taxable gain or loss subsequently realized with respect to
appreciated or depreciated property contributed to a partnership. In
general, such rules require that the portion of the gain (or loss) equal to
the built-in gain (or loss) must be allocated solely to the partner who
contributed the property with the built-in gain (or loss). In addition,
gain or loss on partnership assets occurring after contribution must be
allocated so as to take into account the varying interests of the partners
during the period of appreciation or depreciation. The Treasury Department
has issued final Treasury Regulations under Internal Revenue Code Section
704(c) that generally allow a partnership to adopt specified reasonable
methods for allocating built-in gains and losses to the contributing
partners.
The Declaration of Trust authorizes the making of allocations and the
adoption of conventions as necessary or appropriate to comply with the
current Treasury Regulations and any future Treasury Regulations or IRS
administrative interpretations. The Fund intends to implement the "remedial
allocation method" which is permitted by the current Treasury Regulations.
Consequently, if the Fund disposes of a contributed security in a taxable
transaction, an amount equal to the difference between the Fund's adjusted
tax basis in the security and the fair market value of such security on the
date of its contribution to the Fund will be allocated to the contributing
Shareholder as taxable gain. Additionally, an amount equal to the
difference between the fair market value of such security on the date of its
contribution to the Fund and the amount received on the disposition of the
security by the Fund will be an item of gain or loss, as the case may be,
which would be allocated among all Shareholders. The Adviser Trustee may
alter this allocation method in the event of future Treasury Regulations or
an administrative interpretation of the IRS that provides greater guidance
or a more simplified allocation method.
The Fund also intends to account for any shifts in precontribution gain
caused by the distribution of securities (other than securities contributed
by the receiving Shareholder) in a manner generally designed to preserve to
each Shareholder the amount of the Shareholder's precontribution gain.
The allocations to be employed by the Fund are intended to conform to
the Treasury Regulations under Internal Revenue Code Sections 704(b) and
704(c).
ITEM 23. FINANCIAL STATEMENTS.
SOMERSET EXCHANGE FUND
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (UNAUDITED)
COMMON STOCK Market Value
Sectors Industries Investments Shares (Note 1a)
<S> <C> <C> <C> <C>
Basic Materials Aluminum MAXXAM Group, Inc.+ 64,000 $ 2,560,000
Chemicals du Pont (E.I.) de Nemours & Co. 20,000 1,615,000
Chemicals - Diverse Airgas, Inc.+ 24,000 444,000
Paper & Forest Products Longview Fibre Co. 29,140 451,670
Capital Goods Electrical Equipment AFC Cable Systems, Inc.+ 20,000 320,000
General Electric Co. 13,971 1,150,861
Honeywell, Inc. 5,715 302,895
Engineering & Construction Jacobs Engineering Group, Inc.+ 77,250 1,554,656
Manufacturing Dover Corp. 6,900 295,838
Pollution Control World Fuel Services Corp.* 46,000 663,288
Consumer Auto Parts Bandag, Inc. (Class A) 6,200 280,549
Cyclicals
Entertainment Pinnacle Systems, Inc.+ 60,000 776,250
Walt Disney Company (The) 29,000 1,613,125
Hotel/Motel Harrah's Entertainment, Inc.+ 40,000 880,000
Household Furniture & Basset Furniture Industries, Inc. 12,000 267,000
Appliances Leggett & Platt, Inc. 43,000 1,118,000
Leisure Time Grand Casinos, Inc.*+ 61,300 946,582
Office Equipment & Supplies Alco Standard Corp. 10,000 437,500
Publishing - Newspaper Times Mirror Co. 11,330 468,779
Restaurants Bob Evans Farms, Inc. 50,000 700,000
Boston Chicken, Inc.+ 30,000 795,000
Darden Restaurants, Inc. 18,605 146,514
McDonald's Corp. 4,255 197,326
Rainforest Cafe, Inc.*+ 15,000 294,638
Retail - General Merchandise Casey's General Stores, Inc.* 15,000 236,283
Retail - Specialty Amplicon, Inc. 62,500 1,023,438
Office Depot, Inc.+ 48,000 684,000
Regis Corp. 20,000 440,000
Sunglass Hut International, Inc.*+12,000 122,087
Specialized Services Career Horizons, Inc.+ 20,000 562,500
Catalina Marketing Corporation+ 23,000 1,012,000
Service Corporation International* 6,000 291,092
ServiceMaster L.P.+ 36,675 829,772
Textiles - Apparel Russell Corp. 19,900 $ 666,650
Manufacturing St. John Knits, Inc.* 59,954
2,042,477
Consumer Staples Beverages - Soft Drink Coca-Cola Co. 13,800 646,875
PanAmerican Beverages, Inc. 14,000 603,750
Foods Archer-Daniels-Midland Co. 10,366 183,997
General Mills, Inc. 4,000 217,000
Heinz (H.J.) Co. 16,200 536,625
Ralston Purina Co. 6,000 376,500
Household Products Procter & Gamble Co. 11,081 990,364
Retail - Food Chains Albertson's, Inc. 7,500 307,500
Safeway, Inc.+ 12,000 432,000
Smart & Final, Inc.* 60,000 1,197,084
Tobacco Philip Morris Companies, Inc. 13,671 1,430,328
UST, Inc. 100,000 3,325,000
Energy Oil - International Exxon Corp. 16,500 1,357,125
Healthcare Healthcare - Diverse Abbott Laboratories 37,685 1,658,140
Johnson & Johnson Co. 19,600 935,900
Warner-Lambert Co. 5,500 299,750
Healthcare - Drugs Pfizer, Inc. 10,200 712,725
Watson Pharmaceuticals, Inc.+ 100,000 3,900,000
Healthcare - HMOs Medpartners/Mullikin Inc.+ 13,600 255,000
Medpartners/Mullikin Inc.*+ 161,400 2,642,409
Mid-Atlantic Medical Services, 21,240 265,500
Inc.
Healthcare - Miscellaneous Apria Healthcare Group, Inc.*+ 39,060 758,467
Community Care of America, Inc.*+ 35,000 214,144
Exogen, Inc.*+ 35,000 161,956
Healthsouth Rehabilitation Corp.*+28,000 686,610
HEARx, Ltd.*+ 60,000 181,314
Horizon/CMS Healthcare Corp.*+ 68,451 567,822
OccuSystems, Inc.*+ 36,145 877,434
Hospital Management Tenet Healthcare Corp.+ 25,000 484,375
Medical Products Saint Jude Medical, Inc.*+ 50,000 1,453,290
Interest Banks - Money Center Chase Manhattan Corp. 5,000 347,500
Sensitive Banks - Regional First Union Corporation 4,200 $ 266,700
Northern Trust Corp. 9,450 558,731
PNC Bank Corp. 18,860 549,297
Wells Fargo & Company 2,100 489,038
Financial - Miscellaneous First USA, Inc. 14,991 732,685
Forest City Enterprises, Inc. 22,000 926,750
Mercury Finance Company 37,000 402,375
Student Loan Marketing Association 4,110 300,030
Insurance - Brokers Marsh & McLennan Companies, Inc. 4,400 398,750
Insurance - Life John Alden Financial Corporation 11,536 232,162
Insurance - Multiline American International Group, Inc. 5,015 472,037
Insurance - Property Commerce Group, Inc. 50,000 1,031,250
Savings & Loan Ahmanson (H.F.) & Co. 50,400 1,272,600
CCB Financial Corp. 6,643 343,775
Miscellaneous Miscellaneous Imation Corporation 286 6,506
Minnesota Mining & Manufacturing 2,860 185,900
Co.
Technology Communications - Equipment MFS Communications Co., Inc.+ 9,176 289,044
Computer Software Informix, Corp.+ 13,273 289,517
Parametric Technology Company+ 7,000 291,375
SunGard Data Systems, Inc.+ 8,100 331,088
Computer Systems 3Com Corp.*+ 6,000 217,638
Cerplex Group, Inc.*+ 50,000 298,895
COMPAQ Computer Corp.+ 6,300 344,925
Hewlett-Packard Co. 16,000 704,000
International Business Machines 6,500 701,187
Corp. 10,000 183,750
Stratus Computer, Inc.
Electronics - Instruments GenRad, Inc.+ 25,000 371,875
Electronics - Semiconductors Intel Corporation 4,000 300,500
Motorola, Inc. 31,500 1,701,000
Solectron Corp.+ 9,750 307,125
Telecommunications - Long AT&T Corp. 8,200 427,425
Distance
Transportation Truckers Anuhco, Inc.+ 34,221 269,490
Caliber Systems, Inc. 8,600 156,950
Utilities Electric Utilities Citizens Utilities Company (Class 25,000 $ 275,000
A)
Telephone ALLTEL Corp.* 35,000 849,646
C-TEC Corp. (Class B)+ 35,000 848,750
Telephone & Data Systems, Inc. 11,300 436,462
Preferred Stock Banks - Foreign Banesto Holdings (10.50%, Series
A) (ADR)** 476,786 13,945,991
Indosuez Holdings, S.C.A. 379,000 10,327,750
(10.375%, Series A) (ADR)**
Face
Short-Term Investments Amount
---------------------- ------
Commercial Paper*** Ford Motor Credit Co., 5.72%
due 8/01/1996 $1,915,000 1,914,696
Gross Contributions . . . . . . . 98,148,919
Interest Rate Swaps . . . . . . . (56,880)
Liabilities in Excess of Other
Assets . . . . . . . . . . . . . (28,220,933)
-----------
Net Assets . . . . . . . . . . . $69,871,106
============
* Restricted security. The value of the Fund's investment in restricted securities
was approximately $13,919,000, representing 19.9% of net assets.
</TABLE>
<TABLE>
<CAPTION> JULY 31, 1996
SCHEDULE OF INVESTMENTS (UNAUDITED)
Acquisition Market Value
Issue Date # Cost (Note 1a)
- ----- ------------ --------- -------------
<S> <C> <C> <C>
3Com Corp. 7/11/1996 $ 273,000 $ 217,638
ALLTEL Corp. 7/11/1996 1,041,250 849,646
Apria Healthcare Group, Inc. 7/11/1996 1,122,975 758,467
Casey's General Stores, Inc. 7/11/1996 281,250 236,283
Cerplex Group, Inc. 7/11/1996 343,750 298,895
Community Care of America, Inc. 7/11/1996 273,438 214,144
Exogen, Inc. 7/11/1996 288,750 161,955
Grand Casinos, Inc. 7/11/1996 288,750 161,956
Healthsouth Rehabilitation Corp. 7/11/1996 973,000 686,610
HEARx, Ltd. 7/11/1996 367,500 181,314
Horizon/CMS Healthcare Corp. 7/11/1996 855,638 567,822
Medpartners/Mullikin Inc. 7/11/1996 3,086,775 2,642,409
OccuSystems, Inc. 7/11/1996 1,125,013 877,434
Rainforest Cafe, Inc. 7/11/1996 395,625 294,638
Saint Jude Medical, Inc. 7/11/1996 1,653,125 1,453,290
Service Corporation International 7/11/1996 336,000 291,092
Smart & Final, Inc. 7/11/1996 1,507,500 1,197,084
St. John Knits, Inc. 7/11/1996 2,682,942 2,042,477
Sunglass Hut International, Inc. 7/11/1996 237,000 122,087
World Fuel Services Corp. 7/11/1996 828,000 663,288
Total $17,961,281 $13,918,529
=========== ===========
</TABLE>
** American Depository Receipts (ADR).
*** Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
# For Federal income taxes, the date the contributing shareholder
acquired the security represents the acquisition date.
+ Non-income producing securities.
See Notes to Financial Statements.
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of July 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets: Investments, at value (identified cost-$104,964,149) (Note $98,148,919
1a) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 266
Receivables:
Securities sold . . . . . . . . . . . . . . . . . . $1,909,000
Dividends . . . . . . . . . . . . . . . . . . . . . 33,270 1,942,270
Deferred organization expenses (Note 1e) . . . . . . . . ---------- 300,701
Prepaid registration fees and other assets (Note 1e) . . 8,000
----------
Total assets . . . . . . . . . . . . . . . . . . . . . . 100,400,156
Liabilities: Loans (Note 4) . . . . . . . . . . . . . . . . . . . . . 28,000,000
Interest rate swaps (Notes 1b & 3) . . . . . . . . . . . 56,880
Payables:
Securities purchased . . . . . . . . . . . . . . . . 1,914,696
Loaned securities and extended deliveries . . . . . 116,459
Investment adviser (Note 2) . . . . . . . . . . . . 24,416
Administrator (Note 2) . . . . . . . . . . . . . . . 8,138 2,063,709
Accrued expenses and other liabilities . . . . . . . . . --------- 408,461
----------
Total liabilities . . . . . . . . . . . . . . . . . . . . 30,529,050
----------
Net Net assets . . . . . . . . . . . . . . . . . . . . . . . $69,871,106
Assets: -----------
Net Assets Capital stock . . . . . . . . . . . . . . . . . . . . . . $76,850,424
Consist Accumulated investment loss-net . . . . . . . . . . . . . (107,208)
of: Unrealized depreciation on investments-net . . . . . . . (6,872,110)
Net assets - Equivalent to $454.59 Per Share Based on -----------
153,700 Shares of Beneficial Interest Outstanding . . . $69,871,106
-----------
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Period July 11, 1996+ to July 31, 1996
<S> <C> <C> <C>
Investment Dividends . . . . . . . . . . . . . . . . . . . . . . . $27,941
Income
(Note 1d): Interest and amortization of discount earned . . . . . 5,167
-------
Total income . . . . . . . . . . . . . . . . . . . . . 33,108
-------
Expenses: Interest expense . . . . . . . . . . . . . . . . . . . $98,847
Investment advisory fees (Note 2) . . . . . . . . . . . 24,416
Administrative fees (Note 2) . . . . . . . . . . . . . 8,138
Professional fees . . . . . . . . . . . . . . . . . . . 3,839
Amortization of organization expenses (Note 1e) . . . . 3,333
Printing and shareholder reports . . . . . . . . . . . 768
Trustees' fees and expenses . . . . . . . . . . . . . . 741
Pricing fees . . . . . . . . . . . . . . . . . . . . . 110
Registration fees (Note 1e) . . . . . . . . . . . . . . 14
Other . . . . . . . . . . . . . . . . . . . . . . . . . 110
Total expenses . . . . . . . . . . . . . . . . . . . . ------ 140,316
----------
Investment income-net . . . . . . . . . . . . . . . . . (107,208)
----------
Unrealized Unrealized depreciation on investments . . . . . . . . (6,872,110)
Loss on ----------
Investments
(Notes 1b, NET DECREASE IN NET ASSETS RESULTING FROM
1d): OPERATIONS . . . . . . . . . . . . . . . . . . . . . . ($6,979,318)
============
+ Commencement of Operations.
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
Increase (Decrease) in Net Assets: July 11, 1996+
to
July 31, 1996
<S> <C> <C>
Operations: Investment income-net . . . . . . . . . . . . . . . . . . . . $ (107,208)
Unrealized depreciation on investments . . . . . . . . . . . (6,872,110)
--------------
Net decrease in net assets resulting from operations . . . . (6,979,318)
--------------
Beneficial Net increase in net assets derived from beneficial interest
Interest transactions . . . . . . . . . . . . . . . . . . . . . . . . 76,850,424
Transactions: -------------
Net Total increase in net assets . . . . . . . . . . . . . . . . 69,871,106
Assets:
Beginning of period . . . . . . . . . . . . . . . . . . . . . -
-------------
End of period* . . . . . . . . . . . . . . . . . . . . . . . $69,871,106
*Accumulated net investment loss-net . . . . . . . . . . . . $ (107,208)
+ Commencement of Operations.
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED
IN THE FINANCIAL STATEMENTS. For the Period
July 11, 1996+ to
Increase (Decrease) in Net Asset Value: July 31, 1996
- -------------------------------------- -----------------
<S> <C> <C>
Per Share Net asset value, beginning of period . . . . . . . . . . . $500.00
Operating Investment loss-net . . . . . . . . . . . . . . . . . . . . (0.70)
Performance: Unrealized loss on investments-net . . . . . . . . . . . . (44.71)
Total from investment operations . . . . . . . . . . . . . (45.31)
Net asset value, end of period . . . . . . . . . . . . . . $454.59
Ratios to Expenses excluding interest expense . . . . . . . . . . . . .99% *
Average Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 3.36% *
Assets: Investment income-net . . . . . . . . . . . . . . . . . . . (2.57%) *
Supplemental Net assets, end of period (in thousands) . . . . . . . . . $69,871
Data: Portfolio turnover . . . . . . . . . . . . . . . . . . . . 0.00%
* Annualized.
+ Commencement of Operations.
See Notes to Financial Statements
</TABLE>
SOMERSET EXCHANGE FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Somerset Exchange Fund (the "Fund"), a Delaware business trust, is registered
under the Investment Company Act of 1940 as a diversified, closed-end
management investment company. Investments in the Fund were made by
investors contributing publicly-traded equity securities in exchange for
shares of beneficial interest in the Fund. Shares of beneficial interest
will be illiquid unless and until shareholders vote to convert the Fund into
an open-end investment company (or, if appropriate, an interval fund, which
is a closed-end investment company which makes scheduled periodic repurchase
offers, if at that time redemptions in kind are permissible). No present
market exists for the shares of beneficial interest and none is expected to
develop. The Fund will not be listed on an exchange or otherwise be regularly
traded. No provision will be made initially for the Fund to provide liquidity
through cash tender offers or other means that may be available to closed-end
investment companies. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of securities - Securities for which market quotations are
readily available and which are not restricted securities , including listed
options and futures contracts, will be valued at their current market values
in the principal market in which such securities are normally traded. The
value of equity securities that are not restricted securities listed on the
New York or American Stock Exchanges or listed on the NASDAQ National Market
System shall be the closing sale prices or, lacking any closing prices, the
last available bid price. Equity securities that are not restricted
securities and not listed on the New York or American Stock Exchanges but
that are listed on any other securities exchange shall be valued as if
listed on the New York Stock Exchange, providing the closing of trading
coincides. If the close of trading on such securities exchange does not
coincide with the closing of trading on the New York Stock Exchange, the
value shall be based on the latest available price data at the time of
determination of net asset value. Unlisted readily marketable equity
securities that are not restricted securities shall be valued at the
latest bid price in the over-the- counter market.
Merrill Lynch Asset Management, L.P. ("MLAM"), subject to the supervision of
the Trustees of the Fund, will generally value restricted securities at
discounts to the fair market value of freely tradable securities of the same
class. United States Trust Company of New York may assist MLAM in the
valuation of restricted securities. It is expected that such discounts,
which may vary with respect to particular securities, will range initially
between 5% and 25% of the fair market value of freely tradable securities
with such discounts diminishing until the time the restricted securities
become freely tradable.
Pursuant to procedures authorized by the Trustees of the Fund, the preferred
stock holdings will be valued at fair value as determined by MLAM or its
designee, after consideration of all relevant factors, data and information,
which may include information from various firms with knowledge of such
issues, and the prices of comparable preferred stock issues. Unlisted
options and interest rate and equity swaps will be valued at their fair
values determined in good faith by or on behalf of the Trustees of the Fund.
(b) Derivative financial instruments - The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt and equity markets. Losses may arise
due to changes in the value of the contract or if the counterparty does not
perform under the contract.
- - Options - The Fund is authorized to write call options and purchase put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market to reflect the
current market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis
of the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).The Fund does
not expect to sell securities contributed by shareholders upon exercise of
written call options and purchased put options.
Written and purchased options are non-income producing investments.
- - Financial futures contracts - The Fund may purchase or sell financial
futures contracts as a hedge against adverse changes in interest rates and
the stock market. A futures contract is an agreement between two parties to
buy and sell a security, respectively, for a set price on a future date.
Upon entering into a contract, the Fund deposits and maintains as collateral
such initial margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in value of
the contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains or losses. When the contract
is closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed.
- - Interest rate swaps - The Fund is authorized to enter into interest rate
swaps and purchase or sell interest rate caps and floors. In an interest
rate swap, the Fund exchanges with another party their respective
commitments to pay or receive interest on a specified notional principal
amount. The purchase of an interest rate cap (or floor) entitles the
purchaser, to the extent that a specified index exceeds (or falls below) a
predetermined interest rate, to receive payments of interest equal to the
difference between the index and the predetermined rate on a notional
principal amount from the party selling such interest rate cap (or floor).
(c) Income taxes - The Fund will be treated as a partnership for federal
income tax purposes. As a partnership for federal income tax purposes, the
Fund will not incur federal income tax liability. Items of partnership
income, gain, loss and deduction will pass through to the shareholders as
partners in the Fund.
(d) Security transactions and investment income - Interest income (including
amortization of discount) is recognized on the accrual basis. Dividend
income is recorded on the ex-dividend date. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses - Deferred organization expenses are
charged to expense over a five-year period.
(f) Distributions - Distributions of cash from investment income will be
made quarterly in such amounts as the Trustees of the Fund may determine.
Distributions of cash from realized capital gains will be made at least once
annually in years in which such gains are realized.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The Fund
has entered into an Investment Advisory Agreement with MLAM. The general
partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc., ("ML & Co."), which
is the limited partner.
MLAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operation of the Fund. For such services, the Fund pays a
quarterly fee of 0.60%, on an annual basis, of the Fund s average weekly net
assets.
The Fund has also entered into an Administration Agreement with MLAM whereby
MLAM will provide or arrange for the provision of administrative services
(other than investment advice and related portfolio activities) necessary
for the operation of the Fund. For such services, the Fund pays a quarterly
fee of 0.20%, on an annual basis, of the Fund's average weekly net assets.
MLAM has entered into a Sub-Administration Agreement with United States
Trust Company of New York ("U.S. Trust") pursuant to whicih U.S. Trust
performs certain administrative services in connection with the Fund.
MLAM cmpensates U.S. Trust for such services directly out of its fee with
no additional cost to the Fund. MLAM has also entered into an agreement
with U.S. Trust pursuant to which U.S. Trust performs certain ongoing
shareholder services. MLAM compensates U.S. Trust directly for such services
with no additional cost to the Fund.
Certain officers and/or directors of the Fund are officers and/or directors
of MLAM, PSI, Merrill Lynch and/or ML & Co.
The Fund has entered into a loan agreement with Merrill Lynch International
Bank, a wholly-owned indirect subsidiary of ML & Co. The interest rate on
borrowed funds is reset at regular intervals based upon a fixed and pre-
determined spread referenced to LIBOR. Interest on the amount of outstanding
borrowings and a commitment fee of .10% on the unused amount of the
loan commitment is payable periodically.
3. INVESTMENTS: Net unrealized losses as of July 31, 1996 were as follows:
Unrealized
Losses
Long-term investments........ $(6,815,230)
Interest rate swaps......... ------
(56,880)
- -------
Total........................
$(6,872,110)
The Fund has entered into the following interest rate swaps as of July 31,
1996:
Notional Interest Received Interest Paid
------------------------- -------------------------
Amount Expiration
Date Current Rate Type Current Rate Type
$24,000,000 5.688% Variable* 6.89%
Fixed 7/15/2001
*3 month LIBOR at reset date.
4. SHORT-TERM BORROWINGS:
On July 11, 1996, the Fund entered into a loan commitment in the amount of
$28,000,000.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENT AND EXHIBITS.
(1) Financial Statements.
Schedule of Investments as of July 31, 1996 (unaudited).
Statement of Assets and Liabilities as of July 31, 1996
(unaudited).
Statement of Operations for the period July 11, 1996
(commencement of operations) to July 31, 1996 (unaudited).
Statement of Changes in Net Assets for the period July 11,
1996 (commencement of operations) to July 31, 1996 (unaudited).
Financial Highlights for the period July 11, 1996
(commencement of operations) to July 31, 1996 (unaudited).
(2) Exhibits:
Exhibit
Letter Description
- ------ -----------
(a) Seconded Amended and Restated Declaration of Trust
("Declaration of Trust") of Registrant.
(b) Form of By-Laws of Registrant.
(c) Not applicable.
(d) Portions of the Declaration of Trust and By-Laws of the
Registrant defining the rights
of holders of shares of the Registrant. (a)
(e) Not applicable.
(f) Loan Agreement between the Registrant and Merrill
Lynch International Bank Limited.
(g) (1) Investment Advisory Agreement between Registrant and Merrill
Lynch Asset Management, L.P.
(2) Administration Agreement between Registrant and Merrill Lynch
Asset Management, L.P.
(3) Sub-Administration Agreement between Merrill Lynch Asset
Management, L.P. and United
States Trust Company of New York.
(h) Not applicable.
(i) Not applicable.
(j) Custodian Contract between Registrant and The Chase Manhattan
Bank, N.A.
(k) Shareholder Transfer Agency Agreement between Registrant and
The Chase Manhattan Bank, N.A.
(l) Not applicable.
(m) Not applicable.
(n) Not applicable.
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Financial data schedule. (b)
- -------------
(a) Reference is made to Articles III, V, VI, VIII and X of the Registrant's
Declaration of Trust, filed as Exhibit (a); and to Articles IX and XI of the
Registrant's By-Laws, filed as Exhibit (b).
(b) To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
Not applicable.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Not applicable.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 28. NUMBER OF HOLDERS AND SECURITIES.
Number of Holders
Title of Class July 31, 1996
- ------------------- ----------------
Shares of beneficial interest,
without par value . . . . . . . . . . . . . 119
ITEM 29. INDEMNIFICATION.
Reference is made to Article VIII of Declaration of Trust and Article X
of By-Laws. Article VIII of the Declaration of Trust provides that each
person who is or was a Trustee (including an Adviser Trustee), officer,
employee or agent of the Registrant or who serves or has served at the
Registrant's request as a director, officer or trustee of another person in
which the Registrant has or had any interest as a shareholder, creditor or
otherwise shall be entitled to indemnification out of the assets of the
Registrant to the extent provided in, and subject to the provisions of, the
By-Laws, provided that no indemnification shall be granted by the Registrant
in contravention of applicable law.
Article X of the By-Laws provides that, to the fullest extent permitted
by law, the Registrant shall indemnify each of its Trustees and officers
(including persons who serve at the Registrant's request as directors,
officers or trustees of another person in which the Registrant has any
interest as a shareholder, creditor or otherwise) (hereinafter referred to
as a "Covered Person") against all liabilities and expenses, including but
not limited to amounts paid in satisfaction of judgments, in compromise or
as fines and penalties, and counsel fees reasonably incurred by any Covered
Person in connection with the defense or disposition of any action, suit or
other proceeding, whether civil, criminal, administrative or investigative,
before any court or administrative or legislative body, in which such
Covered Person may be or may have been involved as a party or otherwise or
with which such person may be or may have been threatened, while in office
or thereafter, in any way relating to the Registrant or by reason of being
or having been such a Trustee or officer, except with respect to any matter
as to which such Covered Person shall have been finally adjudicated in a
decision on the merits in any such action, suit or other proceeding not to
have acted in good faith in the reasonable belief that such Covered Person's
action was in the best interests of the Registrant and except that no
Covered Person shall be indemnified against any liability to the Registrant
or its Shareholders to which such Covered Person would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered Person's
office. Expenses, including counsel fees so incurred by any such Covered
Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), shall be paid from time to time by the
Registrant in advance of the final disposition of any such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Covered
Person to repay amounts so paid by the Registrant if it is ultimately
determined that indemnification of such expenses is not authorized under
this Article, provided that (a) such Covered Person shall provide security
- ------ for his undertaking, (b) the Registrant shall be insured against
losses arising by reason of such Covered Person's failure to fulfill his
undertaking, or (c) a majority of the Trustees who are disinterested persons
and who are not Interested Persons (as that term is defined in the
Investment Company Act of 1940) (provided that a majority of such Trustees
then in office act on the matter), or independent legal counsel in a written
opinion, shall determine, based on a review of readily available facts (but
not a full trial-type inquiry), that there is reason to believe such Covered
Person ultimately will be entitled to indemnification.
The Registrant may purchase insurance on behalf of an officer or Trustee
protecting such person to the full extent permitted under the general laws
of the State of Delaware from liability arising from his activities as
officer or Trustee of the Registrant. The Registrant, however, may not
purchase insurance on behalf of any officer or Trustee of the Registrant
that protects or purports to protect such person from liability to the
Registrant or to its stockholders to which such officer or director 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.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Director,
officer, or controlling person of the Registrant and the principal
underwriter in connection with the successful defense of any action, suit or
proceeding) is asserted by such Director, officer or controlling person or
the principal underwriter in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or
"MLAM"), acts as investment adviser for the following open-end investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch Institutional Intermediate Fund, Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Puerto Rico Tax-Exempt Fund, Inc., Merrill
Lynch Ready Assets Trust, Merrill Lynch Retirement Asset Builder Program,
Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch Utility Income Fund, Inc. and Merrill Lynch Variable Series Funds,
Inc. and the following closed-end investment companies: Convertible
Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., and Merrill Lynch Senior Floating Rate
Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser which term as sued in this Item includes its corporate predecessors)
acts as the investment adviser for the following open-end investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., Emerging Tigers Fund
Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and the
following closed-end investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Muni
Assets Fund, Inc., MuniEnhanced Fund, Inc, MuniInsured Fund, Inc., MuniVest
Fund, inc., MuniVest Fund II, Inc. MuniVest California Insured Fund, Inc.,
MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund., Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Senior High Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNewYork Holdings, Inc. and WorldWide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series, Merrill Lynch Institutional Tax-Exempt Fund and Merrill
Lynch Institutional Intermediate Fund is One Financial Center, 23rd Floor,
Boston, Massachusetts 02110-2646. The address of the Investment Adviser and
FAM is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch and Merrill Lynch & Co., Inc. ("ML&Co.") is World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281. The
address of Merrill Lynch Financial Data Services, Inc. ("MLFDS") is 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been
engaged since August 1, 1993 for his, her or its own account or in the
capacity of director, officer, partner or trustee. In addition, Mr. Zeikel
is President, Mr. Glenn is Executive Vice President and Mr. Richard is
Treasurer of all or substantially all of the investment companies described
in the preceding paragraph. Messrs. Zeikel, Glenn and Richard also hold the
same position with all or substantially all of the investment companies
advised by FAM as they do with those advised by the Investment Adviser.
Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors or
officers of one or more of such companies.
<TABLE>
<CAPTION> Position with Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
------ ------------------ ----------------------------------
<S> <C> <C>
Merrill Lynch & Co., Inc. . . . . . . Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services, Inc.,
("Princeton Services") . . . . . General Partner General Partner of FAM
Arthur Zeikel . . . . . . . . . . . . President President of FAM; President and
Director
of Princeton Services; Director of
Merrill Lynch Funds
Distributor, Inc., ("MLFD"), Executive
Vice President of ML&Co.; Executive
Vice President of Merrill Lynch
Terry K. Glenn . . . . . . . . . . . Executive Vice Executive Vice President of FAM;
President Executive Vice President and
Director of Princeton
Services; President and Director of
MLFD; Director of
Merrill Lynch Financial Data Services,
Inc.; President of Princeton
Administrators
Vincent R. Giordano . . . . . . . . . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Elizabeth Griffin . . . . . . . . . . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Norman R. Harvey . . . . . . . . . . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
N. John Hewitt . . . . . . . . . . . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Philip L. Kirstein . . . . . . . . . Senior Vice President Senior Vice President, General Counsel
and Secretary of FAM; Senior Vice
President, General
Counsel, Director and Secretary of
Princeton Services;
Director of MLFD
Ronald M. Kloss . . . . . . . . . . . Senior Vice President Senior Vice President and Controller
and Controller of FAM: Senior Vice President and
Controller of Princeton
Services
Stephen M.M. Miller . . . . . . . . . Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle, Jr. . . . . . . . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Richard L. Reller . . . . . . . . . . Senior Vice President First Vice President of FAM; First
Vice
President of Princeton Services
Gerald M. Richard . . . . . . . . . . Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM: Senior Vice President and
Treasurer of Princeton
Services; Vice President and Treasurer
of MLFD
Ronald L. Welburn . . . . . . . . . . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Anthony Wiseman . . . . . . . . . . . Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
Rules thereunder will be maintained at the offices of the Registrant at 800
Scudders Mill Road, Plainsboro, New Jersey 08536 and the offices of
Investment Adviser at 500 College Road, Princeton, New Jersey 08543, except
that the books and records of the Fund with respect to custody and transfer
agency will be maintained at the offices of The Chase Manhattan Bank, N.A.,
770 Broadway, New York, New York 10003-9598.
ITEM 32. MANAGEMENT SERVICES.
Not Applicable.
ITEM 33 UNDERTAKINGS.
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the township of
Plainsboro and State of New Jersey, on the 9th day of September, 1996.
SOMERSET EXCHANGE FUND
(Registrant)
By: /s/ Eric S. Mitofsky
------------------------------
Eric S. Mitofsky, Vice President
SOMERSET EXCHANGE FUND
Second Amended and Restated Declaration of Trust
THIS AMENDED AND RESTATED DECLARATION OF TRUST, made this 8th day
of July, 1996, by the Trustees hereunder (hereinafter with any
additional and successor trustees referred to as the "Trustees") and by
the holders of shares of beneficial interest to be issued hereunder as
hereinafter provided.
W I T N E S S E T H :
WHEREAS, the Trustees have agreed to manage all property coming
into their hands as trustees of a Delaware business trust in accordance
with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold
all cash, securities and other assets, which they may from time to time
acquire in any manner as Trustees hereunder IN TRUST to manage and
dispose of the same upon the following terms and conditions for the pro
rata benefit of the holders from time to time of Shares, whether or
not certificated, in this Trust as hereinafter set forth.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as SOMERSET EXCHANGE
----------- ----
FUND.
Section 2. Definitions. Whenever used herein, unless otherwise
--------- -----------
required by the context or specifically provided:
(a) The term "Adviser Trustee" shall mean Merrill Lynch
Asset Management, L.P., a Delaware limited partnership, the business
address of which is 800 Scudders Mill Road, Plainsboro, New Jersey 08543,
and/or any Person which becomes a successor Adviser Trustee of the Trust
as provided herein, in such Person's capacity as Adviser Trustee of the
Trust;
(b) The term "Commission" shall have the meaning provided in
the 1940 Act;
(c) The "Trust" refers to the Delaware business trust established
by this Agreement and Declaration of Trust, as amended from time to time;
(d) "Shareholder" means a record owner of Shares of the Trust,
each such person constituting a beneficial owner within the meaning of the
Delaware Act;
(e) "Shares" means the equal proportionate units of interest
into which the beneficial interest in the Trust shall be divided from
time to time, and includes a fraction of a Share as well as a whole Share;
(f) The "1940 Act" refers to the Investment Company Act of 1940,
and the Rules and Regulations thereunder, all as amended from time to time;
(g) The term "Person" shall mean an individual or any
corporation, partnership, joint venture, trust or other enterprise;
(h) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust as amended or restated from time to time;
(i) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time;
(j) The term "Delaware Act" shall mean the Delaware Business
Trust Act, 12 Del. C. Section 3801, et seq.;
(k) The term "Bankruptcy" shall mean, with respect to an
Adviser Trustee, any of the following:
(i) filing a voluntary petition in bankruptcy or
for reorganization or for the adoption of an arrangement under the
Bankruptcy Code (as now or in the future amended) or an admission seeking
the relief therein provided;
(ii) making a general assignment for the benefit
of creditors;
(iii) consenting to the appointment of a receiver for all or
a substantial part of such Adviser Trustee's property;
(iv) in the case of the filing of an involuntary petition
in bankruptcy, an entry of an order for relief;
(v) the entry of a court order appointing a receiver or
trustee for all or a substantial part of such Adviser Trustee's property
without its consent; or
(vi) the assumption of custody or sequestration by a court
of competent jurisdiction of all or substantially all of such Adviser
Trustee's property;
(l) "Capital Account" shall mean the capital account of
each Shareholder established and maintained in accordance with Article III,
Section 3 of this Declaration of Trust;
(m) "Capital Contribution" shall mean, with respect to
any Shareholder, the total amount of money and the fair value of any
property (other than money) actually contributed to the Trust by such
Shareholder;
(n) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the regulations issued thereunder;
(o) "Valuation Date" shall mean the close of business on each
date as may be determined by the Trustees for all purposes of this
Declaration of Trust.
(p) "Fiscal Period" shall mean the period that starts on the
Closing Date, and thereafter each period which starts on the day immediately
following the last day of the preceding Fiscal Period, and which ends
on the first to occur of the following dates:
1. any Valuation Date;
2. any date as of which any withdrawal or distribution
of capital is made by or to any Shareholder or as of which
this Declaration of Trust provides for any amount to be debited against
the Capital Account of any Shareholder, other than by reason of a
withdrawal or distribution by or to, or an allocation to the Capital
Accounts of, all Shareholders that does not result in any change of any
Shareholder's pro rata share of the total number of Shares outstanding; or
3. the date that immediately precedes any date as of
which a Capital Contribution is accepted by the Trust from any
new or existing Shareholder or as of which this Declaration of Trust
provides for any amount to be credited to the Capital Account of any
Shareholder, other than by reason of an allocation to the Capital
Accounts of all Shareholders that does not result in any change of any
Shareholder's pro rata share of the total number of Shares outstanding;
(q) "Fiscal Year" shall mean the fiscal year of the Trust
as established from time to time by the Trustees, at the direction of the
Adviser Trustee; provided that such fiscal year shall be a year that is a
permissible tax year under Section 706(b) of the Code;
(r) "Independent Trustees" shall mean Jack B. Sunderland, Stephen
B. Swensrud and J. Thomas Touchton, and/or any other individual who
becomes a successor or additional Individual Trustee of the Trust and is
not any "interested person" of the Trust as such term is defined in the
1940 Act as provided herein, in such individual's capacity as an Independent
Trustee of the Trust;
(s) "Individual Trustees" shall mean Terry K. Glenn, Jack
B. Sunderland, Stephen B. Swensrud and J. Thomas Touchton, and/or any other
individual who becomes a successor or additional Individual Trustee of
the Trust as provided herein, in such individual's capacity as an
Individual Trustee of the Trust;
(t) "Net Assets" shall mean the total value of all assets of
the Trust (including net unrealized appreciation or depreciation of such
assets and accrued interest, dividends and other income receivable)
less an amount equal to all accrued debts, liabilities and
obligations of the Trust (including any reserves for
contingencies), calculated in the manner authorized by the Trustees;
(u) "Net Loss" shall mean the excess (if any) of the Net Assets
on the first day of a Fiscal Period over the Net Assets on the last day
of the same Fiscal Period;
(v) "Net Profit" shall mean the excess (if any) of the Net Assets
on the last day of a Fiscal Period over the Net Assets on the first day
of the same Fiscal Period; and
(w) "Offering" shall mean the offering of the Trust's shares in
an offering exempt from registration under the Securities Act of 1933
through Merrill Lynch, Pierce, Fenner & Smith Incorporated or other
placement agent approved by the Individual Trustees.
(x) The term "Service" shall mean the Internal Revenue Service.
Section 4. Designation of Trustees. Merrill Lynch
----------- --------------------------
Asset Management, L.P., Terry K. Glenn, Jack B. Sunderland, Stephen B.
Swensrudand J.
Thomas Touchton are hereby designated and appointed as trustees of the
Trust and such Persons accept such designation.
ARTICLE II
Purposes of Trust
This Trust is formed for the following purpose or purposes:
(a) to conduct, operate and carry on the business of an investment
company;
(b) to subscribe for, invest in, reinvest in, purchase or
otherwise acquire, hold, pledge, sell, assign, transfer, lend, write
options on, exchange, distribute or otherwise dispose of and deal in and
with securities and other assets of every nature, kind, character, type
and form, including, without limitation of the generality of the
foregoing, all types of stocks, shares, futures contracts, bonds,
debentures, notes, bills and other negotiable or non-negotiable
instruments, obligations, evidences of interest, certificates of interest,
certificates of participation, certificates, interests, evidences
of ownership, guarantees, warrants, options or evidences of indebtedness
issued or created by or guaranteed as to principal and interest by any
state or local government or any agency or instrumentality thereof, by
the United States Government or any agency, instrumentality, territory,
district or possession thereof, by any foreign government or any
agency, instrumentality, territory, district or possession thereof, by
any corporation organized under the laws of any state, the United States or
any territory or possession thereof or under the laws of any foreign
country, bank certificates of deposit, bank time deposits, bankers'
acceptances and commercial paper; to pay for the same in cash or by the
issue of stock, including treasury stock, bonds or notes of the Trust or
otherwise; and to exercise any and all rights, powers and privileges of
ownership or interest in respect of any and all such investments of
every kind and description, including, without limitation, the right
to consent and otherwise act with respect thereto, with power to
designate one or more persons, firms, associations or corporations to
exercise any of said rights, powers and privileges in respect of any said
instruments;
(c) to borrow money or otherwise obtain credit and to secure
the same by mortgaging, pledging or otherwise subjecting as security the
assets of the Trust:
(d) to issue, sell, repurchase, redeem, retire, cancel,
acquire, hold, resell, reissue, dispose of, and otherwise deal in,
Shares including Shares in fractional denominations, and to apply to any
such repurchase, redemption, retirement, cancellation or acquisition of
Shares any funds or other assets of the Trust, whether capital or surplus or
otherwise, to the full extent now or hereafter permitted by the laws of
the State of Delaware;
(e) to conduct its business, promote its purposes, and carry on
its operations in any and all of its branches and maintain offices both
within and without the State of Delaware, in any and all States of the
United States of America, in the District of Columbia, and in any other
parts of the world; and
(f) to do all and everything necessary, suitable, convenient,
or proper for the conduct, promotion, and attainment of any of the
businesses and purposes herein specified or which at any time may be
incidental thereto or may appear conducive to or expedient for the
accomplishment of any of such businesses and purposes and which might
be engaged in or carried on by a Trust organized under the Delaware Act, and
to have and exercise all of the powers conferred by the laws of the
State of Delaware upon a Delaware business trust.
The foregoing provisions of this Article II shall be construed
both as purposes and powers and each as an independent purpose and power.
ARTICLE III
Beneficial Interest
Section 1. Shares of Beneficial Interest. (a) The
--------- -----------------------------
beneficial interest in the Trust at all times shall be divided into Shares,
with or without par value as the Trustees may from time to time determine,
each of which shall, except as provided in the following sentence,
represent an equal proportionate interest in the Trust with each other
Share, none having priority or preference over another. The number of
Shares authorized shall be unlimited, and the Shares so authorized may
be represented in part by fractional shares. From time to time, the
Trustees may divide or combine the Shares into a greater or lesser number
without thereby changing the proportionate beneficial interests in the Trust.
(b) As of the last day of each Fiscal Period, the Net Profit or
Net Loss of the Trust for such Fiscal Period shall be allocated to and among
the Shareholders in proportion to the number of Shares held by each such
Shareholder and the amount so allocated to each such Shareholder shall
be credited or debited (as the case may be) to the respective
Shareholder's Capital Account in accordance with Section 3 of this Article
III.
(c) As of the last day of each Fiscal Year, items of
income, deduction, gain, loss or credit that are recognized for income
tax purposes shall be allocated among the Shareholders in such manner as
to reflect equitably amounts credited to or debited against each
Shareholder's Capital Account, whether in such Fiscal Year or in prior
Fiscal Years. To this end, the Trustees shall establish and maintain
records that shall show the extent to which the Capital Account of each
Shareholder shall, as of the last day of each Fiscal Year, be comprised of
amounts which have not been reflected in the taxable income of such
Shareholder. To the extent deemed by the Adviser Trustee to be feasible
and equitable, taxable income and gains in each Fiscal Year shall be
allocated among the Shareholders who have enjoyed the related credits, and
items of deduction, loss and credit in each Fiscal Year shall be allocated
among the Shareholders who have borne the burden of the related debits.
The Trust may make such allocations and adopt such conventions as may
be necessary or appropriate to comply with the current Treasury
Regulations and any future Treasury Regulations or IRS administrative
interpretations. To the extent permissible under the Code, the Trust may
implement the remedial allocation method in accordance with Section
704(c) of the Code. Taxable gain or loss realized from the sale of Trust
assets which were contributed in kind by a Shareholder (other than gain
which was recognized by such contributing Shareholder upon such
contribution pursuant to Section 721(b) of the Code), and other items of
income, gain, loss or deduction that are recognized for tax purposes that
are required to be specially allocated under Section 704(c) of the Code
and the regulations promulgated thereunder, shall be allocated to the
contributing Shareholder to the extent required thereunder. Allocations
pursuant to this subsection (c) shall be solely for income tax purposes
and shall not affect, or in any way be taken into account in
computing, any Shareholder's Capital Account or Share of Net Profit or Net
Loss, other items or distributions pursuant to any provision of this
Declaration of Trust.
Section 2. Issuance of Shares in the Offering.
--------- ------------------------------------
The Trustees areauthorized to issue or authorize the issuance of Shares at
not less than the par value thereof, if any, and to fix the price or the
minimum price or the consideration (in cash and/or such other property,
real or personal, tangible or intangible, including the securities of other
entities, as from time to time they may determine) or minimum
consideration for such Shares in the Offering.
Shares may be issued in fractional denominations to the same
extent as whole Shares, and Shares in fractional denominations shall be
Shares having proportionately to the respective fractions represented
thereby all the rights of whole Shares, including, without limitation,
the right to vote, the right to receive dividends and
distributions, and the right to participate upon liquidation of the Trust.
The value of securities of other entities contributed to the Fund
in the Offering for purposes of the issuance of Shares will be the fair
market value of such securities as of the close of business on the day
before the closing of the Offering. The fair market value of securities
that are restricted as to disposition by the Securities Act of 1933 will,
for purposes of the issuance of Shares, be the fair market value of
freely tradeable securities of the same class in the principal market
in which such securities are normally traded, without regard to such
restrictions. The fair market value of freely tradeable securities
contributed to the Fund in the Offering will be the fair market value of
such securities in the principal market in which such securities are
normally traded.
Section 3. Capital Accounts.
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(a) A Capital Account shall be established and maintained for
each Shareholder. Subject to such other adjustments as may be required
under the Code and the regulations promulgated thereunder, the Capital
Account of each Shareholder shall consist of (i) the sum of (a) such
Shareholder's Capital Contributions, (b) such Shareholder's distributive
share of Trust Net Profit (and items thereof) allocated to such
Shareholder pursuant to Section 1(b) of this Article III, and (c) the
amount of any Trust liabilities that are assumed by such Shareholder or
that are secured by any Trust assets distributed to such Shareholder,
minus (ii) the sum of (a) the amount of cash and the fair market value of
any Trust assets distributed to such Shareholder pursuant to any provision
of this Declaration of Trust, (b) such Shareholder's distributive share of
Trust Net Loss (and items thereof) allocated to such Shareholder pursuant
to Section 1(b) of this Article III, and (c) the amount of any liabilities
of such Shareholder that are assumed by the Trust or that are secured by
any property contributed by such Shareholder to the Trust. Immediately
after the closing of the Offering, each Shareholder's Capital Account shall
be reduced by the selling commissions paid by the Fund with respect to
such Shareholder's Capital Contribution to the Trust. For purposes of
this Agreement, such commissions shall be treated as specially allocated
items of Trust expense.
(b) Except where this Declaration of Trust otherwise requires,
a substitute Shareholder (to the extent such a substitute is permitted to be
a Shareholder under this Declaration of Trust) shall be deemed to have
received the Capital Account and to have made the Capital Contributions to
the Trust that were made by the Shareholder whom such substitute Shareholder
succeeds, and to have received from the Trust the distributions and
allocations received from the Trust by such former Shareholder.
Section 4. Non-Transferability. A Shareholder may not
--------- -------------------
transfer, sell or exchange Shares of the Trust, without the consent of
the Adviser Trustee, which consent may be withheld in its sole discretion
for any reason or for no reason. In addition, no transfer of Shares may
be made unless, in the opinion of counsel for the Trust, such transfer
would not result in a termination of the Trust for purposes of Section 708
of the Code. In no event shall all or any part of a Shareholder's
Shares be assigned to a minor or an incompetent, unless in trust for
the benefit of such person. No transfer of Shares may be made if the net
asset value of the Shares to be transferred is less than $20,000. In
addition, Shares may be sold, transferred, assigned or otherwise disposed
of by a Shareholder only if, in the opinion of counsel, such transfer or
assignment would not violate federal securities laws or state securities
or "blue sky" laws (including investor suitability standards). Provided,
however, that a Shareholder who is a natural person may transfer his or
her beneficial interest in the Shares to a spouse, child, parent or other
close relative or to any non-profit organization which qualifies under
Section 501(c)(3) of the Internal Revenue Code or to a trust of which such
a person or entity is the beneficiary and that such beneficial interest
in the Shares may be transferred by operation of law to the estate of a
deceased Shareholder; provided that, in the absence of the foregoing
consent, such transferee or estate will be entitled only to the
transferor Shareholder's economic interest in the profits, losses and
capital of the Fund but will not be entitled to the corresponding voting
rights of such Shareholder.
Section 5. Ownership of Shares. The ownership of Shares will be
--------- -------------------
recorded in the books of the Trust or a transfer agent. The record books of
the Trust or any transfer agent, as the case may be, shall be conclusive as
to who are the holders of Shares and as to the number of Shares held from
time to time by each holder. No certificates certifying the ownership
of Shares need be issued except as the Trustees may otherwise determine
from time to time.
Section 6. Additional Issuances of Shares. The Trust will not
---------- --------------------------------
issue additional Shares subsequent to the Offering except to the extent the
Adviser Trustee is required to acquire additional Shares in connection with
the treatment of the Trust as a partnership for federal income tax
purposes. Any such Shares issued to the Adviser Trustee shall be acquired
by the Adviser Trustee for consideration in cash at a price not less than
the net asset value thereof.
Section 7. No Preemptive Rights; Derivative Suits. Shareholders
--------- ---------------------------------------
shall have no preemptive or other right to subscribe for any additional
Shares or other securities issued by the Trust. No action may be brought
by a Shareholder on behalf of the Trust unless Shareholders owning not
less than 10 percent of the then outstanding Shares join in the bringing
of such action.
Section 8. Status of Shares and Limitation of Personal Liability.
--------- -------------------------------------------------------
Shares shall be deemed to be personal property giving only the rights
provided in this instrument. Every Shareholder by virtue of having become
a Shareholder shall be held to have expressly assented and agreed to the
terms hereof and to have become a party hereto. The death of a Shareholder
during the continuance of the Trust shall not operate to terminate the
same nor entitle the representative of any deceased Shareholder to an
accounting or to take any action in court or elsewhere against the Trust or
the Trustees, but only to the rights of said decedent under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title in or
to the whole or any part of the Trust property or right to call for a
partition or division of the same or for an accounting, nor shall the
ownership of Shares constitute the Shareholders, partners, irrespective
of the fact that the Trust is intended to be classified as a
partnership for federal income tax purposes. Neither the Trust nor
the Trustees, nor any officer, employee or agent of the Trust shall have
any power to bind any Shareholder or Trustee personally or to call upon
any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder at any time personally
may agree to pay by way of subscription for any Shares or otherwise.
Section 9. Mandatory Redemption of Shares. Prior to the conversion
--------- ------------------------------
of the Trust into an open-end fund (or an interval fund), in the event
the Trust has actual knowledge that a contributed security held by the
Trust (a "Contributed Security") is the subject of a tender offer or
other extraordinary event (an "Extraordinary Event") that will result in
the recognition of precontribution gain by the Shareholder that contributed
such security (the "Contributing Shareholder"), the Trust, subject to
limitations under the 1940 Act, will redeem Shares, at their current net
asset value, from the Contributing Shareholder in exchange for such
Contributed Security. The number of Shares to be redeemed will depend upon
the current net asset value of the Shares at the time of redemption and the
current value of the Contributed Security. The aggregate value of Shares
to be redeemed will equal the lesser of (i) the then current fair value
of the Contributed Security and (ii) the net asset value of the Shares held
by the Contributing Shareholder, except that the Trust will redeem all of
the Shares of a deceased Shareholder if the Trust has actual knowledge of
the death of the Shareholder and the securities contributed by such
Shareholder are the subject of an Extraordinary Event.
In the event the Trust does not have actual knowledge of
an Extraordinary Event sufficiently in advance of the consummation of such
Event so as to comply with the provisions of the 1940 Act, the Trust
will not redeem Shares of the Contributing Shareholder. The Trust will
provide the Securities and Exchange Commission with notice at least 30
days prior to the date of redemption in accordance with the 1940 Act.
To the extent an Extraordinary Event occurs, the Trust will not make any
special distribution in respect of any federal or state income tax
liability incurred by the Contributing Shareholder as a result of the
transaction in respect of precontribution gain with respect to such
security regardless of whether the Trust makes any redemption, in whole or
in part, under this Section 9.
Redemptions of Contributed Securities under the
circumstances described above will be effected at current net asset value.
The Trust will not redeem shares in the event of an
Extraordinary Event to the extent (i) the Trust has pledged the Contributed
Securities as collateral for its borrowings and the Trust is not able to
obtain the release of such securities from the lender holding the
Contributed Security as collateral or (ii) the Trust is not able to
dispose of Contributed Securities without violating the terms of such
borrowings or obtain a waiver of such terms from the lender.
ARTICLE IV
Trustees
Section 1. Election. Subject to the provisions of the 1940 Act, a
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Trustee may be elected either by the Trustees or the Shareholders. The
Trustees named herein shall serve until the first meeting of the
Shareholders or until the election and qualification of their successors.
Prior to the first meeting of Shareholders the initial Trustees hereunder
may elect additional Trustees to serve until such meeting and until
their successors are elected and qualified. The Trustees also at any
time may elect Trustees to fill vacancies in the number of Trustees. The
number of Trustees shall be fixed from time to time by the Trustees and, at
or after the commencement of the business of the Trust, shall be not less
than three. Each Trustee, whether named above or hereafter becoming a
Trustee, shall serve as a Trustee during the lifetime of this Trust, until
such Trustee dies, resigns, retires, or is removed, or, if sooner, until
the next meeting of Shareholders called for the purpose of electing Trustees
and the election and qualification of his or her successor. Subject to
Section 16(a) of the 1940 Act, the Trustees may elect their own successors
and, pursuant to this Section, may appoint Trustees to fill vacancies.
Section 2. Powers. (a) Subject to the terms hereof, including but
--------- ------
not limited to subsections (b) and (c) of this Section, the Trustees shall
have all powers necessary or desirable to carry out the purposes of
the Trust, including, without limitation, the powers referred to in
Article II hereof.
Without limiting the generality of the foregoing and subject to
the terms hereof, including, but not limited to, the powers of the
Adviser Trustee and the Individual Trustees set forth in this Section, the
Trustees shall have full power and authority:
(i) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to
execute and deliver proxies or powers of attorney to such person or
persons as the Trustees shall deem proper, granting to such person or
persons such power and discretion with relation to securities or property
as the Trustees shall deem proper;
(ii) To hold any security or property in a form not
indicating any trust whether in bearer, unregistered or other negotiable
form or in the name of the Trust or a custodian, subcustodian or other
depository or a nominee or nominees or otherwise;
(iii) To consent to or participate in any plan for
the reorganization, consolidation or merger of any corporation or concern,
any security of which is held in the Trust; to consent to any contract,
lease, mortgage, purchase or sale of property by such corporation or
concern, and to pay calls or subscriptions with respect to any security held
in the Trust;
(iv) To join with other security holders in acting through
a committee, depositary, voting trustee or otherwise, and in that
connection to deposit any security with, or transfer any security to, any
such committee, depositary or trustee, and to delegate to them such power
and authority with relation to any security (whether or not so deposited
or transferred) as the Trustees shall deem proper, and to agree to pay, and
to pay, such portion of the expenses and compensation of such committee,
depositary or trustee as the Trustees shall deem proper;
(v) To compromise, arbitrate, or otherwise adjust claims in favor
of or against the Trust or any matter in controversy, including, but not
limited to, claims for taxes;
(vi) To enter into joint ventures, general or
limited partnerships and any other combinations or associations;
(vii) To purchase and pay for entirely out of Trust property
such insurance as they may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies
insuring the assets of the Trust and payment of distributions and principal
on its portfolio investments, and insurance policies insuring the
Shareholders, Individual Trustees, officers, employees, agents
(including placement agents), investment advisers or Adviser Trustees,
principal underwriters, or independent contractors of the Trust
individually against all claims and liabilities of every nature arising
by reason of holding, being or having held any such office or position, or
by reason of any action alleged to have been taken or omitted by any such
person as Shareholder, Individual Trustee, officer, employee, agent
(including placement agents), investment adviser or Adviser Trustee,
principal underwriter, or independent contractor, including any action taken
or omitted that may be determined to constitute negligence, whether or not
the Trust would have the power to indemnify such person against such
liability;
(viii) To change the registered office or registered agent in
the State of Delaware;
(ix) Subject to Article X, Section 9 hereof, to reorganize
the Trust; and
(x) To sell all or substantially all of the assets of the Trust.
Further, without limiting the generality of the foregoing,
the Trustees shall have full power and authority to incur and pay out of
the principal or income of the Trust such expenses and liabilities as may be
deemed by the Trustees to be necessary or proper for the purposes of the
Trust.
Any determination made in good faith and, so far as
accounting matters are involved, in accordance with generally accepted
accounting principles by or pursuant to the authority granted by the
Trustees, as to the amount of the assets, debts, obligations or liabilities
of the Trust or its Shareholders; the amount of any reserves or charges set
up and the propriety thereof; the time of or purpose for creating such
reserves or charges; the use, alteration or cancellation of any reserves
or charges (whether or not any debt, 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); the price or closing bid or asked price of any investment
owned or held by the Trust; the market value of any investment or fair
value of any other asset of the Trust; the number of Shares
outstanding; the estimated expense to the Trust in connection with
purchases of its Shares; the ability to liquidate investments in an orderly
fashion; and the extent to which it is practicable to deliver a selection
of securities held by the Trust in payment for any such Shares, or as to
any other matters relating to the issue, sale, purchase and/or other
acquisition or disposition of investments or Shares of the Trust, shall be
final and conclusive, and shall be binding upon the Trust and its
Shareholders, past, present and future, and Shares are issued and sold
on the condition and understanding that any and all such determinations
shall be binding as aforesaid.
Any Trustee or any organization with which any Trustee may
be associated also may act as broker for the Trust in making purchases and
sales of securities for or to the Trust for its investment portfolio, and
may charge and receive from the Trust the usual and customary commission
for such service. Any organization with which a Trustee may be associated
in acting as broker for the Trust shall be responsible only for the
proper execution of transactions in accordance with the instructions of
the Trust and shall be subject to no further liability of any sort whatever.
(b) (1) Subject to the provisions of the 1940 Act, the
Adviser Trustee shall have the exclusive power and authority from time to
time to do the following:
(i) subject to the supervision of the Individual
Trustees, to manage and control the portfolio investments of the
Trust, including, but not limited to, the power to make all decisions
regarding the Trust's investment portfolio and, among other things, to
find, evaluate, structure, monitor and liquidate, upon dissolution or
otherwise, such investments and in connection therewith to enter into,
execute, amend, supplement, acknowledge and deliver any and all
contracts, agreements or other instruments, including, but not limited
to, contracts with one or more banks, trust companies or other
investment advisers, including the Trustees, for the performance of such
functions, including the investment and reinvestment of all or part of the
Trust's assets and execution of portfolio transactions; and
(ii) in accordance with Section 4 of Article III,
to determine, in its sole discretion, whether to permit transfers of
Shares.
The grant of exclusive power and authority to the Adviser
Trustee under this Section in no way limits the rights, powers or authority
of the Trustees as otherwise provided under the Delaware Act or as otherwise
provided by law.
(2) Subject to the requirements of the 1940 Act, the
Individual Trustees, in the name and on behalf of the Trust, are authorized
to enter into an investment advisory agreement with the Adviser Trustee for
the management of the portfolio of the Trust.
(3) The Adviser Trustee will maintain an interest in each item
of income, gain, loss, deduction or credit of the Trust through its
ownership of Shares equal to one percent of the total outstanding Shares
or, if total contributions to the Trust exceed $50,000,000, an interest
equal to one percent less the product of one percent times $50,000,000
divided by the total contributions to the Trust, but in no event less than
0.2 percent.
(4) If an Adviser Trustee is removed or resigns as provided
herein, such Adviser Trustee will transfer its interest in the Trust at a
price per Share equal to the then current net asset value of the Trust to
any other Adviser Trustee (a "Successor Adviser Trustee") appointed by
the Trustees or the Shareholders. A Successor Adviser Trustee will
acquire its requisite interest in the Trust from an Adviser Trustee whose
appointment has been revoked.
Unless otherwise permitted by the 1940 Act, an Adviser Trustee
may not withdraw as an Adviser Trustee or reduce its interest in the
Trust without giving at least one year's prior written notice to the Trust,
if such withdrawal or reduction is likely to cause the Trust to lose its
classification as a partnership for federal income tax purposes,
provided, however, that the foregoing shall not apply if the Trust
terminates its advisory agreement with the Adviser Trustee.
The Adviser Trustee, or any affiliate thereof, also may act as
a placement agent with respect to the sale of Shares by separate contract
or may be a person controlled by or affiliated with any Trustee or any
such agent or a person in which any Trustee or any such agent is
interested financially, subject only to applicable provisions of law.
Nothing herein contained shall operate to prevent any Adviser Trustee, who
also acts as such an agent, from also receiving compensation for services
rendered as such agent.
(c) Subject to the terms of subsections (a) and (b) hereof,
the Individual Trustees shall have the exclusive power and authority from
time to time to do the following:
(1) adopt By-Laws not inconsistent with this Declaration of
Trust providing for the conduct of the business of the Trust and may amend
and repeal them to the extent that they do not reserve that right to the
Shareholders and such By-Laws are deemed to be incorporated and included in
this Declaration of Trust;
(2) fill vacancies in their number, including vacancies
resulting from increases in their own number, and may elect and remove
such officers and employ, appoint and terminate such employees or agents
as they consider appropriate;
(3) appoint from their own number and terminate any one or
more committees;
(4) employ one or more custodians, administrators, transfer
agents, Shareholder servicing agents, agents for the distribution of
Shares, and set record dates;
(5) delegate such authority as they consider desirable
including, the determination of the Trust's net income, total assets and per
Share net asset value to any officer of the Trust, committee of the
Trustees, or any employee or agent; and
(6) execute such deeds, agreements or other instruments in the
name of the Trust as they may deem appropriate from time to time.
In addition, the Individual Trustees shall perform all duties
imposed on the
directors of registered investment companies by the 1940 Act, and the Adviser
Trustee will not
be entitled to vote on any matters in respect of such duties.
Section 3. Meetings. At any meeting of the Individual Trustees,
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not less than three of the Individual Trustees then in office shall
constitute a quorum. If the number of Trustees then in office shall be
less than three, then all of the Trustees shall constitute a quorum. Any
meeting may be adjourned from time to time by a majority of the votes cast
upon the question, whether or not a quorum is present, and the meeting may
be held at a later date set prior to such adjournment without the necessity
of further notice.
When a quorum is present at any meeting, a majority of the
Trustees present may take any action, except when a larger vote is
required by this Declaration of Trust, the By-laws or the 1940 Act.
Any action required or permitted to be taken at any meeting of
the Trustees or of any committee thereof may be taken without a meeting, if
a written consent to such action is signed by all of the Trustees or
members of any such committee then in office, as the case may be, and
such written consent is filed with the minutes of proceedings of the
Trustees or any such committee.
The Individual Trustees or any committee designated by
the Individual Trustees may participate in a meeting of the Trustees or
such committee by means of a conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other at the same time.
Participation by such means shall constitute presence in person at a
meeting.
Section 4. Ownership of Assets of the Trust. Title to all of the
--------- ---------------------------------
assets of the Shares of the Trust at all times shall be vested in the
Trust as a separate legal entity under the Delaware Act.
Section 5. Removal and Resignation of Trustees. The Trustees or
--------- -----------------------------------
the Shareholders by vote of 66-2/3% of the outstanding Shares entitled to
vote thereon may remove at any time any Individual Trustee with or without
cause, and any Trustee may resign at any time as Trustee, except, with
respect to the Adviser Trustee, as provided in Section 2 of this Article
IV, without penalty by written notice to the Trust; provided that
twenty days' advance written notice shall be given in the event that
there are only three or fewer Individual Trustees at the time a notice
of resignation is submitted. An Adviser Trustee may be removed by a
majority vote of the Individual Trustees or by the vote of a majority
in interest of the Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. The Shareholders shall have power to
--------- -------------
vote only (i) for the election of Trustees as provided in Article IV,
Section 1, of this Declaration of Trust; provided, however, that no
-------- -------
meeting of Shareholders is required to be called for the purpose of
electing Trustees unless and until such time as less than a majority of
the Trustees have been elected by the Shareholders, (ii) for the
removal of Trustees as provided in Article IV, Section 5, (iii) with
respect to any amendment of this Declaration of Trust as provided in
Article X, Section 8, (iv) with respect to the termination of the Trust
as provided in Article X, Section 4, and (v) with respect to such additional
matters relating to the Trust as may be required by law, by this Declaration
of Trust, or the By-laws of the Trust or any registration of the Trust with
the Securities and Exchange Commission or any state, or as the Trustees may
consider desirable. Each whole Share shall be entitled to one vote as to
any matter on which it is entitled to vote (except that in the election of
Trustees said vote may be cast for as many persons as there are Trustees to
be elected), and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall
be valid if executed by any one of them, unless at or prior to exercise of
the proxy the Trust receives a specific written notice to the contrary
from any one of them. A proxy purporting to be executed by or on behalf of
a Shareholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the
challenger.
Section 2. Meetings. Meetings of the Shareholders may be called by
--------- --------
the Trustees or such other person or persons as may be specified in the
By-laws and shall be called by the Trustees upon the written request of
Shareholders owning at least 10% of the outstanding Shares entitled to
vote. Shareholders shall be entitled to at least ten days' prior notice
of any meeting.
Section 3. Quorum and Required Vote. Fifty percent (50%) of the
--------- -------------------------
outstanding Shares shall be a quorum for the transaction of business at a
Shareholders' meeting. Any lesser number, however, shall be sufficient for
adjournment, and adjournments with respect to any particular matter to be
considered at a meeting with respect to which there are insufficient
votes may be made from time to time; and any adjourned session or sessions
may be held within 120 days after the date set for the original meeting
without the necessity of further notice. Except when a larger vote is
required by any provision of this Declaration of Trust or the By-laws
of the Trust and subject to any applicable requirements of law, a
majority of the Shares voted shall decide any question.
Section 4. Action by Written Consent. Any action required or
---------- ---------------------------
permitted to be taken at any meeting may be taken without a meeting if
a consent in writing, setting forth such action, is signed by a majority
of Shareholders entitled to vote on the subject matter thereof (or such
larger proportion thereof as shall be required by any express
provision of this Declaration of Trust) and such consent is filed with
the records of the Trust.
Section 5. Additional Provisions. The By-laws may include further
--------- ---------------------
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Distributions and Redemptions
Section 1. Distributions. The Individual Trustees shall
------------ -------------
distribute periodically to the Shareholders the net investment income of the
Trust, determined by the Trustees or as they may authorize and as herein
provided. Distributions of income may be made in one or more payments,
which shall be in cash or otherwise, and on a date or dates and as of a
record date or dates determined by the Trustees. At any time and from
time to time in their discretion, the Individual Trustees also may cause to
be distributed to the Shareholders as of a record date or dates determined
by the Individual Trustees, in Shares, cash or otherwise, all or part
of any gains realized on the sale or disposition of the assets of the
Trust or all or part of any other principal of the Trust. Each distribution
pursuant to this Section 1 shall be made ratably according to the number of
Shares held by the several Shareholders on the record date for such
distribution. No distribution need be made on Shares purchased pursuant
to orders received, or for which payment is made, after such time or
times as the Individual Trustees may determine.
Section 2. Determination of Net Income. In determining the net
---------- ----------------------------
investment income of the Trust for any period, there shall be deducted
from income for that period (a) such portion of all charges, taxes,
expenses and liabilities due or accrued as the Individual Trustees shall
consider properly chargeable and fairly applicable to income for that
period or any earlier period and (b) whatever reasonable reserves the
Individual Trustees shall consider advisable for possible future charges,
taxes, expenses and liabilities which the Individual Trustees shall
consider properly chargeable and fairly applicable to income for that
period or any earlier period. The net investment income for any period may
be adjusted for amounts included on account of net income in the net asset
value of Shares issued or redeemed or repurchased during that period.
In determining the net investment income for a period ending on a date
other than the end of the Trust's Fiscal Year, income may be estimated as
the Individual Trustees shall deem fair. Gains on the sale or disposition
of assets shall not be treated as income, and losses shall not be charged
against income unless appropriate under applicable accounting principles,
except in the exercise of the discretionary powers of the Individual
Trustees. Any amount contributed to the Trust which is received as income
pursuant to a decree of any court of competent jurisdiction shall be
applied as required by the said decree.
Section 3. Redemptions at the Option of the Trust. The Trust
---------- -----------------------------------------
shall have the right at its option and at any time to redeem Shares of any
Shareholder at the net asset value thereof if at such time such Shareholder
owns fewer Shares than, or Shares having an aggregate net asset value of
less than, an amount determined from time to time by the Trustees. In
addition, if the value of a Shareholder's Capital Account falls below
$5,000, the Trustees may, in their sole discretion, repurchase such
Shareholder's Shares at the net asset value thereof.
ARTICLE VII
Compensation and Limitation of Liability
of Individual Trustees, Adviser Trustee,
Officers, Employees and Agents
Section 1. Compensation. Each Trustee not affiliated with the
--------- ------------
Trust's investment adviser, administrator or consultant shall be
entitled to reasonable compensation from the Trust and the Individual
Trustees may fix the amount of their compensation. An Adviser Trustee shall
be entitled to such compensation as may be set forth in any contract
between the Trust and the Adviser Trustee referred to in Section 2 of
Article IV.
Section 2. Limitation of Liability. A Trustee or an Adviser
--------- --------------------------
Trustee or an officer, agent or employee of the Trust (each, a "Covered
Person", and collectively, the "Covered Persons"), when acting in their
respective capacities for the Trust, shall not be personally liable to any
person other than the Trust or a Shareholder for any act, omission or
obligation of the Trust, the Trustee, Adviser Trustee or Covered Person.
Notwithstanding anything in this Declaration of Trust to the contrary,
the Trustees or an Adviser Trustee shall not be responsible or liable to
the Trust or a Shareholder in any event for any neglect or wrongdoing of
any Covered Person, nor shall any Trustee, Adviser Trustee or Covered
Person be responsible or liable to the Trust or a Shareholder for the act,
omission or obligation of any Trustee, Adviser Trustee or Covered Person;
provided, that nothing herein contained shall protect any Trustee, Adviser
Trustee or Covered Person against any liability to the Trust or a
Shareholder to which he or it 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 or her or its office.
In addition, the Trustees shall not be liable to the Trust or
any Shareholder by reason of (i) any tax liabilities incurred by the
Shareholders as a result of their contribution of securities to the Fund
in exchange for Shares, (ii) any failure to withhold income tax under
federal or state tax laws with respect to income allocated to the
Shareholders or (iii) any change in the federal or state tax laws
or regulations or in the interpretations thereof as they apply to the
Fund or the Shareholders, whether such change or interpretation occurs
through legislative, judicial or administrative action.
Every note, bond, contract, instrument, certificate, share,
or undertaking and every other act or thing whatsoever executed or done by
the Trustees, an Adviser Trustee, a Covered Person or any of them on
behalf of the Trust, in connection with the Trust's business, shall be
deemed conclusively to have been executed or done only in their or his or
her capacity as Trustees, an Adviser Trustee or Covered Person, and such
Trustees, Adviser Trustee or Covered Person shall not be personally liable
thereon to any Person.
To the extent that, at law or in equity, an Adviser Trustee,
Trustee or Covered Person has duties (including fiduciary duties) and
liabilities relating thereto to the Trust or to the Shareholders, an
Adviser Trustee, Trustee or Covered Person acting in connection with the
Trust's business or affairs, shall not be liable to the Trust or to any
Shareholder for their, his or its good faith reliance on the
provisions of this Declaration of Trust. The provisions of this
Declaration of Trust, to the extent that they restrict the duties and
liabilities of an Adviser Trustee, Trustee or Covered Person
otherwise existing at law or in equity, are agreed by the Shareholders to
replace such other duties and liabilities of such Adviser Trustee,
Trustee or Covered Person.
ARTICLE VIII
Indemnification
Section 1. Indemnification of Trustees, Officers, Employees and
--------- -------------------------------------------------------
Agents. Each person who is or was a Trustee (including an Adviser
- ------
Trustee), officer, employee or agent of the Trust or who serves or has
served at the Trust's request as a director, officer or trustee of another
person in which the Trust has or had any interest as a
shareholder, creditor or otherwise shall be entitled to indemnification out
of the assets of the Trust to the extent provided in, and subject to the
provisions of, the By-Laws, provided that no indemnification shall be
granted by the Trust in contravention of applicable law. The By- Laws
may provide for advancing expenses to any party covered by the
indemnification set forth therein as they are incurred with respect to
the defending of any claim, suit, action or proceeding where an
undertaking by or on behalf of such party is received requiring such party
to repay amounts advanced if it is ultimately determined that such party
is not entitled to indemnification thereunder. In addition, the By-Laws
may permit the Trustees to purchase insurance for parties indicated in the
By-Laws in respect of any liability asserted against all or any of them in
any of the above-referenced capacities or arising out of their status as
such.
Section 2. Merged Persons. For the purposes of this Article VIII
--------- --------------
references to "the Trust" include any constituent person (including any
constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had power and
authority to indemnify its directors, trustees, officers, employees or
agents as well as the resulting or surviving person; so that any person
who is or was a director, trustee, officer, employee or agent of such a
constituent person or is or was serving at the request of such a
constituent person as a trustee, director, officer, employee or agent of
another person shall stand in the same position under the provisions
of this Article VIII with respect to the resulting or surviving person as
he would have with respect to such a constituent person if its separate
existence had continued.
Section 3. Shareholders. Each Shareholder shall be entitled to the
--------- ------------
same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the
State of Delaware. Notwithstanding this limitation on a Shareholder's
liability, in case any Shareholder or former Shareholder shall be held to
be liable by reason of his or her being or having been a Shareholder and
not because of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general successor)
shall be entitled out of the assets of the Trust to be indemnified against
all losses and expenses arising from such liability. Upon request, the
Trust shall cause its counsel to assume the defense of any claim which, if
successful, would result in an obligation of the Trust to indemnify the
Shareholder as aforesaid.
ARTICLE IX
Partnership Classification for Tax Purposes;
Appointment of Tax Matters Partner
Section 1. Partnership Classification; Federal Tax Elections.
--------- -------------------------------------------------
(a) Partnership Classification. The Trust is intended to be
----------------------------
classified as a partnership for federal income tax purposes and in
accordance with the tax laws of the State of Delaware and other
jurisdictions in a manner consistent with such intention. A
Shareholder shall not take any action that is inconsistent with the
preceding sentence. The Trust will not elect to be treated as a regulated
investment company or a real estate investment trust under the Code.
(b) Federal Tax Elections. The Trust, in the sole discretion of the
----------------------
Trustees, may make or revoke elections for federal tax purposes as follows:
(i) In the case of a distribution of property within the
meaning of Section 734 of the Code, the Trust, in the absolute
discretion of the Trustees, may elect pursuant to Section 754 of the Code
(or corresponding provisions of future law) and pursuant to similar
provisions of applicable state or local income tax laws, to adjust the
basis of the remaining assets of the Trust; and
(ii) All other elections required or permitted to be made
by the Trust under the Code shall be made by the Trustees in such
manner as will, in the opinion of the Trustees, be in the best interest of
the Trust. (In reaching such opinion the Trustees shall not be required to
poll or survey the Shareholders.) The Trust shall, to the extent permitted
by applicable law and regulations, elect to treat as an expense for federal
income tax purposes all amounts incurred by it for state and local taxes,
interest and other charges that may, in accordance with applicable law and
regulations, be considered as expenses.
Section 2. Tax Matters Partners.
--------- ---------------------
(a) The Trustees shall from time to time (but at least as
frequently as required by law) designate a Tax Matters Partner pursuant to
Section 6231 of the Code. Only a Shareholder may be designated as the
Tax Matters Partner. The Adviser Trustee is hereby designated as the
initial Tax Matters Partner, and it shall serve in that capacity unless
and until a new Tax Matters Partner is designated by the Trustees.
The Tax Matters Partner shall have the following duties:
(i) to the extent and in the manner required by applicable
law and regulations, to furnish the name, address, profits interest and
taxpayer identification number of each Shareholder, and such other
information as may be required by such law or regulations, to the
Secretary of the Treasury or his or her delegate (the "Secretary"); and
(ii) to the extent and in the manner required by
applicable law and regulations, to keep each Shareholder informed of
administrative and judicial proceedings for the adjustment at the
Trust level of any item required to be taken into account by a
Shareholder for federal income tax purposes (such administrative and
judicial proceedings referred to hereinafter as "judicial review").
(b) The Trust shall indemnify and reimburse the Tax Matters
Partner for any and all expenses, including, without limitation, legal and
accounting fees, claims, liabilities, losses and damages incurred in
connection with any judicial or administrative review with respect to the
tax liability of the Shareholders. The payment of all such expenses shall
be made before any distributions are made. Neither the Adviser Trustee (nor
any affiliate of the Adviser Trustee) nor the Individual Trustees shall
have any obligation to provide funds for such purpose. The taking of any
action and the incurring of any expense by the Tax Matters Partner in
connection with any such proceeding, except to the extent required by law,
is a matter in the sole discretion of the Tax Matters Partner.
(c) The Tax Matters Partner is hereby authorized, but not required:
(i) to enter into any settlement agreement with the
Service with respect to any tax audit or judicial review, in which
agreement the Tax Matters Partner may expressly state that such agreement
shall bind the Adviser Trustee, the Trustee and the Shareholders, except
that such settlement agreement shall not bind any person or entity who is
entitled to file and who (within the time prescribed pursuant to the Code
and regulations thereunder) files a statement with the Service stating that
the Tax Matters Partner shall not have the authority to enter into a
settlement agreement on behalf of such person or entity;
(ii) in the event that a notice of a final
administrative adjustment at the Trust level of any item required
to be taken into account by the Adviser Trustee, the Individual Trustees
or a Shareholder for tax purposes (a "final adjustment") is mailed to the
Tax Matters Partner, to seek judicial review of such final
adjustment, including the filing of a petition for readjustment with the
Tax Court, the District Court of the United States for the district in
which the Trust's principal place of business is located or the United
States Claims Court;
(iii) to intervene in any action brought by or on behalf of
the Trustees or a Shareholder for judicial review of a final adjustment;
(iv) to file a request for an administrative adjustment
with the Service at any time and, if any part of such request is not
allowed by the Service, to file a petition for judicial review with respect
to such request;
(v) to enter into an agreement with the Service to extend
the period for assessing any tax which is attributable to any Trust item
required to be taken into account by the Adviser Trustee, the Individual
Trustees or a Shareholder for tax purposes, or an item affected by any
such item; and
(vi) to take any other action on behalf of the
Adviser Trustee, the Individual Trustees or a Shareholder in connection with
any administrative or judicial tax proceeding to the extent permitted
by applicable law or regulations.
ARTICLE X
Other General Provisions
Section 1. Trustee's Good Faith Action, Expert Advice, No Bond or
--------- -------------------------------------------------------
Surety.
- ------
The exercise by the Trustees of their powers and discretion hereunder
under the circumstances then prevailing, shall be binding upon everyone
interested. Subject to Article VII, Section 2 hereof, a Trustee shall
be liable for his, her or its own willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, as the case may be, and for nothing else,
and shall not be liable for errors of judgment or mistakes of fact or law.
The Trustees may take advice of counsel or other experts with respect to
the meaning and operation of this Declaration of Trust, and subject to the
provisions of Section 2 of Article VII shall be under no liability for
any act or omission in accordance with such advice or for failing to
follow such advice. The Trustees shall not be required to give any bond
as such, nor any surety if a bond is required.
Section 2. Liability of Third Persons Dealing with Trustees or an
---------- -------------------------------------------------------
Adviser Trustee.
- ----------------
No person dealing with the Trustees or an Adviser Trustee shall be bound
to make any inquiry concerning the validity of any transaction made or to be
made by the Trustees or an Adviser Trustee pursuant hereto or to see to the
application of any payments made or property transferred to the Trust or
upon its order.
Section 3. Individual Trustees, Adviser Trustees, Officers, etc.
--------- -------------------------------------------------------
Not Personally Liable.
- ----------------------
All persons extending credit to, contracting with or having any
claim against the
Trust shall look only to the assets of the Trust for payment under such
credit, contract or
claim; and none of the Individual Trustees, an Adviser Trustee or any of the
Trust's officers,
employees or agents, whether past, present or future, shall be personally
liable therefor.
Section 4. Dissolution and Termination of Trust. (a) Unless
---------- ----------------------------------------
dissolved as provided herein, the Trust shall continue until October 2,
2006, unless the term of the Trust is extended by the Trustees or by the
vote or consent of the lesser of (i) the holders of 67% or more of the
Shares present at a meeting, if the holders of more than 50% of the Shares
are present or represented at such meeting, and (ii) the holders of more
than 50% of the Shares (hereinafter, a "Majority Vote of Shares").
(b) The Trust may be dissolved at any time upon: (i) the
election by the Trustees to terminate the Trust if the value of the Trust's
assets is reduced to below $50,000,000, unless applicable law with respect
to such termination, at the time it is to be made, requires a vote of the
Trustees and the Shareholders; (ii) the disposition by the Trust of all
or substantially all of its assets; (iii) a vote by a Majority Vote of
Shares to terminate the Trust; (iv) an election by the Trustees to terminate
the Trust at any time if there is a change of law, regulation or
interpretation of law or regulation or event, and as a result of such
occurrence or event, in the opinion of the Trustees, there is or would be a
material adverse effect on the Trust's ability to operate in accordance
with its investment objective, unless applicable law with respect to such
termination, at the time it is to be made, requires a vote of Trustees and
Shareholders; (v) the determination by the Trustees that such termination
is in the best interest of Shareholders due to concerns over the continued
treatment of the Trust as a partnership for federal income tax
purposes, unless applicable law with respect to such termination, at the
time it is to be made, requires a vote of Trustees and Shareholders; or
(vi) the occurrence of any other act that causes a dissolution of the
Trust under the Delaware Act and the remaining Trustees (or, if none
remain, the Shareholders) do not elect to continue the operations of the
Trust.
Upon dissolution of the Trust, after paying or making
reasonable provision for the payment of all charges, taxes, expenses and
liabilities, whether due or accrued or anticipated as may be determined
by the Trustees, the Trust shall reduce, in accordance with such procedures
as the Trustees consider appropriate, the remaining assets to
distributable form in cash or shares or other securities, or any
combination thereof, and distribute the proceeds to the Shareholders
ratably according to the number of Shares held by the several
Shareholders on the date of termination.
Upon termination of the Trust, following completion of winding up
of its business, the Trustees shall cause a certificate of
cancellation of the Trust's certificate of trust to be filed in
accordance with Section 3810 of the Delaware Act, which certificate
of cancellation may be signed by any one Trustee.
Section 5. Termination Upon Bankruptcy or Expulsion of the Adviser
--------- --------------------------------------------------------
Trustee.
- -------
Upon the bankruptcy or expulsion of the Adviser Trustee, the Trust
shall be dissolved effective 120 days after the event. However, the
Shareholders of the Trust may, by a majority in interest at any meeting
of such Shareholders or by an instrument in writing without a meeting
executed by a majority of the Trustees and consented to by a majority in
interest by such Shareholders, agree to continue the business of the Trust
even if there has been such an event.
Section 6. Filing of Copies, References, Headings. The initial
---------- ---------------------------------------
Trustees shall file a Certificate of Trust of the Trust with the Secretary
of State of the State of Delaware in accordance with Section 3810 of the
Delaware Act. The original or a copy of this instrument and of each
amendment hereto and of each Declaration of Trust supplemental hereto
shall be kept at the office of the Trust where it may be inspected by
any Shareholder. Anyone dealing with the Trust may rely on a certificate
by an officer of the Trust as to whether or not any such amendments or
supplemental Declarations of Trust have been made and as to matters in
connection with the Trust hereunder; and, with the same effect as if it
were the original, may rely on a copy certified by an officer of the Trust
to be a copy of this instrument or of any such amendment or supplemental
Declaration of Trust. In this instrument or in any such amendment or
supplemental Declaration of Trust, references to this instrument,
and all expressions like "herein," "hereof," and "hereunder," shall be
deemed to refer to this instrument as amended or affected by any such
amendment or supplemental Declaration of Trust. Headings are placed herein
for convenience of reference only and in case of any conflict, the text
of this instrument, rather than the headings, shall control. This
instrument may be executed in any number of counterparts each of which
shall be deemed an original.
Section 7. Applicable Law. This Declaration of Trust shall be
---------- --------------
governed by and construed in accordance with the laws of the State of
Delaware. The trust created hereby shall be a business trust created
under, and subject to the provisions of, the Delaware Act and may exercise
all powers which are ordinarily exercised by such a trust under the
Delaware Act; provided, however, that there shall not be applicable to the
Trust, the Trustees or this Declaration of Trust (a) the provisions of
Section 3540 of Title 12 of the Delaware Code or (b) any provisions of the
laws (statutory or common) of the State of Delaware pertaining to trusts
which are inconsistent with the rights, duties, powers, limitations or
liabilities of the Trustees set forth or referenced in this Declaration of
Trust.
Section 8. Amendments. Except as specifically provided herein,
--------- ----------
the Trustees may, without Shareholder vote, amend or otherwise supplement
this Declaration of Trust by an instrument in writing signed by a
majority of the Trustees; provided, however, the Shareholders shall have
the right to vote (a) on any amendment which would affect their right to
vote granted in Section 1 of Article V hereof, (b) on any amendment to
this Section, (c) on any amendment as may be required by the 1940 Act, if
applicable, and (d) on any amendment submitted to them by the Trustees.
Section 9. Reorganization. Notwithstanding anything else herein,
--------- -------------------------------------------------------
the Trustees, in order to change the form of organization of the
Trust, may, without Shareholder approval (unless otherwise required by
applicable law), (a) cause the Trust to merge or consolidate with or into
one or more trusts, partnerships, associations or corporations so long as
the surviving or resulting entity is an investment company under the 1940
Act, or is a series thereof, or (b) cause the Trust to incorporate under the
laws of the State of Delaware. Any agreement of merger or consolidation or
certificate of merger may be signed by a majority of the Trustees and
facsimile signatures conveyed by electronic or telecommunication
means shall be valid.
Pursuant to and in accordance with the provisions of Section
3815(f) of the Delaware Act,and notwithstandinganythingelseherein,an
agreementofmergerorconsolidation approved by the Trustees in accordance
with this Section may effect any amendment to this Declaration of Trust
or effect the adoption of a new declaration of trust of the Trust if it is
the surviving or resulting trust in the merger or consolidation.
Section 10. Severability. The invalidity or unenforceability of
----------- ------------
any particular provision of this Declaration of Trust shall not affect the
other provisions hereof, and this Declaration of Trust shall be construed in
all respects as if such invalid or unenforceable provision was omitted.
Section 11. Integration. This Declaration of Trust, together with
----------- -----------
the By-Laws, constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto.
IN WITNESS WHEREOF, the undersigned Trustees have hereunto set
their hands for themselves and their assigns as of the day and year first
above written.
ADVISER TRUSTEE
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: Princeton Services, Inc.
General Partner
By: _______________________________________
Terry K. Glenn, Executive
Vice President
INDIVIDUAL TRUSTEES
_______________________________________
Terry K. Glenn
_______________________________________
Jack B. Sunderland
_______________________________________
Stephen B. Swensrud
_______________________________________
J. Thomas Touchton
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this day of , 1996, before me personally
------- -----------------
came the above-named Trustees of the Trust, to me known, and known to me
to be the persons described in and who executed the foregoing instrument,
and who duly acknowledged to me that they had executed the same.
-----------------------------------
Notary Public
BY-LAWS
OF
SOMERSET EXCHANGE FUND
ARTICLE I
Agreement and Declaration of Trust and Principal Office
1.1. Agreement and Declaration of Trust. These By-Laws shall be
----------------------------------
subject to the Agreement and Declaration of Trust, as from time to time in
effect (the "Declaration of Trust"), of the above-captioned Delaware business
trust established by the Declaration of Trust (the "Trust").
1.2. Principal Office of the Trust. The principal office of the
-----------------------------
Trust shall be located in Plainsboro, New Jersey.
ARTICLE II
Meetings of Trustees
2.1. Regular Meetings. Regular meetings of the Trustees may be
----------------
held without call or notice at such places and at such times as the Trustees
from time to time may determine, provided that notice of the first regular
meeting following any such determination shall be given to absent Trustees.
2.2. Special Meetings. Special meetings of the Trustees may be
----------------
held at any time and at any place designated in the call of the meeting when
called by the President or the Treasurer or by two or more Trustees,
sufficient notice thereof being given to each Trustee by the Secretary or an
Assistant Secretary or by the officer or the Trustees calling the meeting.
2.3. Notice of Special Meetings. It shall be sufficient notice
--------------------------
to a Trustee of a special meeting to send notice by mail at least forty-eight
hours or by telegram at least twenty-four hours before the meeting addressed
to the Trustee at his or her usual or last known business or residence
address or to give notice to him or her in person or by telephone at least
twenty-four hours before the meeting. Notice of a meeting need not be given
to any Trustee if a written waiver of notice, executed by him or her before
or after the meeting, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him or her. Neither notice of a meeting
nor a waiver of a notice need specify the purposes of the meeting.
2.4. Notice of Certain Actions by Consent. If in accordance with
------------------------------------
the provisions of the Declaration of Trust any action is taken by the
Trustees by a written consent of less than all of the Trustees, then prompt
notice of any such action shall be furnished to each Trustee who did not
execute such written consent, provided that the effectiveness of such action
shall not be impaired by any delay or failure to furnish such notice.
ARTICLE III
Officers
3.1. Enumeration; Qualification. The officers of the Trust shall
--------------------------
be a President, one or more Vice Presidents, that may be Executive Vice
Presidents, Senior Vice Presidents or Vice Presidents, a Treasurer, a
Secretary, and such other officers, if any, as the Trustees from time to time
may in their discretion elect. The Trust also may have such agents as the
Trustees from time to time may in their discretion appoint. Officers may be
but need not be a Trustee or shareholder. Any two or more offices may be
held by the same person.
3.2. Election. The President, the Treasurer and the Secretary
--------
shall be elected by the Trustees upon the occurrence of any vacancy in any
such office. Other officers, if any, may be elected or appointed by the
Trustees at any time. Vacancies in any such other office may be filled at
any time.
3.3. Tenure. The President, Treasurer and Secretary shall hold
------
office in each case until he or she sooner dies, resigns, is removed or
becomes disqualified. Each other officer shall hold office and each agent
shall retain authority at the pleasure of the Trustees.
3.4. Powers. Subject to the other provisions of these By-Laws,
------
each officer shall have, in addition to the duties and powers herein and in
the Declaration of Trust set forth, such duties and powers as commonly are
incident to the office occupied by him or her as if the Trust were organized
as a Delaware corporation or such other duties and powers as the Trustees may
from time to time designate.
3.5. President. Unless the Trustees otherwise provide, the
---------
President shall preside at all meetings of the shareholders and of the
Trustees. Unless the Trustees otherwise provide, the President shall be the
chief executive officer.
3.6. Vice President. Each Vice President shall have such powers
--------------
and perform such duties as the Board of Trustees or the President may from
time to time prescribe.
3.7. Treasurer. The Treasurer shall be the chief financial and
---------
accounting officer of the Trust, and, subject to the provisions of the
Declaration of Trust and to any arrangement made by the Trustees with a
custodian, investment adviser or manager, or transfer, shareholder servicing
or similar agent, shall be in charge of the valuable papers, books of account
and accounting records of the Trust, and shall have such other duties and
powers as may be designated from time to time by the Trustees or by the
President.
3.8. Secretary. The Secretary shall record all proceedings of the
---------
shareholders and the Trustees in books to be kept therefor, which books or
a copy thereof shall be kept at the principal office of the Trust. In the
absence of the secretary from any meeting of the shareholders or Trustees,
an Assistant Secretary, or if there be none or if he or she is absent, a
temporary Secretary chosen at such meeting shall record the proceedings
thereof in the aforesaid books.
3.9. Resignations and Removals. Any Trustee or officer may resign
-------------------------
at any time by written instrument signed by him or her and delivered to the
President or Secretary or to a meeting of the Trustees. Such resignation
shall be effective upon receipt unless specified to be effective at some
other time. The Trustees may remove any officer elected by them with or
without cause. Except to the extent expressly provided in a written
agreement with the Trust, no Trustee or officer resigning and no officer
removed shall have any right to any compensation for any period following his
or her resignation or removal, or any right to damages on account of such
removal.
ARTICLE IV
Committees
4.1. Appointment. The Trustees may appoint from their number an
-----------
executive committee and other committees. Except as the Trustees otherwise
may determine, any such committee may make rules for conduct of its business.
4.2. Quorum; Voting. A majority of the members of any Committee
--------------
of the Trustees shall constitute a quorum for the transaction of business,
and any action of such a Committee may be taken at a meeting by a vote of a
majority of the members present (a quorum being present).
ARTICLE V
Reports
The Trustees and officers shall render reports at the time and in
the manner required by the Declaration of Trust or
any applicable law. Officers and Committees shall render such additional
reports as they may deem desirable or as may from time to time be required
by the Trustees.
ARTICLE VI
Fiscal Year
The fiscal year of the Trust shall be fixed, and shall be subject
to change, by the Board of Trustees.
ARTICLE VII
Seal
The seal of the Trust shall consist of a flat-faced die with the
word "Delaware," together with the name of the Trust and the year of its
organization cut or engraved thereon but, unless otherwise required by the
Trustees, the seal shall not be necessary to be placed on, and in its absence
shall not impair the validity of any document, instrument or other paper
executed and delivered by or on behalf of the Trust.
ARTICLE VIII
Execution of Papers
Except as the Trustees generally or in particular cases may
authorize the execution thereof in some other manner, all deeds, leases,
contracts, notes and other obligations made by the Trustees shall be signed
by the President, any Vice President, or by the Treasurer and need not bear
the seal of the Trust.
ARTICLE IX
Issuance of Share Certificates
9.1. Sale of Shares. Except as otherwise determined by the
--------------
Trustees, the Trust will issue and sell for cash or securities from time to
time, full and fractional shares of its shares of beneficial interest, such
shares to be issued and sold at a price of not less than net asset value per
share as from time to time determined in accordance with the Declaration of
Trust and these By-Laws and, in the case of fractional shares, at a
proportionate reduction in such price. In the case of shares sold for
securities, such securities shall be valued in accordance with the provisions
for determining value of assets of the Trust as stated in the Declaration of
Trust and these By-Laws. The officers of the Trust are severally authorized
to take all such actions as may be necessary or desirable to carry out this
Section 9.1.
9.2. Share Certificates. In lieu of issuing certificates for
------------------
shares, the Trustees or the transfer agent either may issue receipts therefor
or may keep accounts upon the books of the Trust for the record holders of
such shares, who shall in either case, for all purposes hereunder, be deemed
to be the holders of certificates for such shares as if they had accepted
such certificates and shall be held to have expressly assented and agreed to
the terms hereof.
The Trustees at any time may authorize the issuance of share
certificates. In that event, each shareholder shall be entitled to a
certificate stating the number of shares owned by him, in such form as shall
be prescribed from time to time by the Trustees. Such certificates shall be
signed by the President or Vice President and by the Treasurer or Assistant
Treasurer. Such signatures may be facsimile if the certificate is signed by
a transfer agent, or by a registrar, other than a Trustee, officer or
employee of the Trust. In case any officer who has signed or whose facsimile
signature has been placed on such certificate shall cease to be such officer
before such certificate is issued, it may be issued by the Trust with the
same effect as if he or she were such officer at the time of its issue.
9.3. Loss of Certificates. The Trust, or if any transfer agent
--------------------
is appointed for the Trust, the transfer agent with the approval of any two
officers of the Trust, is authorized to issue and countersign replacement
certificates for the shares of the Trust which have been lost, stolen or
destroyed subject to the deposit of a bond or other indemnity in such form
and with such security, if any, as the Trustees may require.
9.4. Discontinuance of Issuance of Certificates. The Trustees at
------------------------------------------
any time may discontinue the issuance of share certificates and by written
notice to each shareholder, may require the surrender of share certificates
to the Trust for cancellation. Such surrender and cancellation shall not
affect the ownership of shares in the Trust.
ARTICLE X
Indemnification
10.1. Trustees, Officers, etc. To the fullest extent permitted by
-----------------------
law, the Trust shall indemnify each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or trustees
of another person in which the Trust has any interest as a shareholder,
creditor or otherwise) (hereinafter referred to as a "Covered Person")
against all liabilities and expenses, including but not limited to amounts
paid in satisfaction of judgments, in compromise or as fines and penalties,
and counsel fees reasonably incurred by any Covered Person in connection with
the defense or disposition of any
action, suit or other proceeding, whether civil, criminal, administrative or
investigative, before any court or administrative or legislative body, in
which such Covered Person may be or may have been involved as a party or
otherwise or with which such person may be or may have been threatened, while
in office or thereafter, in any way relating to the Trust or by reason of
being or having been such a Trustee or officer, except with respect to any
matter as to which such Covered Person shall have been finally adjudicated
in a decision on the merits in any such action, suit or other proceeding not
to have acted in good faith in the reasonable belief that such Covered
Person's action was in the best interests of the Trust and except that no
Covered Person shall be indemnified against any liability to the Trust or its
Shareholders to which such Covered Person would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered Person's
office. Expenses, including counsel fees so incurred by any such Covered
Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), shall be paid from time to time by the
Trust in advance of the final disposition of any such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Covered
Person to repay amounts so paid by the Trust if it is ultimately determined
that indemnification of such expenses is not authorized under this Article,
provided that (a) such Covered Person shall provide security for his
- -------------
undertaking, (b) the Trust shall be insured against losses arising by reason
of such Covered Person's failure to fulfill his undertaking, or (c) a
majority of the Trustees who are disinterested persons and who are not
Interested Persons (as that term is defined in the Investment Company Act of
1940) (provided that a majority of such Trustees then in office act on the
matter), or independent legal counsel in a written opinion, shall determine,
based on a review of readily available facts (but not a full trial-type
inquiry), that there is reason to believe such Covered Person ultimately will
be entitled to indemnification.
10.2. Compromise Payment. As to any matter disposed of (whether
------------------
by a compromise payment, pursuant to a consent decree or otherwise) without
an adjudication in a decision on the merits by a court, or by any other body
before which the proceeding was brought, that such Covered Person either (a)
did not act in good faith in the reasonable belief that such Covered Person's
action was in the best interests of the Trust or (b) is liable to the Trust
or its Shareholders by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
such Covered Person's office, indemnification shall be provided if (a)
approved as in the best interest of the Trust, after notice that it involves
such indemnification, by at least a majority of the Trustees who are
disinterested persons and are not Interested Persons (provided that a
majority of such Trustees then in office act on the
matter), upon a determination, based upon a review of readily available facts
(but not a full trial-type inquiry) that such Covered Person acted in good
faith in the reasonable belief that such Covered Person's action was in the
best interests of the Trust and is not liable to the Trust or its
Shareholders by reason of wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office, or (b) there has been obtained an opinion in writing of
independent legal counsel, based upon a review of readily available facts
(but not a full trial-type inquiry) to the effect that such Covered Person
appears to have acted in good faith in the reasonable belief that such
Covered Person's action was in the best interests of the Trust and that such
indemnification would not protect such Covered Person against any liability
to the Trust to which such Covered Person would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Any approval
pursuant to this Section shall not prevent the recovery from any Covered
Person of any amount paid to such Covered Person in accordance with this
Section as indemnification if such Covered Person is subsequently adjudicated
by a court of competent jurisdiction not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests
of the Trust or to have been liable to the Trust or its shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered Person's
office.
10.3. Indemnification Not Exclusive. The right of indemnification
-----------------------------
hereby provided shall not be exclusive of or affect any other rights to which
any such Covered Person may be entitled. As used in this Article X, the term
"Covered Person" shall include such person's heirs, executors and
administrators, and a "disinterested person" is a person against whom none
of the actions, suits or other proceedings in question or another action,
suit, or other proceeding on the same or similar grounds is then or has been
pending. Nothing contained in this article shall affect any rights to
indemnification to which personnel of the Trust, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under
law, nor the power of the Trust to purchase and maintain liability insurance
on behalf of such person.
10.4. Limitation. Notwithstanding any provisions in the
----------
Declaration of Trust and these By-Laws pertaining to indemnification, all
such provisions are limited by the following undertaking set forth in the
rules promulgated by the Securities and Exchange Commission:
In the event that a claim for indemnification is
asserted by a Trustee,
officer or controlling person of the Trust in connection with the
registered securities of the Trust, the Trust will not make such
indemnification unless (i) the Trust has submitted, before a court or other
body, the question of whether the person to be indemnified was liable by
reason of wilful misfeasance, bad faith, gross negligence, or reckless
disregard of duties, and has obtained a final decision on the merits that
such person was not liable by reason of such conduct or (ii) in the absence
of such decision, the Trust shall have obtained a reasonable determination,
based upon a review of the facts, that such person was not liable by virtue
of such conduct, by (a) the vote of a majority of Trustees who are neither
interested persons as such term is defined in the Investment Company Act of
1940, nor parties to the proceeding or (b) an independent legal counsel in
a written opinion.
The Trust will not advance attorneys' fees or other
expenses incurred by the person to be indemnified unless the Trust shall have
(i) received an undertaking by or on behalf of such person to repay the
advance unless it is ultimately determined that such person is entitled to
indemnification and one of the following conditions shall have occurred: (x)
such person shall provide security for his undertaking, (y) the Trust shall
be insured against losses arising by reason of any lawful advances or (z) a
majority of the disinterested, non-party Trustees of the Trust, or an
independent legal counsel in a written opinion, shall have determined that
based on a review of readily available facts there is reason to believe that
such person ultimately will be found entitled to indemnification.
ARTICLE XI
Shareholders
11.1. Meetings. A meeting of the shareholders shall be called by
--------
the Secretary whenever ordered by the Trustees, or requested in writing by
the holder or holders of at least 10% of the outstanding shares entitled to
vote at such meeting. If the meeting is a meeting of the shareholders of one
or more series of shares, but not a meeting of all shareholders of the Trust,
then only the shareholders of such one or more series shall be entitled to
notice of and to vote at the meeting. If the Secretary, when so ordered or
requested, refuses or neglects for more than five days to call such meeting,
the Trustees, or the
shareholders so requesting may, in the name of the Secretary, call the
meeting by giving notice thereof in the manner required when notice is given
by the Secretary.
11.2. Access to Shareholder List. Shareholders of record may apply
--------------------------
to the Trustees for assistance in communicating with other shareholders for
the purpose of calling a meeting in order to vote upon the question of
removal of a Trustee. When ten or more shareholders of record who have been
such for at least six months preceding the date of application and who hold
in the aggregate shares having a net asset value of at least $25,000 or at
least 1% of the outstanding shares, whichever is less, so apply, the Trustees
shall within five business days either:
(i) afford to such applicants access to a list of names and
addresses of all shareholders as recorded on the books of the Trust; or
(ii) inform such applicants of the approximate number of
shareholders of record and the approximate cost of mailing material to them
and, within a reasonable time thereafter, mail, materials submitted by the
applicants, to all such shareholders of record. The Trustees shall not be
obligated to mail materials which they believe to be misleading or in
violation of applicable law.
11.3. Record Dates. For the purpose of determining the
------------
shareholders of any series who are entitled to vote or act at any meeting or
any adjournment thereof, or who are entitled to receive payment of any
dividend or of any other distribution, the Trustees from time to time may fix
a time, which shall be not more than 90 days before the date of any meeting
of shareholders or the date of payment of any dividend or of any other
distribution, as the record date for determining the shareholders of such
series having the right to notice of and to vote at such meeting and any
adjournment thereof or the right to receive such dividend or distribution,
and in such case only shareholders of record on such record date shall have
such right notwithstanding any transfer of shares on the books of the Trust
after the record date; or without fixing such record date the Trustees may
for any such purposes close the register or transfer books for all or part
of such period.
11.4. Place of Meetings. All meetings of the shareholders shall
-----------------
be held at the principal office of the Trust or at such other place within
the United States as shall be designated by the Trustees or the President of
the Trust.
11.5. Notice of Meetings. A written notice of each meeting of
------------------
shareholders, stating the place, date and hour and the purposes of the
meeting, shall be given at least ten days before
the meeting to each shareholder entitled to vote thereat by leaving such
notice with him or at his residence or usual place of business or by mailing
it, postage prepaid, and addressed to such shareholder at his address as it
appears in the records of the Trust. Such notice shall be given by the
Secretary or an Assistant Secretary or by an officer designated by the
Trustees. No notice of any meeting of shareholders need be given to a
shareholder if a written waiver of notice, executed before or after the
meeting by such shareholder or his attorney thereunto duly authorized, is
filed with the records of the meeting.
11.6. Ballots. No ballot shall be required for any election unless
-------
requested by a shareholder present or represented at the meeting and entitled
to vote in the election.
11.7. Proxies. Shareholders entitled to vote may vote either in
-------
person or by proxy in writing dated not more than six months before the
meeting named therein, which proxies shall be filed with the Secretary or
other person responsible to record the proceedings of the meeting before
being voted. Unless otherwise specifically limited by their terms, such
proxies shall entitle the holders thereof to vote at any adjournment of such
meeting but shall not be valid after the final adjournment of such meeting.
ARTICLE XII
Amendments to the By-Laws
These By-Laws may be amended or repealed, in whole or in part, by
a majority of the Trustees then in office at any meeting of the Trustees, or
by one or more writings signed by such a majority.
Dated: June 5, 1996
LOAN AGREEMENT
LOAN AGREEMENT dated as of July 11, 1996 (as the same may be
amended, supplemented or otherwise modified from time to time, the
"Agreement"), by and between Merrill Lynch International Bank Limited, a bank
organized under the laws of England (the "Lender") and Somerset Exchange
Fund, a Delaware Business Trust (the "Borrower"). This Agreement establishes
the terms and conditions that will govern the Loans from the Lender to the
Borrower.
RECITALS
All terms not otherwise defined above or in this Introductory
Statement are as defined in Article 1 hereof, or as defined elsewhere herein.
The Borrower has requested the Lender to make loans to the Borrower
in the maximum amount of $35,000,000 or such lesser amount as indicated
herein.
Subject to the terms and conditions set forth herein, the Lender
is willing to make the Loans to the Borrower.
Accordingly, the parties hereto hereby agree as follows:
1. DEFINITIONS
For the purposes hereof unless the context otherwise requires, the
following terms shall have the meanings indicated. Unless the context
otherwise requires, any of the following terms may be used in the singular
or the plural, depending on the reference:
"Act" shall have the meaning given to such term in section
---
3.13.
"Advisor Trustee" shall mean Merrill Lynch Asset Management, L.P.,
---------------
a Delaware limited partnership or any successor thereto or assignee thereof,
in its capacity as advisor trustee to the Borrower.
"Affiliate" means with respect to any Person, any other Person
---------
which directly or indirectly controls, is controlled by or is under common
control with such Person. A Person shall be deemed to control a Person if
such Person possesses directly or indirectly, the power to direct or cause
the direction of the management and policies of such other Person, whether
through ownership of voting securities, by contract or otherwise.
"Base Rate" shall mean for any day, a rate per annum (expressed
---------
as a decimal) equal to the rate announced by The Chase Manhattan Bank, N.A.
from time to time at its principal office in New York City as its stated or
prime or other similar base lending rate (such rate to change when and if
such stated, prime or other similar base lending rate changes).
"Borrowing Date" shall have the meaning given to such term in
--------------
Section 2.2.
"Business Day" means a day (other than a Saturday or Sunday) on
------------
which deposits in Dollars and any other relevant currency may be dealt in on
the London Inter Bank Market and banks are open in London and New York City.
"Commitment" shall mean thirty-five million Dollars ($35,000,000)
----------
or such lesser amount to the extent the Commitment is reduced in accordance
with the provisions of Section 2.10.
"Commitment Fee" shall have the meaning given to such term in
--------------
Section 2.5.
"Custodian" shall mean The Chase Manhattan Bank, N.A. and any
---------
successor custodian appointed by the Borrower.
"Custodian Agreement" shall mean the agreement between the
-------------------
Custodian and the Borrower in connection with the Securities.
"Dollars" or "$" means the lawful currency of the United States of
-------
America.
"Event of Default" shall have the meaning given to such term in
----------------
Section 5.1.
"GAAP" shall mean generally accepted accounting principles
----
consistently applied (except for accounting changes in response to FASB
releases or other authoritative pronouncements).
"Indebtedness" of any Person means (a) liability of such Person (i)
------------
for borrowed money, or under any reimbursement obligation related to a letter
of credit-or bond or performance bond facility, or (ii) evidenced by a bond,
note, debenture or other evidence of indebtedness (including a purchase money
obligation) representing extensions of credit or given in connection with the
acquisition of any business, property, service or asset of any kind (other
than current liabilities (except the current portion of funded debt) (in each
case as determined in accordance with GAAP)) or (iii) under swap, cap or
other interest rate or foreign currency hedging agreements and options,
financial future contracts and options on financial
futures contracts or (iv) under margin accounts or other securities
transactions conducted by the Borrower on margin or (v) for obligations with
respect to a capital lease; (b) any liability of others for any obligation
described in the preceding clause (a) that (i) the Person has guaranteed or
that is ' otherwise its legal liability (whether contingent or otherwise or
direct or indirect, but excluding endorsements of negotiable instruments for
deposit or collection in the ordinary course of business) or (ii) is secured
by any Lien or any restriction or limitation of any kind on any property or
asset owned or held by that Person, regardless of whether the obligation
secured thereby shall have been assumed by or is a personal liability of that
Person and (c) any amendment, supplement, modification, deferral, renewal,
extension or refunding of any liability of the types referred to in clauses
(a) and (b) above.
"Interest Period" shall mean a period of one month to five years as
---------------
selected by the Borrower in a written notice received by the Lender no later
than 4:00 P.M. (London time) on the third Business Day before the first day
of the Interest Period. In the case of each Loan, the first Interest Period
shall begin on the proposed date of such Loan and each subsequent Interest
Period shall begin on the last date of the previous Interest Period. If any
Interest Period would end on a day which is not a Business Day, the last day
of such Interest Period shall be extended to occur on the next succeeding
Business Day, provided, however, if such extension would cause such interest
period to occur in the next following calendar month, the last day of such
Interest Period shall occur on the next preceding Business Day. If the
Borrower fails to timely specify an Interest Period applicable to a Loan,
then the Interest Period for such Loan shall be one month. No Interest
Period may be selected which would end later than the Maturity Date.
"Interest Rate" shall mean a rate per annum during each Interest Period
-------------
(i) of LIBOR plus .60% and (ii) in the event that for any reason the Lender
is unable to determine LIBOR, the Base Rate minus 1.00%.
"LIBOR" means in relation to a particular Interest Period, the rate per
-----
annum equal to the rate (as determined by the Lender) (rounded to the nearest
1/16 of 1% or, if there is no nearest 1/16 of 1%, then to the next higher
1/16 of 1%) as quoted by three leading banks in the interbank eurodollar
market selected by the Lender after consultation with the Borrower as the
rate at which such banks are offering Dollar deposits in an amount equal
approximately to the Loan to which such Interest Period shall apply for a
period equal to such Interest Period, as
quoted at approximately 11:00 a.m. two Business Days prior to the first day
of such Interest Period.
"Lien" means any mortgage, pledge, hypothecation, assignment,
----
deposit arrangement, encumbrance, lien (statutory or other), preference,
priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing or similar statement or notice filed under the
Uniform Commercial Code or any other similar recording or notice statute, and
any lease having substantially the same effect as any of the foregoing).
"Loan" shall have the meaning given to such term in Section 2.1.
----
"Maturity Date" shall mean July 11, 2001 or such earlier date on
-------------
which the Loans shall become due in accordance with Section 7.2.
"Net Asset Value" shall be determined as provided for in the
---------------
Private Placement Memorandum.
"Note" shall have the meaning given to such term in Section 2.1.
----
"Notice of Borrowing" shall have the meaning given to such term in
-------------------
Section 2.2.
"Obligations" shall mean the due and punctual payment of principal
-----------
of and interest on the Loans, all fees and other monetary obligations of the
Borrower to the Lender under this Agreement or the Note.
"Person" shall include any individual, company, corporation, firm,
------
partnership, joint venture, association, organization, trust, state or agency
of a state (in each case, whether or not having separate legal personality).
"Preferred Stock" shall have the meaning given such term in the
---------------
Private Placement Memorandum.
"Private Placement Memorandum" shall mean the Confidential Private
----------------------------
Placement Memorandum of the Borrower dated February 14, 1996 as supplemented
by the Inspection Report and Supplement to the Confidential Private Placement
Memorandum dated June 24, 1996.
"Report" shall have the meaning given to such term in Section 4.10.
------
"Restricted Securities" shall mean securities restricted as to
---------------------
disposition by Federal and/or state securities laws (including, but not
limited to Rules 144 and 145 of the Securities and Exchange Commission) or
by contract provisions.
"Securities" shall mean all securities owned by the Borrower, whether
----------
as a result of a contribution to the Borrower by a Shareholder or otherwise.
"Shareholders" shall have the meaning given to such term in the Private
------------
Placement Memorandum.
"Subordinated Indebtedness" shall mean Indebtedness of the Borrower
-------------------------
subordinated to the Obligations pursuant to written agreements containing
subordination provisions and other material terms in form and substance
satisfactory to the Lender.
"Subsidiary" means, at any time, in relation to a company, any other
----------
company which is directly or indirectly controlled, or more than 50% of whose
issued or outstanding shares or stock having general voting power in ordinary
circumstances is beneficially owned, directly or indirectly, by that first
company.
"Termination Date" shall mean July 10, 2001 or such earlier date on
----------------
which the Commitment shall terminate in accordance with Section 7.2 or in
accordance with Section 2.10.
2. THE LOANS
2.1. Loans. The Lender agrees, on the terms and conditions set forth
-----
herein, from and including the date hereof through and including the
Termination Date to make advances ("Loans") to the Borrower from time to time
in an amount not to exceed the Commitment less the aggregate principal amount
of any outstanding Loans.- The principal amount of any Loan which when added
to the principal amount of all outstanding Loans plus accrued and unpaid
interest thereon shall not exceed 33 1/3% of the Net Asset Value of the
Borrower plus the principal amount of all Loans outstanding plus accrued and
unpaid interest thereon after giving effect to such new Loan as at the date
of such Loan. Subject to the terms of this Agreement, the Borrower may
borrow, repay and reborrow Loans at any time prior to the Termination Date.
The Loans shall be evidenced by a promissory note substantially in the form
of Exhibit A hereto (the "Note").
2.2. Borrowing Notice. The Borrower shall give the Lender irrevocable
----------------
notice (substantially in the form of Exhibit D hereto (a "Notice of
Borrowing")) not later than 4:00 P.M. (London
time) at least three Business Days before the proposed borrowing date (the
"Borrowing Date") of any Loan specifying (i) the Borrowing Date of such Loan
which shall be a Business Day, (ii) the principal amount of such Loan and
(iii) the initial Interest Period applicable to such Loan. Notwithstanding
the foregoing, the Borrower shall give the Lender irrevocable notice of the
initial Loan to be made hereunder not later than 4:00 p.m. (London time) at
least one (1) Business Day before the Borrowing Date of such initial Loan
2.3. Method of Funding Loans. The Lender shall make available to
-----------------------
the Borrower on each Borrowing Date the principal amount of Loans specified
in the applicable borrowing notice to the Borrower's account (Account No.
81313) at the Custodian via Federal Funds wire transfer.
2.4. Interest. Interest shall accrue on the unpaid principal
--------
amount of each Loan at the Interest Rate from and including the date of the
Loan to but excluding the date of any principal payment. Interest accrued
on each Loan shall be payable on the last day of the Interest Period
applicable thereto and on any day on which Loans are repaid whether due to
acceleration or otherwise. Interest on any Loan having an Interest Period
in excess of twelve months shall also be payable on the date during such
Interest Period that would be the last day of an Interest Period commencing
on the same day of such Interest Period but having a duration of six months.
Notwithstanding anything in this Agreement to the contrary, the Interest Rate
on the Loans shall in no event be in excess of the maximum interest rate
permitted by applicable law. All interest shall accrue from day to day and
shall be calculated on the basis of a 360 (three hundred and sixty) day year
and the number of days elapsed.
2.5. Commitment Fee. The Borrower agrees to pay in arrears to the
--------------
Lender on the last Business Day of each March, June, September and December
in each year (commencing on the last Business Day of September 1996) prior
to the Termination Date and on the Termination Date, a fee (the "Commitment
Fee") of 1/10 of 1% per annum, computed on the basis of the actual number of
days elapsed over a year of 360 days, on the average daily amount by which
the Commitment exceeds the sum of the principal balance of Loans outstanding
during the preceding period or quarter. Such Commitment Fee shall commence
to accrue on the date on which this Agreement is fully executed and shall
cease to accrue on the Termination Date
2.6. Default Interest. If an Event of Default shall have occurred
----------------
and be continuing (after as well as before judgment) and the Lender shall
have accelerated the Loans or if,
all or any portion of the principal balance of the Loans or any interest,
fees or other amounts payable hereunder shall not be paid when due (whether
at the stated maturity thereof, by acceleration or otherwise), the Borrower
shall pay interest on such overdue principal amount of the Loans and on such
overdue interest, fees and other amounts payable hereunder, on demand at a
rate per annum equal (i) in the case of the principal amount of the Loans,
the Interest Rate then applicable to such Loans plus 2% per annum and (ii)
in the case of such other amounts, an amount equal to the Base Rate plus 1.5%
per annum, in each case, from the date such amount was due until payment in
full thereof.
2.7. Repayment and Termination. The Borrower shall repay the
-------------------------
outstanding principal amount of all Loans on the Maturity Date.
2.8. Optional Prepayments. The Borrower may from time to time on
the last day of any Interest Period, upon five Business Days prior written
notice to the Lender, which notice shall be irrevocable once given, pay the
outstanding principal amount of the Loans, in whole or in part, without
prepayment penalty, together with accrued interest to the date of such
prepayment on the principal amount prepaid, provided that each partial
principal repayment is in a minimum aggregate amount of $1,000,000 or any
integral multiple of $1,000,000 in excess thereof.
2.9. Manner of Payments. All payments by the Borrower hereunder
------------------
and under the Note shall be made by the Borrower on the date when due without
offset or counterclaim in Dollars in federal or other immediately available
funds to the account of the Lender at Northern Trust International, New York,
New York, Account No. 10022220230, Reference No. 10011755 or in accordance
with the wire transfer instructions provided by the Lender to the Borrower
in writing from time to time. Any such payment received after 11:00 a.m.
New York City time on the date when due shall be deemed received on the
following Business Day.
2.10. Reduction or Termination of Commitment. (a) The Borrower
--------------------------------------
shall have the right, upon at least five (5) Business Days' prior written
notice to the Lender, to reduce permanently the Commitment in whole at any
time, or in part from time to time, to an amount not less than the aggregate
principal balance of the Loans then outstanding (after giving effect to any
contemporaneous prepayment thereof in accordance with Section 2.8), without
premium or penalty, provided that each partial reduction of the Commitment
shall be in an amount equal to $1,000,000 or such greater amount which is an
integral multiple thereof
2.11. Change in Circumstances. (a) In the event that after the
-----------------------
date hereof any change in applicable law or in the official interpretation
or administration thereof (including, without limitation, any request,
guideline or policy not having the force of law) by any authority charged
with the administration or interpretation thereof or, with respect to clause
(ii), (iii) or (iv) below any change in conditions, shall occur which shall:
(i) subject the Lender to, or increase the net amount of, any tax,
levy, impost, duty, charge, fee, deduction or withholding with respect to any
Loan for which the Interest Rate is based upon LIBOR (other than withholding
tax imposed by the United States of America or any political subdivision or
taxing authority thereof or any other tax, levy, impost, duty, charge, fee,
deduction or withholding (x) that is measured with respect to the overall net
income of the Lender, and that is imposed by the United States of America,
or by the jurisdiction in which the Lender is incorporated, or in which the
Lender has its principal office (or any political subdivision or taxing
authority thereof or therein), or (y) that is imposed solely by reason of the
Lender failing to make a declaration of, or otherwise to establish,
non-residence, or to make any other claim for exemption, or otherwise to
comply with any certification, identification, information, documentation or
reporting requirements prescribed under the laws of the relevant
jurisdiction, in those cases where a Lender may properly make such
declaration or claim or so establish non-residence or otherwise comply); or
(ii) change the basis of taxation of any payment to the Lender of
principal or any interest on any Loan for which the interest rate is based
upon LIBOR (except as limited in clause (i) above); or
(iii) impose, modify or deem applicable any reserve, deposit or
similar requirement against any assets held by, deposits with or for the
account of or loans or commitments by an office of the Lender with respect
to any Loan for which the interest rate is based upon LIBOR; or
(iv) impose upon the Lender or the London Interbank Market any
other condition with respect to any Loans for which the interest rate is
based upon LIBOR or this Agreement;
and the result of any of the foregoing shall be to increase the actual cost
to the Lender of making or maintaining any Loan hereunder or to reduce the
amount of any payment (whether of
principal, interest or otherwise) received or receivable by the Lender in
connection with any Loan hereunder, or to require the Lender to make any
payment in connection with any Loan hereunder, in each case by or in an
amount which the Lender in its sole judgment shall deem material, then and
in each case the Borrower shall pay to the Lender, as provided in paragraph
(b) below, such amounts as shall be necessary to compensate the Lender for
such cost, reduction or payment.
(b) The Lender shall deliver to the Borrower from time to time, one
or more certificates setting forth the amounts due to the Lender under
paragraph (a) above, the changes as a result of which such amounts are due,
the manner of computing such amounts and the manner of computing the amounts
allocable to Loans hereunder pursuant to paragraph (-a) above. Each such
certificate shall be conclusive in the absence of manifest error. The
Borrower shall pay to the Lender the amounts shown as due on any such
certificate within ten Business Days after its receipt of the same. No
failure on the part of the Lender to demand compensation under paragraph (a)
above on any one occasion shall constitute a waiver of its rights to demand
compensation on any other occasion. The protection of this Section shall be
available to the Lender regardless of any possible contention of the
invalidity or inapplicability of any law, regulation or other condition which
shall give rise to any demand by the Lender for compensation thereunder.
3. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender the following:
3.1. Securities. The Borrower owns the Securities free of any (i)
----------
interest or lien in favor of any third party other than as permitted pursuant
to Section 5.2 hereof or (ii) restriction on transfer other than with respect
to Restricted Securities, restrictions on the transfer of such Restricted
Securities arising under Federal or state securities laws or by reason of
contract.
3.2. Due Organization. The Borrower is a business trust duly formed
----------------
and its Trustees were validly appointed under the laws of the State of
Delaware and has the requisite power and authority to own its assets and to
conduct the business which it conducts. The Borrower is duly qualified to
do business in all jurisdictions in which the nature of its activities
requires such qualification or has made all filings necessary to so qualify,
except where the failure to do so could not reasonably be expected to have
a material adverse effect on the business,
condition (financial or otherwise), obligations, operations, performance or
properties of the Borrower.
3.3. Power and Authority: Binding Agreements. The Borrower has
---------------------------------------
the full right, power and authority to make, execute, deliver and perform its
obligations under this Agreement and the execution, delivery and performance
of the documents contemplated by this Agreement and consummation of the
transactions contemplated by this Agreement have been duly authorized by all
necessary action on the part of the Borrower. This Agreement and the Note
constitute the legal, valid and binding obligation of the Borrower,
enforceable in accordance with their respective terms, subject, as to the
enforcement of remedies, to applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally and to general principles of
equity regardless of whether enforcement is considered in a proceeding at law
or in equity.
3.4. No Violation. Neither the execution, delivery or performance
------------
by the Borrower of this Agreement and the related documents, the consummation
of the transactions contemplated by this Agreement, nor compliance with the
provisions of this Agreement will (i) violate any law, regulation, order,
judgment or decree binding on the Borrower, (ii) violate or conflict with,
as applicable, the Borrower's Second Amended and Restated Declaration of
Trust or other organizational documents or the Borrower's By-laws or other
governing documents, (iii) conflict with, cause a breach of, constitute a
default under, be cause for the acceleration of the maturity of, or create
or result in the creation or imposition of any Lien on any of the Borrower's
property under, any agreement, indenture, instrument or other undertaking to
which the Borrower is a party.
3.5. No Consents. No order, consent, license, authorization,
-----------
recording or registration is required to authorize or is required in
connection with the execution, delivery and performance or the legality,
validity, binding effect or enforceability of this Agreement, any documents
executed in connection with this Agreement or any transactions contemplated
by this Agreement other than those which have been obtained or made or will
be obtained or made as and when required in accordance with applicable law.
3.6. No Litigation. There are no actions, suits, litigation or
-------------
investigations, pending or threatened, against the Borrower that are
reasonably likely to (i) have a material adverse effect on the business,
condition (financial or otherwise), obligations, operations, performance or
properties of the Borrower or (ii) affect the Borrower's ability to enter
into and perform its obligations under this Agreement or any of the
transactions contemplated by this Agreement.
3.7. Compliance with Laws. The operations of the Borrower are in
--------------------
compliance with all federal, state, local and foreign laws and regulations
applicable to it, including, without limitation, tax, environmental and
health and safety laws and regulations, except where the failure to do so
could not reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise), obligations, operations,
performance or properties of the Borrower.
3.8. No Material Adverse Change. Since June 24, 1996 there has
--------------------------
been no material adverse change in the business, condition (financial or
otherwise), obligations, operations, Performance or properties of the
Borrower.
3.9. Solvency. After giving effect to the Loans, (i) the present
--------
fair value of the Borrower's assets exceeds the total amount of the
Borrower's liabilities (including, without limitation, contingent
liabilities), (ii) the Borrower has capital and assets sufficient to carry
on its business, (iii) the Borrower is not engaged and is not about to engage
in a business or a transaction for which its remaining assets are
unreasonably small in relation to such business or transaction and (iv) the
Borrower does not intend to incur or believe that it will incur debts beyond
its ability to pay as they become due. The Borrower will not be rendered
insolvent by the execution, delivery and performance of this Agreement or the
Note or by the consummation of the transactions contemplated under this
Agreement.
3.10. Place of Business. The address of the principal executive
-----------------
office of the Borrower as indicated on the signature page hereto (or as to
which the Borrower has otherwise informed the Lender in writing) is correct.
3.11. Full Disclosure. Neither this Agreement nor the Private
---------------
Placement Memorandum nor any agreement, document, certificate or written
statement furnished to the Lender by the Borrower or the Custodian in
connection with the transactions contemplated hereby, at the time it was
furnished or delivered, contained any untrue statement of a material fact or
omitted to state a material fact, under the circumstances under which it was
made, necessary in order to make the statements contained herein or therein
taken as a whole not misleading.
3.12. Sole Business. The Borrower is not engaged in any business
-------------
other than as described in the Private Placement Memorandum except to the
extent otherwise contemplated by Section 5.4.
3.13. Investment Company Act. The Borrower is an investment
----------------------
comPany within the meaning of the Investment Company Act of 1940, as
amended (the "Act") and has registered under the Act as a diversified,
closed-end management investment company.
3.14. Private Placement Memorandum. All transactions contemplated
----------------------------
by this Agreement are consistent in all material respects with the
descriptions thereof, if any, contained in the Private Placement Memorandum
and the Borrower has not entered into any agreements which would otherwise
prohibit, restrict or limit the transactions contemplated by this Agreement
or the Private Placement Memorandum.
4. AFFIRMATIVE COVENANTS
Until this Agreement has terminated and all Obligations have been
indefeasibly paid in full, the Borrower will:
4.1. Maintenance of Existence. Preserve and maintain its
------------------------
existence and all rights and franchises material to its business.
4.2. Compliance with Laws. Comply with all applicable laws,
--------------------
statutes, codes, ordinances, regulations, rules, orders, awards, judgments,
decrees, injunctions, approvals and permits applicable to it including, but
not limited to, the Act, except where the failure to do so could not
reasonably be expected to have a material adverse effect on the business,
condition (financial or otherwise), obligations, operations, performance or
properties of the Borrower.
4.3. Payment of Taxes. Pay all taxes, assessments and
----------------
governmental charges imposed upon it or upon its property and all claims
(including, without limitation, claims for labor, materials, supplies or
services) which might, if unpaid, become a lien upon its property, unless,
in each case, the validity or amount thereof is being contested in good faith
by appropriate proceedings and the Borrower has maintained adequate reserves
with respect thereto.
4.4. Books and Records. Maintain or cause to be maintained at all
-----------------
times in accordance with GAAP true and complete books and records of its
financial and business operations.
4.5. Audit Rights. Permit any representative of the Lender to
------------
visit the office of the Borrower to discuss the Borrower's affairs, finances
and accounts with the officers of the Borrower, and with the Advisor
Trustee, all at such reasonable times, upon reasonable notice and as often
as the Lender may reasonably request.
4.6. Notices. Furnish to the Lender: (i) within ten (10) days of
-------
becoming aware of the occurrence of any Event of Default, or event, condition
or act which with the passage of time or notice, or both, would constitute
an Event of Default, notice of the occurrence and nature of such Event of
Default and of the steps that are being taken to cure such Event of Default
or event, condition or act; (ii) promptly after (a) the occurrence thereof,
notice of the institution of or any material adverse development in any
action, suit or proceeding or any governmental investigation or any
arbitration, before any court or arbitrator or any governmental authority
(involving in excess of $1,000,000, or otherwise material) against the
Borrower or any material property of the Borrower, or (b) actual knowledge
thereof, written notice of the threat of any such action, suit, proceeding,
investigation or arbitration; (iii) within one (1) BusinEss Day after the
appointment of any successor Custodian or Advisor Trustee, the name and
address of such successor and (iv) promptly after the adoption thereof notice
of any amendment or modification to any non-fundamental investment policy or
objective described in the Private Placement Memorandum.
4.7. Bankruptcy. Notify the Lender in writing before filing any
----------
petition seeking the protection of any bankruptcy, insolvency or any similar
statutes.
4.8. Financial and Credit Information. (a) Notify the Lender
--------------------------------
immediately, in writing, of any material change in the Borrower's financial
condition which would adversely affect the Borrower's ability to repay any
of its Obligation(s) to the Lender according to the terms of this Agreement
and the Note.
(b) Supply to the Lender such current financial information or
other information as the Lender may reasonably request from time to time.
4.9. Financial Statements. Furnish the Lender (i) within 45 days
--------------------
after the end of the first semi-annual accounting period in each fiscal year
of the Borrower, a copy of its Statement of Assets and Liabilities as at the
end of such semi-annual period, together with the related Schedule of
Investments and Statements of Operations, Changes in Net Assets and Cash
Flows for such period, and certified by the chief financial officer or other
authorized officer of the Borrower, that such statements are correct and
fairly present the financial condition of the Borrower as at the end of such
semi-annual accounting period (subject to normal year-end audit
adjustments); (ii) within 90 days after the end of each fiscal year of the
Borrower, a copy of its Statement of Assets and Liabilities as at the end of
such fiscal year, together with the related Schedule of Investments and
Statements of Operations, Changes in Net Assets and Cash Flows as of and
through the end of such fiscal year, attached to which shall be a report of
Deloitte & Touche LLP or such other independent certified public accountants
of recognized standing and which statement shall have been prepared in
accordance with GAAP other than as described in the footnotes to such
statements and (iii) concurrently with such distribution, copies of all
financial reports distributed by or on behalf of the Borrower to all
Shareholders in addition to the foregoing.
4.10. Reports. (a) Provide the Lender, within five Business Days
-------
after the end of each calendar month, a Statement in the form of Exhibit B
hereto (the "Report"). The Lender reserves the right to request such
additional information from the Borrower or the Custodian in connection with
the Report and any Security as it reasonably deems appropriate.
(b) Provide the Lender not later than the Business Day next succeeding
the final Business Day of each week a copy of the valuation of the Securities
as provided for in the Private Placement Memorandum.
4.11. Government Approval. If any further authorizations,
-------------------
approvals, registrations or filings with any governmental or public
regulatory body or authority of the United States, any state thereof or any
other jurisdiction required for the performance by the Borrower of this
Agreement should hereafter become necessary, obtain or make, or cause to be
obtained or made, all such authorizations, approvals, registrations or
filings as the Lender shall reasonably request.
4.12. Use of Proceeds. The Borrower shall use the proceeds of the
---------------
Loans to finance the purchase of Preferred Stock, to pay placement fees,
selling commissions and offering and organizational expenses of the Borrower
and all other fees and expenses of the Borrower, to pay interest and fees
incurred hereunder and provide security to counterparties in respect of
hedging agreements for short-term liquidity needs.
5. NEGATIVE COVENANTS OF THE BORROWER
Until this Agreement has terminated and all amounts and Obligations
have been indefeasibly paid in full, the Borrower will not:
5.1. No Indebtedness. Create, incur, assume or suffer to exist
---------------
any Indebtedness, except for (i) than Indebtedness of the Borrower under this
Agreement and the Note, (ii) Subordinated Indebtedness (iii) Indebtedness in
respect of (x) swap, cap or other interest rate or foreign currency hedging
arrangements (in each case, where used for hedging purposes), and (y)
options, financial futures contracts and options on financial futures
contracts (in each case, where used for hedging purposes), (iv) Indebtedness
in respect of purchases of securities on short term credit as may be
necessary for the clearance of purchases and sales of portfolio securities
as described in the Private Placement Memorandum and (v) overdrafts extended
by the Custodian under the Custodian Agreement.
5.2. No Liens. Create, incur, assume or suffer to exist any lien
--------
on any of its properties or assets except (i) Liens in respect of
Indebtedness permitted under Section 5.1(iii), (iv) and (v), (ii) Liens for
taxes, assessments or similar charges incurred in the ordinary course of
business which are not delinquent or which are being contested in good faith
and by appropriate proceedings diligently conducted, and for which adequate
reserves have been set aside in accordance with GAAP, provided that
enforcement of such Liens is stayed pending such contest, (iii) statutory
Liens arising by operation of law such as mechanics, materials, carriers',
warehouse liens, (A) which occur in the ordinary course of business (B)
secure normal trade debt which is not yet due and payable, (C) do not secure
Indebtedness for borrowed money, (D) are being contested in good faith and
by appropriate proceedings diligently conducted, and (E) for which adequate
reserves have been set aside in accordance with GAAP, provided that
enforcement of such Liens is stayed pending such contest, (iv) Liens arising
out of judgments or decrees which are being contested in good faith and by
appropriate proceedings diligently conducted, and for which adequate reserves
have been set.aside in accordance with GAAP, provided that enforcement
thereof is stayed pending such contest, and (v) Liens of the Custodian under
the Custodian Agreement.
5.3. No Mergers. Enter into any transaction of merger or
----------
consolidation or liquidate, wind up, dissolve itself (or suffer any
liquidation or dissolution) or take any action.
5.4. No New Business; Amendments to Private Placement Memorandum.
-----------------------------------------------------------
Engage in any business other than as described in the Private Placement
Memorandum or amend or modify any fundamental investment policies or
objectives described in the Private Placement Memorandum without the prior
written consent of the Lender, which consent will not be unreasonably
withheld.
5.5. Distributions. Make any distributions or honor any requests
-------------
for redemptions by a Shareholder, except as contemplated by the Private
Placement Memorandum.
5.6. Amendments. Amend or modify, or permit to be amended or
----------
modified the Second Amended and Restated Declaration of Trust of the Borrower
except (i) such amendments or modifications as are deemed ministerial by the
Borrower or (ii) with the prior written consent of the Lender, which consent
shall not be unreasonably withheld.
5.7. Asset Coverage. Permit (x) the value of the Borrower's total
--------------
assets less (y) 125% of the value of any assets pledged to third parties (as
determined on the date the Borrower calculates its Net Asset Value) to be
less than (z) 150% of the principal amount of the Loans outstanding together
with accrued and unsaid interest thereon.
6. CONDITIONS PRECEDENT TO CLOSING
6.1. Conditions Precedent to Initial Loan. It shall be a
------------------------------------
condition precedent to the effectiveness of this Agreement and the making of
the initial Loan hereunder that
(a) the Lender shall have received the following, in form and
substance satisfactory to the Lender in its sole discretion:
(i) Evidence satisfactory to the Lender that the Borrower is
duly authorized to enter into this Agreement and all transactions
contemplated hereby and to execute and deliver this Agreement, the Note and
all documents to be executed in connection therewith;
(ii) A certificate of the Secretary of the Borrower attesting,
among other things, (w) that a true, correct and complete copy of the
Borrower's Second Amended and Restated Declaration of Trust, together with
all amendments thereto, has been delivered to the Lender, (x) that a true,
correct and complete copy of the resolutions of the Trustees authorizing the
execution, delivery and performance in accordance with their terms of this
Agreement, the Note and the other documents and transactions contemplated
hereby or thereby and the borrowings hereunder has been delivered to the
Lender and such authorization is in full force and effect, (y) that all
representations and warranties made in connection with this Agreement are
true, accurate and correct in all respects and (z) to the incumbency of
officers of the Borrower executing this
Agreement, the Note and any related documents on behalf of the Borrower;
(iii) A copy of the Declaration of Trust and the By-laws of
the Borrower;
(iv) A copy of the Custodian Agreement;
(v) Evidence that the amount of the initial Loans will not
exceed 33 1/3% of the Net Asset Value of the Borrower plus the principal
amount of the initial Loan;
(vi) The favorable opinion of Counsel to the Borrower covering
matters of New York and United States law, in the form of Exhibit C hereto;
(vii) The Note, dated as of the date hereof, duly executed on
behalf of the Borrower;
(viii) A list of assets of the Borrower; and
(ix) Such other documents as the Lender may reasonably
require.
(b) Concurrently with the making of the initial Loan, the
Closing (as defined in the Private Placement Memorandum) shall have occurred.
6.2. Conditions Precedent to All Loans. It shall be a condition
---------------------------------
precedent to all Loans that on the date of such Loan the following statements
shall be true (and each request for a Loan shall constitute a representation
and warranty by the Borrower that on the date of such Loan such statements
are true);
(a) After giving effect to such Loan, the total of all Loans
outstanding will not exceed the Commitment;
(b) The representations and warranties contained in Article 3 are
true and correct on and as of the date of such Loan, except to the extent
such representations and warranties specifically relate to an earlier date;
(c) No event has occurred and is continuing or would result from
the making of such Loan which would constitute an Event of Default and no
event, act or condition which with the passage of time or notice, or both,
would constitute an Event of Default has occurred and is continuing; and
(d) The Borrower has delivered to the Lender the Notice of
Borrowing required pursuant to Section 2.2 hereof.
In addition, it shall be a condition precedent to all Loans that
after giving effect to such Loan, the total of all Loans outstanding plus
accrued and unpaid interest thereon will not exceed 33 1/3% of Net Asset
Value plus the outstanding principal amount of the Loans plus accrued and
unpaid interest after giving effect to the Loans to be made on such date.
7. EVENTS OF DEFAULTS; REMEDIES
7.1. Events of Defaults. An event of default ("Event of Default")
------------------
will occur under this Agreement and the Note if:
(a) the Borrower fails to make any payment of principal hereunder
or under the Note on the date when due and payable;
(b) the Borrower fails to make any payment of interest or any fees
or expenses payable hereunder or under the Note for five (5) or more Business
Days after the same shall be due and payable;
(c) the Borrower fails to observe or perform any covenant or
agreement contained in Article 5 or in Section 4.6(i) or (ii):
(d) the Borrower fails to observe or perform any other term,
covenant, or agreement contained in this Agreement and such failure shall
have continued unremedied for a period of ten (10) Business Days after the
Borrower shall have received written notice thereof from the Lender:
(e) any representation or warranty of the Borrower made in this
Agreement or in any certificate, report or other document delivered pursuant
to this Agreement, shall prove to have been incorrect in any material respect
when made;
(f) default (after giving effect to any applicable grace period)
shall be made with respect to the payment of any Indebtedness of the
Borrower, which Indebtedness exceeds $1,000,000;
(g) an attachment is levied against all or any material portion of
the Securities and such attachment is not stayed or lifted within forty-five
(45) days;
(h) final judgment for the payment of money in excess of $1,000,000
shall be rendered against the Borrower and within thirty (30) days from the
entry of judgment, such judgment shall not have been dismissed or discharged
or stayed or bonded pending appeal or shall not have been discharged within
sixty (60) days from the entry of a final order of affirmance or appeal;
(i) any legal proceeding started by any Person in the bankruptcy
of the Borrower or for the appointment of a receiver, administrator, trustee
or similar officer of the Borrower or of any or all of the revenues and
assets of the Borrower or the winding-up, administration, dissolution or
reorganization of the Borrower and such proceeding (unless commenced by the
Borrower) is not stayed or discontinued within sixty (60) days after the
commencement thereof or the Borrower makes a general assignment for the
benefit of its creditors
(j) the Borrower is unable to pay its debts as they fall due,
stops, suspends or threatens to stop or suspend payment of all or a material
part of its debts,-or takes any proceeding or other step with a view to
readjustment, rescheduling or deferral of all of its Indebtedness or any part
of its Indebtedness which it would or might otherwise be unable to pay when
due or proposes a general assignment or an arrangement or composition with
or for the benefit of the creditors; or
(k) the Borrower is subject to dissolution or termination as the
result of (i) an election by the trustees of the Borrower to terminate or a
vote by the Shareholders to dissolve or terminate or (ii) the Borrower
disposes of all or substantially all of its assets, unless within 60 days
thereafter, the Shareholders vote to continue the operations of the Borrower.
7.2. Remedies. Upon the occurrence and during the continuation
--------
of an Event of Default, the Lender may, without prejudice to any other right
or;remedy of the Lender, at law, by contract or otherwise, by notice to the
Borrower declare all Loans, accrued interest thereon and any other sum then
payable hereunder to be immediately due and payable by the Borrower to the
Lender whereupon they shall become so due and payable, and/or declare the
Commitment to be terminated, whereupon it shall so terminate. If an Event
of Default specified in clause (i) above shall have occurred, the Commitment
shall automatically terminate and the Note shall automatically become due and
payable, both as to interest and principal, without presentment, demand,
protest or other notice of any kind. Upon the occurrence and continuation
of an Event of Default, the Lender may to the extent permitted by applicable
law, also set-off, against any amount owing to it under this Agreement and
the Note, any securities, cash or other property of the Borrower in the
Lender's possession.
8. MISCELLANEOUS
8.1. Expenses. Whether or not the transactions hereby
--------
contemplated shall be consummated, the Borrower agrees to pay all reasonable
expenses incurred by the Lender in connection with the negotiation,
preparation, execution, delivery, waiver, modification or enforcement and
administration of this Agreement (including any amendment hereto) and the
Note, including, but not limited to, the reasonable fees and disbursements
of any counsel for the Lender.
8.2. Cost of Collection. If the Borrower fails to make any
------------------
payment under this Agreement as and when required, the Borrower must pay, to
the extent permitted by applicable law, the Lender's court and collection
costs, including reasonable legal fees,land, if the Loan is referred for
collection to any attorney not employed by the Lender or one of its
affiliates, the Lender's reasonable attorney fees.
8.3. Indemnities. The Borrower shall within five (5) Business
Days after written demand indemnify the Lender for:
(i) Any funding and any other cost, expense or liability (including
reasonable legal fees and taxes (other than taxes excluded pursuant to
Section 8.17) sustained or incurred by the Lender (1) to render this
Agreement enforceable, (2) in connection with protecting or enforcing the
Lender's rights under, this Agreement and/or any amendment thereto or (3) as
a result of the occurrence or continuance of any Event of Default;
(ii) Any funding and any other cost, expense or liability
(including loss of profit, reasonable legal fees and taxes (other than taxes
excluded pursuant to Section 8.17)) sustained or incurred by the Lender as
a result of the receipt or recovery by the Lender of all or any part of a
Loan (other than a Loan interest on which is calculated by reference to Base
Rate) or an overdue sum otherwise than on the last day of an Interest Period
applicable to that Loan;
(iii) Any stamp, documentary, registration or similar tax payable
in connection with the entry into, registration, performance, enforcement or
admissibility in evidence of the Agreement and/or any such amendment,
supplement or waiver, promptly and in any event before any interest or
penalty becomes payable, together with any liability with respect to
or resulting from any delay in paying or omission to pay any such tax;
and
(iv) Any claims, demands, losses, judgments, damages and
liabilities (including liabilities for penalties) incurred by the Lender
and/or its directors, officers, employees and agents teach an "Indemnified
Party") as a result of, or arising out of, or in any way related to, or by
reason of, any investigation, litigation or other proceeding (whether or not
the Lender is a party thereto) related to the entering into and/or the
performance of this Agreement, or the use of the proceeds of any Loan
hereunder or the consummation of any other transaction contemplated by this
Agreement, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding (but excluding any such losses, liabilities,
claims, damages or expenses of an Indemnified Party to the extent incurred
by reason of the gross negligence or willful misconduct of any Indemnified
Party).
8.4. Delay in Enforcement; No Waiver. The Lender can choose to
-------------------------------
delay or not to enforce any of its rights under this Agreement without losing
such rights. If the Lender choose not to exercise or enforce any of such
rights, the Borrower agrees that the Lender is not waiving the right to
enforce such rights at a later time or any of its other rights. Any waiver
of the Lender's rights under this Agreement must be in writing.
8.5. Statements and Notices. Statements and notices will be sent
----------------------
to the address for the Borrower indicated on the signature page hereto,
unless the Borrower notifies the Lender in writing of a change in address.
The Borrower agrees to provide the Lender with 30 days prior written notice
of any change of address or name. The Borrower agrees to send correspondence
to the Lender at the address for the Lender indicated on the signature page
or as otherwise provided by the Lender from time to time with a copy to the
Lender's Representative Office located at 450 Lexington Avenue, New York, New
York 10017, Attention: G. Frederick Reinhardt.
8.6. Waivers. To the extent permitted by applicable law, the
-------
Borrower waives the Borrower's rights to require the Lender, (a) to demand
payments of amounts due (known as "presentment"); (b) to give notice that
amounts due have not been paid (known as "notice of dishonor"); and (c) to
obtain an official certification of non-payment (known as "protest").
8.7 Non-Recourse. The Lender hereby agrees that neither; any
------------
Shareholder nor the Trustees of the Borrower, in
such capacity, shall have any personal liability to the Lender under this
Agreement or the Note, with regard to the principal of or interest on the
Loans, costs, expenses or otherwise. Nothing contained in this Section shall
be construed as limiting the rights, if any, the Lender may have under
applicable law against the Trustees of the Borrower in the case of willful
misconduct by the Trustees; provided, however, that nothing contained in this
-------- -------
sentence is intended to grant to or create in favor of the Lender any rights
it would not otherwise have against the Trustees of the Borrower under
applicable law.
8.8. Successors and Assigns. (a) This Agreement shall be binding
----------------------
upon and inure to the benefit of the successors and permitted assigns of all
the parties to this Agreement. The Lender shall not assign all or part of
its rights, obligations and remedies under this Agreement without the prior
written consent of the Borrower (which consent shall be in the sole
discretion of the Borrower). Any such permitted assignee of such rights and
obligations shall be entitled to the full benefit and the same obligations
under this Agreement to the same extent as if it were an original party in
respect of the rights or obligations assigned or transferred to it. The
Borrower may not assign its rights or obligations under this Agreement.
(b) The Lender may grant participations in all or any part of its
Loans and its Commitment to one or more commercial banks, provided that (i)
the Lender's obligations under this Agreement shall remain unchanged, (ii)
the Lender shall remain solely responsible to the Borrower for the
performance of such obligations, (iii) the Borrower shall continue to deal
solely and directly with the Lender in connection with the Lender's rights
and obligations under this Agreement, (iv) no sub-participations shall be
permitted and (v) the voting rights of any holder of any participation shall
be limited to decisions that only do any of the following: (A) subject the
participant to any additional obligation, (B) reduce the principal of, or
interest on the Loans or any fees or other amounts payable hereunder, (C)
postpone the Termination Date, or the date fixed for payment of interest on
the loans or the Commitment Fee payable hereunder.
(c) If any participation made pursuant to subsection (b) shall be
made to any Person that is not a United States Person as defined in Section
7701(a)(30) of the Internal Revenue Code of 1986, such Person shall;furnish
to the Lender the forms required by Section 8.17 to evidence such Person's
complete exemption from U.S. withholding taxes with respect to all payments
with respect to such participation.
(d) The Lender will not disclose to a potential assignee or
participant any information about the Borrower and
this Agreement unless such potential assignee or participant agrees in
writing to be bound by the provisions of Section 8.18.
8.9. GOVERNING LAW. THIS AGREEMENT AND THE NOTE HAVE BEEN
--------------
EXECUTED AND DELIVERED BY THE BORROWER IN THE STATE OF NEW YORK AND IN ALL
RESPECTS SHALL BE GOVERNED BY AND INTERPRETED UNDER THE LAWS OF THE STATE OF
NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH
STATE AND, IN THE CASE OF PROVISIONS RELATING TO INTEREST RATES, ANY
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
8.10. Effectiveness. The Borrower hereby acknowledges that (i)
-------------
this Agreement shall become effective only at such time as the Lender has
accepted this Agreement in London and the Lender shall have no liability or
obligation hereunder until such time, (ii) the Lender may execute this
Agreement by telecopy and provide executed originals to the Borrower, and
(iii) the Loans will be made in England.
8.11. WAIVER OF JURY TRIAL. TO TEE EXTENT PERMITTED BY APPLICABLE
--------------------
LAW WHICH CANNOT BE WAIVED, EACH OF THE BORROWER AND THE LENDER HEREBY WAIVES
AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR
OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE,
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS
AGREEMENT, THE NOTE OR THE SUBJECT MATTER HEREOF OR THEREOF, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR
OTHERWISE. EACH OF THE BORROWER AND THE LENDER ACKNOWLEDGES THAT IS HAS BEEN
INFORMED BY THE LENDER OR THE BORROWER, AS THE CASE MAY BE, THAT THE
PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE
LENDER OR THE BORROWER, AS THE CASE MAY BE, HAS RELIED, IS RELYING AND WILL
RELY IN ENTERING INTO THIS AGREEMENT AND THE NOTE AND ANY OTHER DOCUMENT
RELATED THERETO. EACH OF THE LENDER AND THE BORROWER, AS THE CASE MAY BE,
MAY FILE AN ORIGINAL COUNTERPART OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE-CONSENT OF THE BORROWER OR THE LENDER, AS THE CASE MAY BE,
TO THE WAIVER OF ITS RIGHTS TO TRIAL BY JURY.
8.12. Amendments. Neither this Agreement nor the Note may be
----------
amended or modified except in writing signed by the Lender and the Borrower.
8.13. Headings. The heading of each provision of this Agreement
--------
is for descriptive purposes only and shall not be deemed to modify or qualify
any of the rights or obligations described in each such provision.
8.14. Severability. If any provision of this Agreement is held
------------
to be invalid, illegal, void or unenforceable,
by reason of any law, rule, administrative order or judicial or arbitral
decision, such determination shall not affect the validity of the remaining
provisions of this Agreement.
8.15. Entire Agreement. This Agreement constitutes the entire
----------------
agreement between Borrower and the Lender and supersedes any and all prior
agreements (whether written or oral).
8.16. Execution in Counterparts. This Agreement may be executed
-------------------------
in any number of counterparts, each of which shall constitute an original,
but all of which when taken together shall constitute one and the same
instrument.
8.17. U.S. Taxes. (a) The Lender hereby represents and warrants
-----------
to the Borrower that all payments to the Lender hereunder and under the Note
may be made by the Borrower to the Lender free and clear of all U.S. Taxes.
The Lender agrees to provide to the Borrower on the date hereof two accurate
and complete original signed copies of either Form 1001 or Form 4224
entitling it to a complete exemption from withholding in respect of such
payments and, upon obsolescence of any previously delivered form, two
accurate and complete original signed copies of Form 1001 or Form 4224
certifying to the Lender's legal entitlement to a complete exception from
U.S. Taxes with respect to each payment.
(b) For the purposes of this Section 8.18, (x) "Form 1001" shall
mean Form 1001 (Ownership, Exemption, or Reduced Rate Certificate) of the
Department of the Treasury of the United States of America, (y) "Form 4224"
shall mean Form 4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Department of the Treasury of the United States of America
(or in relation to either such Form such successor and related forms as may
from time to time be adopted by the relevant taxing authorities of the United
States of America to document a claim to which such Form relates) and (x)
"U.S. Taxes" shall mean any present or future tax, withholding, assessment
or other charge or levy or deduction imposed by or on behalf of the United
States of America or any taxing authority thereof or therein.
(c) The Borrower will not be required to make any additional
payment to or for the account of the Lender to the extent the Borrower is
required to withhold any taxes with respect to any payment to be made by the
Borrower to the Lender hereunder
8.18. Confidentiality. The Lender agrees that it will use its
---------------
best efforts not to disclose without the prior written
consent of the Borrower (other than to its directors, employees, auditors or
counsel for the sole purpose of enabling the Lender to administer the Loans
hereunder) any information with respect to the Borrower which is furnished
pursuant to this Agreement, except that the Lender may disclose any such
information (a) as has become generally available to the public other than
by a breach of this Section 8.18, (b) as may be required or appropriate in
any report, statement or testimony submitted to any governmental authority
(whether in the United States or elsewhere), (c) as may be required or
appropriate in response to any summons or subpoena or any law, order,
regulation or ruling applicable to the Lender and (d) to any prospective
assignee or participant in connection with any contemplated transfer or
participation pursuant to Section 8.8, provided that prior to the delivery
of any information to a prospective assignee or participant, it shall execute
an agreement with the Lender containing provisions substantially identical
to those contained in this Section 8.18. To the extent not otherwise
prohibited, the Lender agrees to provide notice to the Borrower of any
disclosure pursuant to clause (b) or (c) above.
8.19. No Limitation on Service or Suit. Nothing in this Agreement
--------------------------------
or any modification, waiver, consent or amendment thereto shall affect the
right of the Lender or the Borrower, as the case may be, to serve process in
any manner permitted by law or limit the right of the Borrower or the Lender
to bring proceedings against such other party in the courts of any
jurisdiction or jurisdictions in which the Borrower or the Lender may be
served.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by its authorized officer as of the day and
year first written above
SOMERSET EXCHANGE FUND
BY:___________________________
Name:
Title:
Address: 800 Scudders Mill Road
Plainsboro, NJ 08536
The Lender is a member of The Securities and Futures Authority
Limited and operates a Client Complaints Procedure. If for any reason the
Borrower should have cause for concern or complaint, the Borrower should
contact the Manager, PBG Operations, at the Lender's address indicated below.
MERRILL LYNCH INTERNATIONAL
BANK LIMITED
BY:______________________________
Name:
Executed in London, Title:
England on July __, 1996 Address: 33 Chester Street
London SW12 7XD
England
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 11th day of July, 1996, by and between the Somerset
Exchange Fund, a Delaware business trust (the "Fund"), and Merrill Lynch
Asset Management, L.P., a Delaware limited partnership (the "Investment
Adviser").
W I T N E S S E T H:
-------------------
WHEREAS, the Fund is engaged in business as a closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on
the terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the covenants hereinafter contained,
the Fund and the Investment Adviser hereby agree as follows:
ARTICLE I
---------
DUTIES OF THE INVESTMENT ADVISER
--------------------------------
The Fund hereby employs the Investment Adviser to act as an investment
adviser to the Fund and to furnish, or arrange for its affiliates to furnish,
the investment advisory services described below, subject to the policies of,
review by and overall control of, the Board of Trustees of the Fund, 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 for all
purposes herein shall be deemed to be independent contractors and, unless
otherwise expressly provided or authorized, shall have no authority to act
for or represent the Fund in any way or otherwise be deemed agents of the
Fund, except as otherwise provided in the Fund's Declaration of Trust.
(a) Investment Advisory Services. The Investment Adviser shall pro
----------------------------
vide, or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the
latter from time to time may consider necessary for the proper supervision
of the assets of the Fund, shall furnish continuously an investment program
for the Fund and shall determine from time to time which securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall
be held in the various securities in which the Fund invests, options,
futures, options on futures or cash, subject always to the restrictions of
the Declaration of Trust and the By-Laws of the Fund, as amended from time
to time, the provisions of the Investment Company Act and the Fund's
investment objective, investment policies and investment restrictions. The
Investment Adviser shall make decisions for the Fund as to foreign currency
matters, if any. The Investment Adviser shall make decisions for the Fund
as to the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the Fund's portfolio securities
shall be exercised. Should the Trustees 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, on behalf of the Fund, shall take 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 Fund's account
with brokers or dealers selected by it, and to that end, the Investment
Adviser is authorized as the agent of the Fund to give instructions to the
custodian of the Fund as to deliveries of securities and payments of cash for
the account of the Fund. In connection with the selection of such brokers
or dealers and the placing of such orders with respect to assets of the Fund,
the Investment Adviser is directed at all times to seek to obtain execution
and prices within the policy guidelines determined by the Board of Trustees
and set forth in the Confidential Private Placement Memorandum, as
supplemented. 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 Fund is affiliated.
The Investment Adviser shall provide the Fund with office space,
facilities, equipment and necessary personnel and such other services as the
Investment Adviser, subject to review by the Board of Trustees, from time to
time shall determine to be necessary or useful to perform its obligations
under this Agreement.
The Investment Adviser generally shall monitor the Fund's compliance
with investment policies and restrictions as set forth in filings made by
the Fund under the United States Federal securities laws. The Investment
Adviser shall make reports to the Board of Trustees of its performance of
obligations hereunder and furnish advice and recommendations with respect
to such other aspects of the business and affairs of the Fund as it shall
determine to be desirable.
(b) Notice Upon Change in Partners of Investment Adviser. The
-----------------------------------------------------
Investment Adviser is a Delaware limited partnership and its limited partner
is Merrill Lynch & Co., Inc. and its general partner is Princeton Services,
Inc. The Investment Adviser will notify the Fund 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 shall provide the
----------------------
staff and personnel necessary to perform its obligations under this
Agreement, shall assume and pay or cause to be paid all expenses incurred in
connection with the maintenance of such staff and personnel, and, at its own
expense, shall provide the office space, facilities, equipment and necessary
personnel which it is obligated to provide under Article I hereof, and shall
pay all compensation of officers and Trustees of the Fund who are affiliated
persons of the Investment Adviser.
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
--------
other expenses of the Fund including, without limitation: taxes, expenses
for legal and auditing services,
costs of printing proxies and shareholder reports, expenses of portfolio
transactions, Securities and Exchange Commission fees, state Blue Sky filing
fees, fees and expenses with respect to borrowing, fees and actual
out-of-pocket expenses of Trustees who are not affiliated persons of the
Investment Adviser or of United States Trust Company of New York, insurance,
interest, brokerage costs, litigation and other extraordinary or
non-recurring expenses, mailing and other expenses properly payable by the
Fund.
ARTICLE III
-----------
COMPENSATION OF THE INVESTMENT ADVISER
--------------------------------------
For the services provided by the Investment Adviser under this
Agreement, the Fund will pay the Investment Adviser a quarterly fee equal to,
on an annual basis, 0.60 of 1% of the Fund's average weekly net assets. For
this purpose, "average weekly net assets" means the average weekly value of
the total assets of the Fund minus the sum of (i) accrued liabilities of the
Fund, and (ii) any accrued and unpaid interest on outstanding borrowings.
For purposes of this calculation, average weekly net assets are determined
at the end of each quarter on the basis of the average net assets of the Fund
for each week during the quarter. The assets for each weekly period are
determined by averaging the net assets at the last business day of a week
with the net assets at the last business day of the prior week.
If this Agreement becomes effective subsequent to the first day of a
fiscal quarter or terminates before the last day of a fiscal quarter,
compensation for that part of the quarter this Agreement is in effect shall
be pro-rated in a manner consistent with the calculation of the fee as set
forth above.
Payment of the Investment Adviser's compensation for the preceding
quarter shall be made as promptly as possible. During any period when the
valuation of the Fund's assets is suspended by the Board of Trustees, the
valuation of the Fund's assets for the last week prior to such suspension for
this purpose shall be deemed to be the asset value at the close of each
succeeding week until it again is determined.
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 Fund, 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 Fund contemplated
hereby and directors, officers and employees of the Investment Adviser and
of such affiliates.
ARTICLE V
---------
ACTIVITIES OF THE INVESTMENT ADVISER
------------------------------------
The services of the Investment Adviser to the Fund are not to be deemed
to be exclusive; 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") are free to render services to others. It is
understood that Trustees, officers, employees and shareholders of the Fund
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 Fund, and that the Investment Adviser and directors, officers,
employees, partners and shareholders of its affiliates may become interested
in the Fund as shareholders or otherwise.
ARTICLE VI
----------
DURATION AND TERMINATION OF THIS AGREEMENT
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until July 1, 1998 and thereafter, but only so long
as such continuance specifically is approved at least annually by (i) the
Board of Trustees of the Fund, or by the vote of a majority of the
outstanding voting
securities of the Fund, and (ii) a majority of those Trustees 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 Trustees or by the vote of a majority of the
outstanding voting securities of the Fund, or by the Investment Adviser, on
sixty days' written notice to the other party. This Agreement shall
terminate automatically in the event of its assignment.
ARTICLE VII
-----------
AMENDMENTS OF THIS AGREEMENT
----------------------------
This Agreement may be amended by the parties only if such amendment
specifically is approved by (i) the vote of a majority of outstanding voting
securities of the Fund, and (ii) a majority of those Trustees 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 and the rules and regulations thereunder, subject, however, to
such exemptions as may be granted by the Securities and Exchange Commission
under said Act.
ARTICLE IX
----------
GOVERNING LAW
-------------
This Agreement shall be governed by and construed in accordance with the
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 first above written.
SOMERSET EXCHANGE FUND
By:
-------------------------------
Name:
Title:
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: Princeton Services, Inc.
General Partner
By:
-------------------------------
Name:
Title:
ADMINISTRATION AGREEMENT
AGREEMENT made this 11th day of July 1996, by and between the Somerset
Exchange Fund, a Delaware business trust (hereinafter called the "Fund"), and
Merrill Lynch Asset Management, L.P., a Delaware limited partnership
(hereinafter called the "Administrator").
W I T N E S S E T H
- - - - - - - -----
WHEREAS, the Fund is a closed-end diversified management investment
company and is registered as such under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, the Fund desires to retain the Administrator to render certain
administrative services in the manner and on the terms and conditions
hereafter set forth; and
WHEREAS, the Administrator desires to be retained to perform services
on said terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the Fund and the Administrator agree as follows:
1. Duties of the Administrator. The Fund hereby retains the
---------------------------
Administrator to act as administrator of the Fund, subject to the supervision
and direction of the Fund, as hereinafter set forth. The Administrator shall
perform or arrange for the performance of the administrative and clerical
services set forth in Exhibit A hereto. The Administrator may receive the
assistance of United States Trust Company of New York ("U.S. Trust") or its
affiliate, CTC Consulting, Inc. ("CTC"), in connection with certain of the
services to be provided to the Fund by the Administrator including assistance
in valuing securities held by the Fund that are restricted as to disposition
by federal and state securities laws for the purpose of determining the
Fund's net asset value. The Fund agrees to deliver on a timely basis, such
information to the Administrator as may be necessary or appropriate for the
Administrator's performance of its duties and responsibilities hereunder,
including but not limited to, daily records of transactions, and expenses
borne by the Fund, the Fund management letter to shareholders and such other
information necessary for the Administrator to prepare the above-referenced
reports and filings.
2. Expenses of the Administrator. The Administrator will bear all
-----------------------------
expenses necessary to perform its obligations under this Agreement, including
any fees or expenses of any agents or subcontractors retained by the
Administrator in connection with the performance of its duties hereunder.
The Fund will pay all
other expenses incurred in the operation of the Fund, including, among other
things, expenses for legal and auditing services, costs of printing proxies,
shareholder reports, Securities and Exchange Commission fees, expenses of
registering the Fund's shares under state securities laws, fees and expenses
with respect to any borrowing, fees and expenses of Trustees not affiliated
with the Fund's investment adviser or its affiliates, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Fund.
3. Compensation of the Administrator. For the services rendered to
---------------------------------
the Fund as described herein, the Fund will pay the Administrator a quarterly
fee equal to, on an annual basis, 0.20 of 1% of the Fund's average weekly net
assets. For this purpose, "average weekly net assets" means the average
weekly value of the total assets of the Fund minus the sum of (i) accrued
liabilities of the Fund, and (ii) any accrued and unpaid interest on
outstanding borrowings. For purposes of this calculation, average weekly net
assets are determined at the end of each quarter on the basis of the average
net assets of the Fund for each week during the quarter. The assets for each
weekly period are determined by averaging the net assets at the last business
day of a week with the net assets at the last business day of the prior week.
Any third party utilized by the Administrator in respect of its duties under
the Administration Agreement (including U.S. Trust and CTC) will be
compensated directly by
the Administrator out of its fee at no additional cost to the Fund.
Compensation by the Fund of the Administrator shall commence on the date
of the first receipt by the Fund of the proceeds of the sale of its shares
as described in the Fund's Confidential Private Placement Memorandum, as
supplemented, and the fee for the period from the date the Fund shall first
receive the proceeds of the sale of its shares as aforesaid to the end of the
quarter during which such proceeds are so received, shall be pro-rated
according to the proportion that such period bears to the full quarterly
period. Upon termination of this Agreement before the end of a quarter, the
fee for such part of that quarter shall be pro-rated according to the
proportion that such period bears to the full quarterly period and shall be
payable within thirty (30) days after the date of termination of this
Agreement.
Payment of the Administrator's compensation for the preceding quarter
shall be made as promptly as possible. During any period when the valuation
of the Fund's assets is suspended by the Board of Trustees, the valuation of
the Fund's assets for the last week prior to such suspension for this purpose
shall be deemed to be the asset value at the close of each succeeding week
until it again is determined.
4. Limitation of Liability of the Administrator. The Administrator
--------------------------------------------
shall exercise its best judgment in rendering its services pursuant to this
Agreement. The Administrator shall not be liable to any person for any error
of judgment or mistake of
law or for any loss arising out of any act or omission by the Administrator
in the performance of its duties hereunder, provided, however, that nothing
herein contained shall be construed to protect the Administrator against any
liability to the Fund or its shareholders to which the Administrator shall
otherwise be subject by reason of (i) gross negligence, willful misfeasance
or bad faith in the performance of its duties, or by reckless disregard by
the Administrator of its obligations and duties hereunder or (ii) any action,
suit, investigation or other proceeding arising out of or based upon any
action actually or allegedly taken or omitted by any one or more third
parties of any of the duties of the Administrator on behalf of the
Administrator (each such party being referred to as an "Agent").
5. Indemnification of the Fund. The Administrator agrees to indemnify
---------------------------
and hold harmless the Fund from and against all charges, claims, expenses
(including legal fees) and liabilities incurred by the Fund in or by reason
of any action, suit, investigation or other proceeding arising out of or
based upon any action actually or allegedly taken or omitted by an Agent in
connection with the performance by such Agent of any duties of the
Administrator hereunder. In addition, the Administrator agrees to indemnify
and hold harmless the Fund and any person or entity other than the
Administrator acting as tax matters partner of the Fund in accordance with
Section 2 of Article IX of the Fund's Amended and Restated Declaration of
Trust (in such capacity, the "Tax Matters Partner"), from and against all
charges, claims, expenses (including legal fees) and liabilities incurred by
the Fund or the Tax Matters Partner as a result of the Administrator's
failure to timely provide accurate and complete information to the Fund or
the Tax Matters Partner regarding the shareholders of the Fund.
6. Activities of the Administrator. The services of the Administrator
-------------------------------
under this Agreement are not to be deemed exclusive, and the Administrator
and any person controlled by or under common control with the Administrator
shall be free to render similar services to others.
7. Duration and Termination of this Agreement. This Agreement shall
------------------------------------------
become effective as of the date first above written, shall supersede any
other written agreement between the parties hereto, and shall remain in force
until terminated as provided herein. This Agreement may be terminated at any
time, without the payment of any penalty, by the Fund on thirty days' written
notice, or by the Administrator, on one hundred twenty days' written notice,
to the other party. This Agreement shall automatically terminate in the
event of its assignment.
8. Amendments of this Agreement. This Agreement may be amended by the
----------------------------
parties hereto only if such amendment is specifically approved by the Board
of Trustees of the Fund and such amendment is set forth in a written
instrument executed by each of the parties hereto.
9. Governing Law. The provisions of this Agreement shall be construed
-------------
and interpreted in accordance with the laws of the State of New York as at
the time in effect and the applicable provisions of the 1940 Act. To the
extent that the applicable law of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the 1940 Act,
the latter shall control.
10. Counterparts. This Agreement may be executed by the parties hereto
------------
in counterparts and if executed in more than one counterpart the separate
instruments shall constitute one agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SOMERSET EXCHANGE FUND
By:
-------------------------------
Name:
Title:
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: Princeton Services, Inc.
General Partner
By:
-------------------------------
Name:
Title:
EXHIBIT A
DUTIES OF THE ADMINISTRATOR PURSUANT TO SECTION 1
-------------------------------------------------
The Administrator shall perform or arrange for the performance of the
administrative services of the Fund including, but not limited to, the
following administrative services:
1. provide general administrative services, including: (i) provide the
Fund with administrative office and data processing facilities; (ii) consult
with the Fund's officers, independent accountants and legal counsel in
establishing the accounting policies of the Fund; (iii) prepare and, subject
to approval by the Fund, file reports and other documents required by United
States Federal securities laws and regulations; (iv) coordinate tax-related
matters; (v) respond to inquiries from Fund shareholders; (vi) arrange for
payment of the Fund's expenses; (vii) prepare such financial information and
reports as may be required by any financial institutions from which the Fund
borrows funds; and (viii) provide such assistance to the Fund's Trustees and
the Fund's counsel and auditors as generally may be required to carry on
properly the business and operations of the Fund.
2. maintain and keep the books and records of the Fund, including the
books and records required to be maintained and preserved by registered
investment companies under Rules 31a-1 and 31a-2 under the Investment Company
Act of 1940, as amended, and applicable tax laws;
3. provide, or arrange for the provision of, the accounting services
required by the Fund;
4. prepare annual tax reporting statements on Internal Revenue Service
Form 1065, Schedule K-1 and mail such statements within 60 days of the end
of each calendar year;
5. prepare, or arrange for the preparation of, periodic account
statements and reports for Fund shareholders including semi-annual reports
containing unaudited financial statements, annual reports containing audited
financial statements and listings of the Fund's investments;
6. perform, or arrange for the performance of, custodial services for
the Fund, such custodial services to be pursuant to a form of custodial
agreement the terms of which shall be in compliance with the provisions of
the 1940 Act and which shall be approved by the Board of Trustees of the
Fund;
7. calculate, or arrange for the calculation of, the net asset value
of the Fund's shares on a daily basis; and
8. perform or arrange for the performance of transfer agency services
for the Fund, including maintaining a record for each shareholder of the
number of full and fractional shares held, rounded to the nearest 1/1000th
of a share.
SUB-ADMINISTRATION AGREEMENT
AGREEMENT made this 11th day of July 1996, by and between Merrill Lynch
Asset Management, L.P., a Delaware limited partnership (hereinafter called
the "Administrator"), and United States Trust Company of New York, a New York
trust company (hereinafter called the "Sub-Administrator").
W I T N E S S E T H
- - - - - - - -----
WHEREAS, Somerset Exchange Fund (the "Fund") is a closed-end diversified
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund has retained the Administrator to render certain
administrative services to the Fund pursuant to the terms of the
Administration Agreement, dated July 11, 1996 (the "Administration
Agreement"), between the Fund and the Administrator; and
WHEREAS, the Administrator desires to retain the Sub-Administrator to
render certain administrative services with respect to the Fund in the manner
and on the terms and conditions hereafter set forth; and
WHEREAS, the Sub-Administrator desires to be retained to perform
services on said terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the Administrator and the Sub-Administrator agree as follows:
1. Duties of the Sub-Administrator. The Administrator hereby retains
-------------------------------
the Sub-Administrator to act as sub-administrator of the Fund, subject to the
supervision and direction of the Administrator, as hereinafter set forth.
The Sub-Administrator shall perform or arrange for the performance of the
administrative and clerical services set forth in Exhibit A hereto. The Sub-
Administrator may receive the assistance of CTC Consulting, Inc. ("CTC") in
connection with certain of the services to be provided to the Administrator
in respect of the Fund by the Sub-Administrator, including assistance in
valuing securities held by the Fund that are restricted as to disposition by
federal and state securities laws for the purpose of determining the Fund's
net asset value. The Sub-Administrator agrees to deliver, on a timely basis,
such information to the Administrator as may be necessary or appropriate for
the Administrator's performance of its duties and responsibilities hereunder.
2. Expenses of the Sub-Administrator. The Sub-Administrator will bear
---------------------------------
all expenses necessary to perform its
obligations under this Agreement, including any fees or expenses of any
agents or subcontractors retained by the Sub-Administrator in connection with
the performance of its duties hereunder, including CTC.
3. Compensation of the Sub-Administrator. For the services rendered
-------------------------------------
to the Administrator as described herein, the Administrator will pay the Sub-
Administrator a quarterly fee equal to, on an annual basis, 0.05 of 1% of the
Fund's average weekly net assets; provided, however, that if in any quarter
the Administrator waives part or all of its fee payable by the Fund pursuant
to the Administration Agreement, the Sub-Administrator's fee payable under
this Agreement with respect to such quarter shall be reduced by the same
proportion that the amount of the fee waived by the Administrator bears to
the fee payable to the Administrator under the terms of the Administration
Agreement for such quarter. For this purpose, "average weekly net assets"
means the average weekly value of the total assets of the Fund minus the sum
of (i) accrued liabilities of the Fund, and (ii) any accrued and unpaid
interest on outstanding borrowings. For purposes of this calculation,
average weekly net assets are determined at the end of each quarter on the
basis of the average net assets of the Fund for each week during the quarter.
The assets for each weekly period are determined by averaging the net assets
at the last business day of a week with the net assets at the last business
day of the prior week. Any third party utilized by the Sub-Administrator in
respect of its duties under
this Sub-Administration Agreement (including CTC) will be compensated
directly by the Sub-Administrator out of its fee at no additional cost to the
Administrator.
Compensation by the Administrator of the Sub-Administrator shall
commence on the date of the first receipt by the Fund of the proceeds of the
sale of its shares as described in the Fund's Confidential Private Placement
Memorandum, as supplemented, and the fee for the period from the date the
Fund shall first receive the proceeds of the sale of its shares as aforesaid
to the end of the quarter during which such proceeds are so received, shall
be pro-rated according to the proportion that such period bears to the full
quarterly period. Upon termination of this Agreement before the end of a
quarter, the fee for such part of that quarter shall be pro-rated according
to the proportion that such period bears to the full quarterly period and
shall be payable within thirty (30) days after the date of termination of
this Agreement.
Payment of the Sub-Administrator's compensation for the preceding
quarter shall be made as promptly as possible. During any period when the
valuation of the Fund's assets is suspended by the Board of Trustees, the
valuation of the Fund's assets for the last week prior to such suspension for
this purpose shall be deemed to be the asset value at the close of each
succeeding week until it again is determined.
4. Limitation of Liability of the Sub-Administrator. The Sub
------------------------------------------------
Administrator shall exercise its best judgment in rendering
its services pursuant to this Agreement. The Sub-Administrator shall not be
liable to any person for any error of judgment or mistake of law or for any
loss arising out of any act or omission by the Sub-Administrator in the
performance of its duties hereunder, provided, however, that nothing herein
contained shall be construed to protect the Sub-Administrator against any
liability to the Administrator, the Fund or its shareholders to which the
Sub-Administrator shall otherwise be subject by reason of (i) negligence,
willful misfeasance or bad faith in the performance of its duties, or by
reckless disregard by the Sub-Administrator of its obligations and duties
hereunder or (ii) any action, suit, investigation or other proceeding arising
out of or based upon any action actually or allegedly taken or omitted by any
one or more third parties of any of the duties of the Sub-Administrator on
behalf of the Sub-Administrator (each such party being referred to as an
"Agent").
5. Indemnification of the Administrator. The Sub-Administrator agrees
------------------------------------
to indemnify and hold harmless the Administrator from and against all
charges, claims, expenses (including legal fees) and liabilities incurred by
the Administrator in or by reason of any action, suit, investigation or other
proceeding arising out of or based upon any action actually or allegedly
taken or omitted by an Agent in connection with the performance by such Agent
of any duties of the Sub-Administrator hereunder. In addition, the Sub-
Administrator agrees to indemnify and hold harmless the Administrator and any
person or entity acting as tax matters partner of the Fund in accordance with
Section 2 of Article IX of the Fund's Amended and Restated Declaration of
Trust (in such capacity, the "Tax Matters Partner"), from and against all
charges, claims, expenses (including legal fees) and liabilities incurred by
the Administrator or the Tax Matters Partner as a result of the Sub-
Administrator's failure to timely provide accurate and complete information
to the Administrator or the Tax Matters Partner regarding the shareholders
of the Fund.
6. Activities of the Sub-Administrator. The services of the Sub
-----------------------------------
Administrator under this Agreement are not to be deemed exclusive, and the
Sub-Administrator and any person controlled by or under common control with
the Sub-Administrator shall be free to render similar services to others.
7. Duration and Termination of this Agreement. This Agreement shall
------------------------------------------
become effective as of the date first above written, shall supersede any
other written agreement between the parties hereto, and shall remain in force
until terminated as provided herein. This Agreement may be terminated at any
time, without the payment of any penalty, by the Administrator on thirty
days' written notice, or by the Sub-Administrator, on one hundred twenty
days' written notice, to the other party. This Agreement shall automatically
terminate in the event of its assignment.
8. Amendments of this Agreement. This Agreement may be amended by the
----------------------------
parties hereto only if such amendment is set forth in a written instrument
executed by each of the parties hereto.
9. Governing Law. The provisions of this Agreement shall be construed
-------------
and interpreted in accordance with the laws of the State of New York as at
the time in effect and the applicable provisions of the 1940 Act. To the
extent that the applicable law of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the 1940 Act,
the latter shall control.
10. Counterparts. This Agreement may be executed by the parties hereto
------------
in counterparts and if executed in more than one counterpart the separate
instruments shall constitute one agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: Princeton Services, Inc.
General Partner
By:
------------------------------
Name:
Title:
UNITED STATES TRUST COMPANY OF NEW YORK
By:
------------------------------
Name:
Title:
EXHIBIT A
DUTIES OF THE SUB-ADMINISTRATOR PURSUANT TO SECTION 1
-----------------------------------------------------
The Sub-Administrator shall assist the Administrator in valuing
portfolio securities that are subject to restrictions as to disposition for
the purpose of determining the Fund's net asset value.
In addition, it is understood that the Sub-Administrator may provide
information to the Fund's investment adviser in connection with the risk
management of the Fund, including, if the Fund's investment adviser elects
to reduce the Fund's exposure to adverse price movements by engaging in
hedging transactions, reviewing such transactions to ensure that they are
consistent with the investment objective and policies of the Fund. The Sub-
Administrator also may review the methodology used to value any securities
that may be used to hedge the Fund's investment portfolio.
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective July 11, 1996, and is between THE CHASE
MANHATTAN BANK, N.A. (the "Bank"), the SOMERSET EXCHANGE FUND (the
"Customer"), and MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM").
1. CUSTOMER ACCOUNTS.
The Bank agrees to establish and maintain the following accounts
("Accounts"):
(a) A custody account in the name of the Customer ("Custody
Account") for any and all stocks, shares, bonds, debentures, notes,
mortgages or other obligations for the payment of money, bullion, coin and
any certificates, receipts, warrants or other instruments representing
rights to receive, purchase or subscribe for the same or evidencing or
representing any other rights or interests therein and other similar
property whether certificated or uncertificated as may be received by the
Bank or its Subcustodian (as defined in Section 3) for the account of the
Customer ("Securities"); and
(b) A deposit account in the name of the Customer ("Deposit
Account") for any and all cash in any currency received by the Bank or its
Subcustodian for the account of the Customer, which cash shall not be
subject to withdrawal by draft or check.
The Customer warrants its authority to: 1) deposit the cash and
Securities ("Assets") received in the Accounts and 2) give Instructions
(as defined in Section 11) concerning the Accounts. The Bank may deliver
securities of the same class in place of those deposited in the Custody
Account.
Upon written agreement between the Bank and the Customer,
additional Accounts may be established and separately accounted for as
additional Accounts under the terms of this Agreement.
2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN
LOCATIONS.
Unless Instructions specifically require another location
acceptable to the Bank:
(a) Securities will be held in the country or other jurisdiction
in which the principal trading market for such Securities is located,
where such Securities are to be presented for payment or where such
Securities are acquired; and
(b) Cash will be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular
currency. To the extent Instructions are issued and the Bank can comply
with such Instructions, the Bank is authorized to maintain cash balances
on deposit for the Customer with itself or one of its affiliates at such
reasonable rates of interest as may from time to time be paid on such
accounts, or in non-interest bearing accounts as the Customer may direct,
if acceptable to the Bank.
If the Customer wishes to have any of its Assets held in the
custody of an institution other than the established Subcustodians as
defined in Section 3 (or their securities depositories), such arrangement
must be authorized by a written agreement, signed by the Bank and the
Customer.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
The Bank may act under this Agreement through the subcustodians
listed in Schedule A of this Agreement with which the Bank has entered
into subcustodial agreements ("Subcustodians"). The Customer authorizes
the Bank to hold Assets in the Accounts in accounts which the Bank has
established with one or more of its branches or Subcustodians. The Bank
and Subcustodians are authorized to hold any of the Securities in their
account with any securities depository in which they participate.
The Bank reserves the right to add new, replace or remove
Subcustodians. The Customer will be given reasonable notice by the Bank
of any amendment to Schedule A. Upon request by the Customer, the Bank
will identify the name, address and principal place of business of any
Subcustodian of the Customer's Assets and the name and address of the
governmental agency or other regulatory authority that supervises or
regulates such Subcustodian.
4. USE OF SUBCUSTODIAN.
(a) The Bank will identify such Assets on its books as belonging
to the Customer.
(b) A Subsustodian will hold such Assets together with assets
belonging to other customers of the Bank in accounts identified on such
Subcustodian's books as special custody accounts for the exclusive benefit
of customers of the Bank.
(c) Any Assets in the Accounts held by a Subcustodian will be
subject only to the instructions of the Bank or its agent. Any Securities
held in a securities depository for the account of a Subcustodian will be
subject only to the instructions of such Subcustodian.
(d) Any agreement the Bank enters into with a Subcustodian for
holding its customer's assets shall provide that such assets will not be
subject to any right, charge, security interest, lien or claim of any kind
in favor of such Subcustodian except for safe custody or administration,
and that the beneficial ownership of such assets will be freely
transferable without the payment of money or value other than for safe
custody or administration. The foregoing shall not apply to the extent of
any special agreement or arrangement made by the Customer with any
particular Subcustodian.
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) The Bank or its Subcustodians will make payments from the
Deposit Account upon receipt of Instructions which include all information
required by the Bank.
(b) In the event that any payment to be made under this Section
5 exceeds the funds available in the Deposit Account, the Bank, in its
discretion, may advance the Customer such excess amount which shall be
deemed a loan payable on demand, bearing interest at the rate customarily
charged by the Bank on similar loans.
(c) If the Bank credits the Deposit Account on a payable date,
or at any time prior to actual collection and reconciliation to the
Deposit Account, with interest, dividends, redemptions or any other amount
due, the Customer will promptly return any such amount upon oral or
written notification: (i) that such amount has not been received in the
ordinary course of business or (ii) that such amount was incorrectly
credited. If the Customer does not promptly return any amount upon such
notification, the Bank shall be entitled, upon oral or written
notification to the Customer, to reverse such credit by debiting the
Deposit Account for the amount previously credited. The Bank or its
Subcustodian shall have no duty or obligation to institute legal
proceedings, file a claim or a proof of claim in any insolvency proceeding
or take any other action with respect to the collection of such amount,
but may act for the Customer upon Instructions after consultation with the
Customer.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Securities will be transferred, exchanged or delivered by
the Bank or its Subcustodian upon receipt by the Bank of Instructions
which include all information required by the Bank. Settlement and
payment for Securities received for, and delivery of Securities out of,
the Custody Account may be made in accordance with the customary or
established securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction occurs,
including, without limitation, delivery of Securities to a purchaser,
dealer or their agents against a receipt with the expectation of receiving
later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to the Bank
(b) The Bank, in its discretion, may credit or debit the
Accounts on a contractual settlement date with cash or Securities with
respect to any sale, exchange or purchase of Securities. Otherwise, such
transactions will be credited or debited to the Accounts on the date cash
or Securities are actually received by the Bank and reconciled to the
Account.
(i) The Bank may reverse credits or debits made to the
Accounts in its discretion if the related transaction fails to settle within
a reasonable period, determined by the Bank in its discretion, after the
contractual settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6
are returned by the recipient thereof, the Bank may reverse the credits and
debits of the particular transaction at any time.
7. ACTIONS OF THE BANK.
The Bank shall follow Instructions received regarding assets
held in the Accounts. However, until it receives Instructions to the
contrary, the Bank will perform the following functions:
(a) Present for payment any Securities which are called,
redeemed or retired or otherwise become payable and all coupons and other
income items which call for payment upon presentation, to the extent that
the Bank or Subcustodian is actually aware of such opportunities.
(b) Execute in the name of the Customer such ownership and other
certificates as may be required to obtain payments in respect of
Securities.
(c) Exchange interim receipts or temporary Securities for
definitive Securities.
(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation. affiliates of the Bank or any
Subcustodian.
(e) Issue statements to the Customer, at times mutually agreed
upon, identifying the Assets in the Accounts.
The Bank will send the Customer an advice or notification of any
transfers of Assets to or from the Accounts. Such statements, advices or
notifications shall indicate the identity of the entity having custody of
the Assets. Unless the Customer sends the Bank a written exception or
objection to any Bank statement within sixty (60) days of receipt, the
Customer shall be deemed to have approved such statement. In such event,
or where the Customer has otherwise approved any such statement, the Bank
shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or
reasonably implied therefrom as though it had been settled by the decree
of a court of competent jurisdiction in an action where the Customer and
all persons having or claiming an interest in the Customer or the
Customer's Accounts were parties.
All collections of funds or other property paid or distributed
in respect of Securities in the Custody Account shall be made at the risk
of the Customer. The Bank shall have no liability for any loss occasioned
by delay in the actual receipt of notice by the Bank or by its
Subcustodians of any payment, redemption or other transaction regarding
Securities in the Custody Account in respect of which the Bank has agreed
to take any action under this Agreement.
8. CORPORATE ACTIONS; PROXIES.
Whenever the Bank receives information concerning the Securities
which requires discretionary action by the beneficial owner of the
Securities (other than a proxY), such as subscription rights, bonus
issues, stock repurchase plans and rights offerings. or legal notices or
other material intended to be transmitted to securities holders
("Corporate Actions"), the Bank will give the Customer notice of such
Corporate Actions to the extent that the Bank's central corporate actions
department has actual knowledge of a Corporate Action in time to notify
its customers.
When a rights entitlement or a fractional interest resulting
from a rights issue. stock dividend, stock split or similar Corporate
Action is received which bears an expiration date, the Bank will endeavor
to obtain Instructions from the Customer or its Authorized Person as
defined in Section 10, but if Instructions are not received in time for
the Bank to take timely action, or actual notice of such Corporate Action
was received too late to seek Instructions, the Bank is authorized to sell
such rights entitlement or fractional interest and to credit the Deposit
Account with the proceeds or take any other action it deems, in good
faith, to be appropriate in which case it shall be held harmless for any
such action.
The Bank will deliver proxies to the Customer or its designated
agent pursuant to special arrangements which may have been agreed to in
writing. Such proxies shall be executed in the appropriate nominee name
relating to Securities in the Custody Account registered in the name of
such nominee but without indicating the manner in which such proxies are
to be voted; and where bearer Securities are involved, proxies will be
delivered in accordance with Instructions
9. NOMINEES.
Securities which are ordinarily held in registered form may be
registered in a nominee name of the Bank, Subcustodian or securities
depository, as the case may be. The Bank may, without notice to the
Customer, cause any such Securities to cease to be registered in the name
of any such nominee and to be registered in the name of the Customer. In
the event that any Securities registered in a nominee name are called for
partial redemption by the issuer, the Bank may allot the called portion to
the respective beneficial holders of such class of security in any manner
the Bank deems to be fair and equitable. The Customer agrees to hold the
Bank, Subcustodians, and their respective nominees harmless from any
liability arising directly or indirectly from their status as a mere
record holder of Securities in the Custody Account.
10. AUTHORIZED PERSONS.
As used in this Agreement, the term "Authorized Person" means
employees or agents including investment managers as have been designated
by written notice from the Customer or its designated agent to act on
behalf of the Customer under this Agreement. Such persons shall continue
to be Authorized Persons until such time as the Bank receives Instructions
from the Customer or its designated agent that any such employee or agent
is no longer an Authorized Person.
11. INSTRUCTIONS.
The term "Instructions" means instructions of any Authorized
Person received by the Bank, via telephone, telex, TWX, facsimile
transmission, bank wire or other teleprocess or electronic instruction or
trade information system acceptable to the Bank which the Bank believes in
good faith to have been given by Authorized Persons or which are
transmitted with proper testing or authentication pursuant to terms and
conditions which the Bank may specify. Unless otherwise expressly
provided, all Instructions shall continue in full force and effect until
canceled or superseded.
Any Instructions delivered to the Bank by telephone shall
promptly thereafter be confirmed in writing by an Authorized Person (which
confirmation may bear the facsimile signature of such Person). but the
Customer will hold the Bank harmless for the failure of an Authorized
Person to send such confirmation in writing, the failure of such
confirmation to conform to the telephone instructions received or the
Bank's failure to produce such confirmation at any subsequent time.
Either party may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. The Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which the Bank shall make
available to the Customer or its Authorized Persons.
12. STANDARD OF CARE; LIABILITIES
(a) The Bank shall be responsible for the performance of only
such duties as are set forth in this Agreement or expressly contained in
Instructions which are consistent with the provisions of this Agreement as
follows:
(i) The Bank will use reasonable care with respect to its
obligations under this Agreement and the safekeeping of Assets. The Bank
shall be liable to the Customer for any loss which shall occur as the result
of the failure of a Subcustodian to exercise reasonable care with respect to
the safekeeping of such Assets to the same extent that the Bank
would be liable to the Customer if the Bank were holding such Assets in New
York. In the event of any loss to the Customer by reason of the failure of
the Bank or its Subcustodian to utilize reasonable care, the
Bank shall be liable to the Customer only to the extent of the Customer's
direct damages, to be determined based on the market value of the property
which is the subject of the loss
at the date of discovery of such loss and without reference to
any special conditions or circumstances.
(ii) The Bank will not be responsible for any act,
omission, default or for the solvency of any broker or agent which it or a
Subcustodian appoints unless such appointment was made negligently or in bad
faith.
(iii) The Bank shall be indemnified by, and without
liability to the Customer for any action taken or omitted by the Bank whether
pursuant to Instructions or otherwise within the scope of this Agreement if
such act or omission was in good faith, without negligence. In performing
its obligations under this Agreement, the Bank may rely on the genuineness of
any document which it believes in good faith to have been validly executed.
(iv) The Customer agrees to pay for and hold the Bank
harmless from any liability or loss resulting from the imposition or
assessment of any taxes or other governmental charges, and any related
expenses with respect to income from or Assets in the Accounts.
(v) The Bank shall be entitled to rely, and may act, upon
the advice of counsel (who may be counsel for the Customer) on all matters
and shall be without liability for any action reasonably taken or omitted
pursuant to such advice.
(vi) The Bank need not maintain any insurance for the
benefit of the Customer.
(vii) Without limiting the foregoing, the Bank shall not be
liable for any loss which results from: 1) the general risk of investing, or
2) investing or holding Assets in a particular country including, but not
limited to, losses resulting from nationalization, expropriation or other
governmental actions; regulation of the banking or securities industry;
currency restrictions, devaluations or fluctuations; and market
conditions which prevent the orderly execution of securities transactions or
affect the value of Assets.
(viii) Neither party shall be liable to the other for any
loss due to forces beyond their control including, but not limited to strikes
or work stoppages, acts of war or terrorism, insurrection, revolution.
nuclear fusion. fission or radiation. or acts of God.
(b) Consistent with and without limiting the first paragraph of
this Section 12, it is specifically acknowledged that the Bank shall have
no duty or responsibility to:
(i) question Instructions or make any suggestions to the
Customer or an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities:
(iii) advise the Customer or an Authorized Person regarding
any default in the payment of principal or income of any security other than
as provided in Section 5(c) of this Agreement;
(iv) evaluate or report to the Customer or an Authorized
Person regarding the financial condition of any broker, agent or other party
to which Securities are delivered or payments are made pursuant to this
Agreement;
(v) review or reconcile trade confirmations received from
brokers. The Customer or its Authorized Persons (as defined in Section 10)
issuing Instructions shall bear any responsibility to review such
confirmations against Instructions issued to and statements issued by the
Bank.
(c) The Customer authorizes the Bank to act under this Agreement
notwithstanding that the Bank or any of its divisions or affiliates may
have a material interest in a transaction, or circumstances are such that
the Bank may have a potential conflict of duty or interest including the
fact that the Bank or any of its affiliates may provide brokerage services
to other customers, act as financial advisor to the issuer of Securities.
act as a lender to the issuer of Securities, act in the same transaction
as agent for more than one customer, have a material interest in the issue
of Securities, or earn profits from any of the activities listed herein.
13. FEES AND EXPENSES.
MLAM agrees to pay the Bank for its services under this
Agreement such amount as may be agreed upon in writing, together with the
Bank's reasonable out-of-pocket or incidental expenses, including, but not
limited to, legal fees. The Bank shall have a lien on and is authorized
to charge any Accounts of the Customer
for any amount owing to the Bank under any provision of this Agreement.
14. MISCELLANEOUS.
(a) Foreign Exchange Transactions. To facilitate the
-----------------------------
administration of the Customer's trading and investment activity, the Bank
is authorized to enter into spot or forward foreign exchange contracts
with the Customer or an Authorized Person for the Customer and may also
provide foreign exchange through its subsidiaries, affiliates or
Subcustodians. Instructions, including standing instructions, may be
issued with respect to such contracts but the Bank may establish rules or
limitations concerning any foreign exchange facility made available. In
all cases where the Bank, its subsidiaries, affiliates or Subcustodians
enter into a foreign exchange contract related to Accounts, the terms and
conditions of the then current foreign exchange contract of the Bank, its
subsidiary, affiliate or Subcustodian and. to the extent not
inconsistent, this Agreement shall apply to such transaction.
(b) Certification of Residence. etc. The Customer certifies
--------------------------
that it is a resident of the United States and agrees to notify the Bank
of any changes in residency. The Bank may rely upon this certification or
the certification of such other facts as may be required to administer the
Bank's obligations under this Agreement. The Customer will indemnify the
Bank against all losses, liability, claims or demands arising directly or
indirectly from any such certifications.
(c) Access to Records. The Bank shall allow the Customer's
-----------------
independent public accountant reasonable access to the records of the Bank
relating to the Assets as is required in connection with their examination
of books and records pertaining to the Customer's affairs. Subject to
restrictions under applicable law, the Bank shall also obtain an
undertaking to permit the Customer's independent public accountants
reasonable access to the records of any Subcustodian which has physical
possession of any Assets as may be required in connection with the
examination of the Customer's books and records.
(d) Governing Law; Successors and Assigns. This Agreement
-------------------------------------
shall be governed by the laws of the State of New York and shall not be
assignable by either party, but shall bind the successors in interest of
the Customer and the Bank.
(e) Entire Agreement; Applicable Riders. Customer represents
-----------------------------------
that the Assets deposited in the Accounts are (Check one):
Employee Benefit Plan or other assets subject to the Employee
--
Retirement Income Security Act of 1974, as amended ("ERISA");
X Mutual Fund assets subject to certain Securities and Exchange
---
Commission ("SEC") rules and regulations;
Neither of the above
---
This Agreement consists exclusively of this document together with
Schedule A and the following Rider(s) (Check applicable rider(s)):
ERISA
---
X MUTUAL FUND
---
SPECIAL TERMS AND CONDITIONS
---
There are no other provisions of this Agreement and this
Agreement supersedes any other agreements, whether written or oral,
between the parties. Any amendment to this Agreement must be in writing,
executed by both parties.
(f) Severability. In the event that one or more provisions of
------------
West Agreement are held invalid, illegal or enforceable in any respect on
the basis of any particular circumstances or in any jurisdiction, the
validity, legality and enforceability of such provision or provisions
under other circumstances or in other jurisdictions and of the remaining
provisions will not in any way be affected or impaired.
(g) Waiver. Except as otherwise provided in this Agreement, no
------
failure or delay on the part of either party in exercising any power or
right under this Agreement operates as a waiver, nor does any single or
partial exercise of any power or right preclude any other or further
exercise, or the exercise of any other power or right. No waiver by a
party of any provision of this Agreement, or waiver of any breach or
default, is effective unless in writing and signed by the party against
whom the waiver is to be enforced.
(h) Notices. All notices under this Agreement shall be
-------
effective when actually received. Any notices or other communications
which may be required under this Agreement are to be sent to the parties
at the following addresses or such other addresses as may subsequently be
given to the other party in writing:
Bank: The Chase Manhattan Bank, N.A.
Chase MetroTech Center
Brooklyn, NY 11245
Attention: Global Investor Services
Customer: Somerset Exchange Fund
C/O Merrill Lynch Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Treasurer
MLAM: Merrill Lynch Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Treasurer
(i) Termination. This Agreement may be terminated by the
-----------
Customer, MLAM or the Bank by giving sixty (60) days written notice to the
other parties, provided that such notice to the Bank shall specify the
names of the persons to whom the Bank shall deliver the Assets in the
Accounts. If notice of termination is given by the Bank, the Customer
shall, within sixty (60) days following receipt of the notice, deliver to
the Bank Instructions specifying the names of the persons to whom the Bank
shall deliver the Assets. In either case the Bank will deliver the Assets
to the persons so specified, after deducting any amounts which the Bank
determines in good faith to be owed to it under Section 13. If within
sixty (60) days following receipt of a notice of termination by the Bank,
the Bank does not receive Instructions from the Customer specifying the
names of the persons to whom the Bank shall deliver the Assets, the Bank,
at its election, may deliver the Assets to a bank or trust company doing
business in the State of New York to be held and disposed of pursuant to
the provisions of this Agreement, or to Authorized Persons, or may
continue to hold the Assets until Instructions are provided to the Bank.
SOMERSET EXCHANGE FUND
By: ____________________________________
Title
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC., GENERAL
PARTNER
By: ____________________________________
Title
THE CHASE MANHATTAN BANK, N.A.
By: ____________________________________
Title
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this 11th day of July, 1996, before me personally came Eric S.
Mitofsky, to me known, who being by me duly sworn, did depose and say that
he/she resides in Woodcliff Lake, New Jersey; that he/she is a Vice
President of Somerset Exchange Fund, the entity described in and which
executed the foregoing instrument; that he/she knows the seal of said
entity, that the seal affixed to said instrument is such seal, that it was
so affixed by order of said entity, and that he/she signed his/her name
thereto by like order.
_____________________
Sworn to before me this 11th
day of July, 1996.
_____________________________
Notary
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this 11th day of July, 1996, before me personally came Stephen M.M.
Miller, to me known, who being by me duly sworn, did depose and say that
he/she resides in Madison, New Jersey; that he/she is a Senior Vice
President of Princeton Services, Inc., the entity described in and which
executed the foregoing instrument; that he/she knows the seal of said
entity, that the seal affixed to said instrument is such seal, that it was
so affixed by order of said entity, and that he/she signed his/her name
thereto by like order.
Sworn to before me this 11th
day of July, 1996.
____________________________
Notary
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this 11th day of July, 1996, before me personally came Susan
Chanko, to me known, who being by me duly sworn, did depose and say that
he/she resides in New York, New York; that he/she is a Vice President of
THE CHASE MANHATTAN BANK, (National Association), the corporation
described in and which executed the foregoing instrument; that he/she
knows the seal of said corporation, that the seal affixed to said
instrument is such seal, that it was so affixed by order of the Board of
Directors of said corporation, and that he/she signed his/her name thereto
by like order.
Sworn to before me this 11th
day of July, 1996.
_______________________
Notary
MUTUAL FUND RIDER TO GLOBAL CUSTODY AGREEMENT
BETWEEN THE CHASE MANHATTAN BANK, N.A.,
THE SOMERSET EXCHANGE FUND, AND MERRILL LYNCH ASSET MANAGEMENT, L.P.,
EFFECTIVE JULY 11, 1996
Customer represents that the Assets being placed in the Bank's
custody are subject to the Investment Company Act of 1940 (the Act), as
the same may be amended from time to time.
Except to the extent that the Bank has specifically agreed to comply
with a condition of a rule, regulation, interpretation promulgated by or
under the authority of the SEC or the Exemptive Order applicable to
accounts of this nature issued to the Bank (Investment Company Act of
1940, Release No. 12053, November 20, 1981), as amended, or unless the
Bank has otherwise specifically agreed, the Customer shall be solely
responsible to assure that the maintenance of Assets under this Agreement
complies with such rules, regulations, interpretations or exemptive order
promulgated by or under the authority of the Securities Exchange
Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
-----------------------------------------
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used in this
Agreement shall mean a branch of a qualified U.S. bank, an eligible
foreign custodian or an eligible foreign securities depository, which are
further defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as
defined in Rule 17f-5 under the Investment Company Act of 1940;
(b) "eligible foreign custodian" shall mean (i) a banking institution
or trust company incorporated or organized under the laws of a country other
than the United States that is regulated as such by that country's government
or an agency thereof and that has shareholders' equity in excess of $200
million in U.S. currency (or a foreign currency equivalent
thereof), (ii) a majority owned direct or indirect subsidiary of a qualified
U.S. bank or bank holding company that is incorporated or organized under
the laws of a country other than the United States and that has shareholders'
equity in excess of $100 million in U.S. currency (or a foreign currency
equivalent thereof)(iii) a banking institution or trust company incorporated
or organized under the laws of a country other than the United States or a
majority owned direct or indirect subsidiary of a qualified U.S. bank or
bank holding company that is incorporated or organized under the laws of a
country other than the United States which has such other qualifications as
shall be specified in Instructions and approved by the Bank; or (iv) any
other entity
that shall have been so qualified by exemptive order, rule or other
appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of
a country other than the United States, which operates (i) the central system
for handling securities or equivalent book-entries in that country,
or (ii) a transnational system for the central handling of securities or
equivalent book-entries.
The Customer represents that its Board of Directors has approved each
of the Subcustodians listed in Schedule A to this Agreement and the terms
of the subcustody agreements between the Bank and each Subcustodian, and
further represents that its Board has determined that the use of each
Subcustodian and the terms of each subcustody agreement are consistent
with the best interests of the Fund(s) and its (their) shareholders. The
Bank will supply the Customer with any amendment to Schedule A for
approval. The Customer has supplied or will supply the Bank with
certified copies of its Board of Directors resolution(s) with respect to
the foregoing prior to placing Assets with any Subcustodian so approved.
Section 11. Instructions.
------------
Add the following language to the end of Section 11:
Account Transactions made pursuant to Section 5 and 6 of this
Agreement may be made only for the purposes listed below.
Instructions must specify the purpose for which any transaction is to
be made and Customer shall be solely responsible to assure that
Instructions are in accord with any limitations or restrictions applicable
to the Customer by law or as may be set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices
as confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or otherwise
become payable;
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment;
(d) Upon conversion of Securities pursuant to their terms into other
securities;
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;
(f) For the payment of interest, taxes, management or supervisory
fees, distributions or operating expenses;
(g) In connection with any borrowings by the Customer requiring a
pledge of Securities, but only against receipt of amounts borrowed;
(h) In connection with any loans, but only against receipt of
adequate collateral as specified in Instructions which shall reflect any
restrictions applicable to the Customer;
(i) For the purpose of redeeming shares of the capital stock of the
Customer and the delivery to, or the crediting to the account of, the
Bank, its Subcustodian or the Customer's transfer agent, such shares to be
purchased or redeemed;
(j) For the purpose of redeeming in kind shares of the Customer
against delivery to the Bank, its Subcustodian or the Customer's transfer
agent of such shares to be so redeemed;
(k) For delivery in accordance with the provisions of any agreement
among the Customer, the Bank and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other arrangements
in connection with transactions by the Customer:
(l) For release of Securities to designated brokers under covered
call options, provided, however, that such Securities shall be released only
upon payment to the Bank of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option, or
at expiration, the Bank will receive from brokers the Securities previously
deposited. The Bank will act strictly in accordance
with Instructions in the delivery of Securities to be held in escrow and will
have no responsibility or liability for any such Securities which are
not returned promptly when due other than to make proper request for such
return;
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related
transactions;
(n) For other proper purposes as may be specified in Instructions
issued by an officer of the Customer which shall include a statement of the
purpose for which the delivery or payment is to be made, the amount of
the payment or specific Securities to be delivered, the name of the person
or persons to whom delivery or
payment is to be made, and a certification that the purpose is a
proper purpose under the instruments governing the Customer; and
(o) Upon the termination of this Agreement as set forth in Section
14(i).
Section 12. Standard of Care; Liabilities.
-----------------------------
Add the following subsection (d) to Section 12:
(d) The Bank hereby warrants to the Customer that in its opinion,
after due inquiry, the established procedures to be followed by each of its
branches, each branch of a qualified U.S. bank, each eligible foreign
custodian and each eligible foreign securities depository holding the
Customer's Securities pursuant to this Agreement afford protection for such
Securities at least equal to that afforded by the Bank's established
procedures with respect to similar securities held by the Bank and its
securities depositories in New York.
Section 14. Access to Records.
-----------------
Add the following language to the end of Section 14(c):
Upon reasonable request from the Customer, the Bank shall furnish the
Customer such reports (or portions thereof) of the Bank's system of
internal accounting controls applicable to the Bank's duties under this
Agreement. The Bank shall endeavor to obtain and furnish the Customer with
such similar reports as it may
reasonably request with respect to each Subcustodian and securities
depository holding the Customer's assets.
SHAREHOLDER TRANSFER AGENCY AGREEMENT
This Agreement is made this 11th day of July, 1996 by and among
The Chase Manhattan Bank, N.A. ("Chase") a national banking association
having an office at 770 Broadway, New York, New York 10003, Somerset
Exchange Fund, a closed-end investment company organized as a business
trust under the laws of the State of Delaware (the "Fund") and Merrill
Lynch Asset Management, L.P., a limited partnership organized under the
laws of the State of Delaware.
I. SERVICES
Commencing on July 11, 1996 and in accordance with procedures
established from time to time by the Fund and Chase, Chase shall perform
the (i) account maintenance services, (ii) mailing services, (iii)
dividend and distribution payment services and (iv) recordkeeping services
(collectively, the "Standard Services") in connection with the Fund's
shares of beneficial interest, without par value (the "Shares"), as more
fully described herein.
A. ACCOUNT MAINTENANCE SERVICES. Chase shall perform transfer
--------------------------------
agent, registrar and other account maintenance services in connection with
the Shares. Such services are composed of (i) registering Share issuance,
redemption and transfers on the
Fund's records of the holders of Shares (the "Shareholders") upon receipt
of instructions from, in the case of issuance and redemption, the Fund,
and in the case of a transfer, the transferor and documentation in proper
form to effect a transfer of Shares; (ii) maintaining stop transfer
orders, including placing and removing the same; (iii) processing new
Shareholder accounts; (iv) posting address changes; and (v) researching
and responding to Shareholder inquiries. Shares will be transferred
upon receipt from the Fund's advisor trustee of evidence of approval of
such transfer or certification that such transfer is permitted under the
Fund's Organization Documents without approval, upon which Chase shall
rely, delivery of such documents, certifications and opinions as the Fund
and Chase may deem necessary to evidence compliance with or exemption from
applicable securities laws and regulations and payment of any applicable
stock transfer taxes. Chase reserves the right to refuse to transfer
Shares until it is satisfied that the endorsement or signature on any
document is valid and genuine, and for that purpose it will require a
signature guarantee by a member or participant in the Securities Transfer
Agents Medallion Program or such other guarantor previously approved by
Chase. Chase shall not be required to effect any transfer unless and
until it has received the approvals, documents, certifications and
opinions provided for herein. Chase's sole responsibility in connection
with any redemption of Shares shall be to register the
same on the Fund's records upon receipt of instruction from the Fund.
B. MAILING. Mailing services provided to the Fund consist of
-----------
(i) annual preparation of a list of Shareholders owning Fund Shares, (ii)
semi-annual distribution of a report to Shareholders and to United States
Trust Company of New York (which will be responsible for the distribution
of such reports to its clients), (iii) mailing proxies, (iv) receiving and
tabulating proxies and mailing Shareholder reports to current
Shareholders, (v) certifying Share vote totals, (vi) assisting with the
annual meeting of Shareholders, if any, and (vii) upon request of the
Fund, mailing to each Shareholder and to United States Trust Company of
New York (which will be responsible for the distribution thereof to its
clients) Internal Revenue Service Form 1065, Schedule K-1.
C. DIVIDEND AND DISTRIBUTION PAYMENT SERVICES. (i) Upon the
------------------------------------------
declaration of any dividend or distribution payable either in Shares or
cash, the Fund shall notify Chase in writing setting forth the date of
payment (the "Payment Date") of such dividend or distribution, the record
date as of which Shareholders entitled to payment thereof shall be
determined (the "Record Date"), and the amount payable per Share to
Shareholders of record as of the Record Date. In the case of dividends at
regular intervals, such notification may be a standing notification
setting forth the method of calculating such dividends and the Fund or its
agent shall advise Chase of the amount of such dividend at the appropriate
intervals. Chase shall notify the Fund and the entity then acting as the
custodian (which entity may be an affiliate of Chase) for the portfolio
securities and cash of the Fund (the "Custodian") of the amount of cash
required to pay the dividend or distribution so that the Fund may instruct
the custodian to make sufficient funds available on or before the Payment
Date. Upon receipt by Chase or a drawee bank selected by Chase of such
funds from the Custodian, Chase shall prepare and mail to Shareholders, at
their addresses as they appear on the records maintained by Chase or
pursuant to any written order of a Shareholder on file with Chase, checks
representing any dividend or distributions to which they are entitled, and
an accompanying distribution statement.
(2) In addition to the forgoing, dividend and distribution
payment services are composed of (i) inserting any enclosure supplied by
the Fund with each dividend or distribution check; (ii) replacing lost
dividend checks; (iii) providing photocopies of canceled checks when
requested by Shareholders; (iv) reconciling paid and outstanding checks;
(v) coding as "undeliverable" certain accounts to suppress mailing of
dividend checks to same; (vi) processing and recordkeeping of accumulated
uncashed dividends; (vii) furnishing requested dividend and
distribution information to Shareholders; and (viii) withholding from such
payments any taxes required to be withheld by Chase under, and remitting
the same in accordance with, applicable provisions of the Internal Revenue
Code.
D. RECORD KEEPING SERVICES. (1) Chase shall keep records
-----------------------
relating to the Standard Services to be performed hereunder, in such form
and manner as it may deem advisable. To the extent required by Section 31
of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder, Chase agrees that all such records prepared or
maintained by Chase relating to the service to be performed by Chase
hereunder are the property of the Fund and will be preserved for the
periods prescribed under Rule 3 la-2 of said rules and made available in
accordance with such section and rules. Chase shall forthwith upon the
Fund's demand surrender promptly to the Fund and cease to retain in its
files those records and documents created and maintained by Chase pursuant
to this Agreement. (2) Chase and the Fund agree that all books, records,
information and data pertaining to the business of the other party which
are exchanged or received pursuant to the negotiation or the carrying out
of this Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law. (3) In
case of any requests or demands for the inspection of the Shareholder
records of the Fund, Chase will
endeavor to notify the Fund and to secure instructions from an authorized
officer of the Fund as to such inspection. Chase reserves the right,
however, to exhibit the Shareholder records to any person whenever it is
advised by its counsel that it may be held liable for the failure to
exhibit the Shareholder records to such person.
II. FEES AND EXPENSES
-----------------
For the services to be performed by Chase pursuant to this
Agreement, Merrill Lynch Asset Management, L.P., or the Fund, as provided
below, shall pay to Chase all fees and expenses described herein:
A. SHAREHOLDER SERVICES FEE. Merrill Lynch Asset Management,
------------------------
L.P., shall pay Chase a service fee (the "Shareholder Service Fee") in the
amount set forth in Exhibit B hereto. The Shareholder Service Fee is
payable quarterly and shall be prorated for any period less than a full
calendar quarter.
B. OUT-OF-POCKET EXPENSES. Merrill Lynch Asset Management,
----------------------
L.P., agrees to reimburse Chase for any and all out-of-pocket expenses,
including, without limiting the preceding, the expenses described and
listed in Exhibit B.
C. ADDITIONAL SERVICES. The Fund may request additional
-------------------
processing, special reports, or other additional services. The Fund shall
submit such requests for additional
services in writing together with such specifications as may be reasonably
required by Chase, and Chase shall respond to such requests in the form of
a price quotation. The Fund's written acceptance of the quotation must be
received prior to implementation of such request.
D. TERMS OF PAYMENT. All fees, out-of-pocket expenses, or
----------------
additional charges of Chase shall be billed on a quarterly basis and shall
be due and payable within 15 days after receipt of the invoice. Chase
will render, after the close of each quarter in which services have been
furnished, a statement reflecting all of the charges for such quarter.
E. TAXES. In addition to any other charges specified
-----
hereunder, the Fund shall pay any sales tax, use tax, transfer tax, excise
tax, tariff, duty, or any other tax or payment in lieu thereof imposed by
any governmental authority or agency as a direct result of the provision
by Chase of goods or services hereunder, except for taxes based on Chase's
net income.
III. REPRESENTATIONS AND WARRANTIES
------------------------------
A. CHASE. Chase represents and warrants to the Fund that:
-----
(1) It is duly organized and existing national banking
association and in good standing under the laws of the United States of
America;
(2) It is empowered under applicable laws and by its
organization certificate and by-laws to enter into and perform this
Agreement;
(3) All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement;
(4) lts entering into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or obligation
of Chase; and
(5) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations
under this Agreement.
B. THE FUND. The Fund represents and warrants to Chase that:
--------
(1) It is a business trust duly organized and existing and in
good standing under the laws of the State of Delaware;
(2) It is empowered under applicable laws and by its Declaration
of Trust, its bylaws,.and the Resolutions of the Board of Trustees (the
"Organization Documents") to enter into and perform this Agreement;
(3) All requisite proceedings have been taken to authorize it to
enter into and perform this Agreement;
(4) Its entering into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or obligation
of the Fund; and
(5) The Fund is validly registered as a diversified, closed-end
management investment company under the Investment Company Act of 1940, as
amended, and the issuance of Shares to subscribers at closing will be in
compliance with applicable securities laws or qualify for exemption
therefrom.
IV. DOCUMENTS FURNISHED BY THE FUND
-------------------------------
A. INITIALLY FURNISHED DOCUMENTS. The Fund has furnished to
-----------------------------
Chase the following documents:
(1) A copy of the Organization Documents of the Fund, attached
hereto as Exhibit A;
(2) Copies of the Fund's notice of registration on Form N-8A,
attached hereto as Exhibit C;
(3) A certificate signed by an officer of the Fund specifying:
the number of authorized Shares, the number of such authorized Shares
issued and currently outstanding, and the names, Share amounts and other
applicable information required for issuance of Shares to subscribers; and
(4) An opinion of counsel to the Fund with respect to the
validity of the authorized and outstanding Shares and whether such Shares
are fully paid and non-assessable.
B. PROSPECTIVELY FURNISHED DOCUMENTS. The Fund shall furnish
---------------------------------
the following documents upon request by Chase:
(1) Copies of all amendments to the Organization Documents of
the Fund;
(2) Copies of all subsequent amendments to the Fund's
registration statement; and
(3) Such other certificates, documents and opinions as Chase
shall deem to be appropriate or necessary for the proper performance of
its duties hereunder.
V. INDEMNIFICATION
---------------
A. FUND INDEMNIFICATION OBLIGATION. Chase shall not be
-------------------------------
responsible for, and the Fund shall indemnify and hold Chase harmless
from, any and all losses, damages, costs, charges, reasonable attorneys'
fees, payments, expenses and liability arising out of or attributable to:
(1) All actions of Chase or its agents or subcontractors
required to be taken pursuant to this Agreement
unless such actions are taken in bad faith or with negligence or willful
misconduct;
(2) The Fund's refusal or failure to comply with the terms of
this Agreement, or the Fund's lack of good faith, negligence or wilful
misconduct, or the breach of any representation or warranty of the Fund
hereunder;
(3) The reliance on or use by Chase or its agents or
subcontractors of information, records or documents which are received by
Chase or its agents or subcontractors and furnished to it by or on behalf
of the Fund, and which have been prepared or maintained by the Fund or any
other person or firm (other than Chase or its agents or subcontractors) on
behalf of the Fund;
(4) The reliance on, or the carrying out by Chase or its agents
or subcontractors of, any instructions or requests of the Fund which are
reasonably believed to bear the proper manual or facsimile signatures of
the officers of the Fund;
(5) The offer or sale of Shares by the Fund in violation of any
requirement under the federal securities laws or regulations or the
securities laws or regulations of any state, or in violation of any stop
order or other determination or ruling by any federal agency or any state
agency with respect to the offer or sale of such Shares in such state.
B. CHASE TRUST INDEMNIFICATION OBLIGATION. Chase shall
--------------------------------------
indemnify and hold the Fund harmless from and against any and all losses,
damages, costs, charges, reasonable attorneys
fees, payments, expenses and liability arising out of or attributable to
Chase's refusal or failure to comply with the terms of this Agreement, or
Chase's lack of good faith, negligence or willful misconduct, or the
breach of any representation or warranty of Chase hereunder.
C. CLAIMS. Upon the assertion of a claim for which either
------
Chase or the Fund may be required to indemnify the other, the party
seeking indemnification shall promptly notify the other party of such
assertion and shall keep the other party advised with respect to all
developments concerning such claim, but the failure to give such notice
shall not affect rights to indemnification hereunder except to the extent
that the indemnifying party demonstrates actual damage caused by such
failure. The party who may be required to indemnify shall have the option
to participate with the party seeking indemnification in the defense of
such claim but not to control such defense. The party seeking
indemnification shall in no case confess any claim or make any compromise
in any case in which the other party may be required to indemnify it,
except with the indemnifying party's prior written consent.
D. FORCE MAJEURE. In the event either Chase or the Fund is
-------------
unable to perform its obligations under the terms of this Agreement
because of acts of God, strikes, interruption of electrical power or other
utilities, equipment or transmission failure or damage reasonably beyond
its control, or other causes
reasonably beyond its control, such party shall not be liable to the other
for any damages resulting from such failure to perform or otherwise from
such causes. Chase shall use all reasonable efforts to minimize the
likelihood of all damage, loss of data, delays and errors resulting from
uncontrollable events, and should such damage, loss of data, delays or
errors occur, Chase shall use its reasonable efforts to mitigate the
effects of such occurrence.
VI. TERM AND TERMINATION
--------------------
A. NOTICE. This Agreement shall remain in effect until
------
terminated by any party, without penalty, upon 90 days' prior written
notice.
B. BREACH. This Agreement may be terminated by any
------
non-breaching party if a party is in material breach of this Agreement.
In order to so terminate this Agreement, written notice shall be given to
an officer of the party in breach of the non-breaching party's intention
to terminate due to a failure to comply with, or breach of, a material
term or condition of this Agreement. Said written notice shall
specifically state the material term or condition claimed to be breached
and shall provide at least 15 days in which to correct such alleged
breach. If such breach is not corrected in the time period allowed, then
any non-breaching may terminate this Agreement immediately, upon written
notice to the other parties.
C. EXPENSES. Should this Agreement be terminated, all
--------
out-of-pocket expenses reasonably incurred by Chase in connection with the
movement of records and materials to its successor or to the Fund shall be
borne by the Fund.
VII. USE OF CHASE NAME
-----------------
The Fund shall not use Chase's name in any offering material,
Shareholder report, advertisement or other material relating to the Fund,
other than for the purpose of merely identifying and describing the
functions of Chase hereunder, in a manner not approved by Chase in writing
prior to such use; provided, however, that Chase shall consent to all uses
of its name required by the Securities and Exchange Commission, any state
securities commission, or any federal or state regulatory authority; and
provided, further, that in no case will such approval be unreasonably
withheld.
VIII. ASSIGNMENT
----------
Except as hereunder provided, neither this Agreement nor any rights
or obligations hereunder may be assigned by any party without the written
consent of the other parties. This Agreement shall inure to the benefit
of and be binding upon the parties and
their respective permitted successors and assigns. Chase may, with the
Fund's consent, subcontract for the performance hereof with any subsidiary
or other affiliate of Chase or U.S. Trust Corporation, and may, with the
Fund's consent, subcontract for the performance hereof with third parties
other than a subsidiary or affiliate of Chase or U.S.Trust Corporation;
provided, however, that Chase shall be as fully responsible to the Fund
for the acts or omissions of any subcontractor as it is for its own acts
and omissions and shall be responsible for its choice of subcontractor.
This Agreement shall be binding upon and inure to the benefit of Chemical
Bank, as successor by merger to Chase (and to be known upon such merger as
The Chase Manhattan Bank) as fully and to the same extent as if such
successor were named herein.
IX. CONFIDENTIALITY
---------------
The information contained in this Agreement is confidential and
proprietary in nature. By receiving this Agreement, the Fund agrees that
none of its trustees, officers, employees, or agents, without the prior
written consent of Chase, will divulge, furnish or make accessible to any
third party, except as required by law or any regulatory authority or as
permitted by the next sentence, any part of this Agreement or information
in connection therewith which has been or may be made available to it.
The Fund agrees
that it will limit access to the Agreement and such information to only
those officers or employees with responsibilities for analyzing the
Agreement, to its counsel, to such independent consultants hired expressly
for the purpose of assisting in such analysis, and to governmental
agencies. In addition, the Fund agrees that any person to whom such
information is properly disclosed shall be informed of the confidential
nature of the Agreement and the information relating thereto, and shall.be
directed to treat the same appropriately. The terms set forth in this
Article W shall continue without termination.
X. MISCELLANEOUS
-------------
This Agreement shall be governed by and construed in accordance
with the laws of the State of New York. The captions in this Agreement
are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but
all of which taken together shall constitute the entire Agreement between
the parties hereto and supersede any prior oral or written Agreement with
respect to the subject matter hereof. This Agreement may not be amended
or modified in any manner except by written instrument executed by both
parties.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers thereunto duly authorized as of
the date first above written.
The Chase Manhattan Bank, N.A.
By
------------------------------------
Name:
Title:
Somerset Exchange Fund
By
------------------------------------
Name:
Title:
Merrill Lynch Asset Management, L.P.
By: Princeton Services, Inc.
General Partner
By:
-------------------------------------
Name:
Title:
EXHIBIT B
TO
SHAREHOLDER TRANSFER AGENCY AGREEMENT
DATED JULY 11,1996
BETWEEN
THE CHASE MANHATTAN BANK, N.A.,
SOMERSET EXCHANGE FUND
AND
MERRILL LYNCH ASSET MANAGEMENT, L.P.
------------------------------
I. Shareholder Service Fee
The Shareholder Service Fee shall be computed quarterly and paid in
arrears and shall be equal to 1.5 basis points per annum of the Fund's net
asset value as of the quarter-end.
II. Out of pocket expenses reimbursable to Chase include, but are not
limited to, the cost of postage, check stock, stationery, forms, envelopes
and proxy materials.
