<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1998
SECURITIES ACT FILE NO. 333-44051
INVESTMENT COMPANY ACT FILE NO. 811-08603
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 1
--------------
DEBT STRATEGIES FUND II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
--------------
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
ARTHUR ZEIKEL
DEBT STRATEGIES FUND II, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
PATRICK D. SWEENEY, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557r
the effective date of this Registration Statement.
--------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering.
[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES BEING BEING OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)................ 11,615,000 shares $10.00 $116,150,000 $34,264.25
</TABLE>
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(1) Includes 1,515,000 shares subject to the Underwriter's over-allotment
option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$295 was previously paid. $33,970.00 has been transmitted in connection with
this filing.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SECTION 8(a), MAY DETERMINE.
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<PAGE>
DEBT STRATEGIES FUND II, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
--------------------- ---------------------
<C> <S> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover Page..... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages................. Inside Front and Outside Back Cover Pages;
Underwriting
3. Fee Table and Synopsis....... Prospectus Summary; Fee Table
4. Financial Highlights......... Not Applicable
5. Plan of Distribution......... Prospectus Summary; Net Asset Value;
Underwriting
6. Selling Shareholders......... Not Applicable
7. Use of Proceeds.............. Use of Proceeds; Investment Objectives and
Policies
8. General Description of the
Registrant.................. Prospectus Summary; The Fund; Investment
Objectives and Policies; Other Investment
Policies; Investment Restrictions;
Dividends and Distributions; Automatic
Dividend Reinvestment Plan; Mutual Fund
Investment Option
9. Management................... Directors and Officers; Investment Advisory
and Management Arrangements; Custodian;
Transfer Agent, Dividend Disbursing Agent
and Registrar
10. Capital Stock, Long-Term
Debt, and Other Securities.. Description of Capital Stock
11. Defaults and Arrears on
Senior Securities........... Not Applicable
12. Legal Proceedings............ Not Applicable
13. Table of Contents of the
Statement of Additional
Information................. Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page................... Not Applicable
15. Table of Contents............ Not Applicable
16. General Information and
History..................... Not Applicable
17. Investment Objective and
Policies.................... Prospectus Summary; Investment Objectives
and Policies; Investment Restrictions
18. Management................... Directors and Officers; Investment Advisory
and Management Arrangements
19. Control Persons and Principal
Holders of Securities....... Investment Advisory and Management
Arrangements
20. Investment Advisory and Other
Services.................... Investment Advisory and Management
Arrangements; Custodian; Underwriting;
Transfer Agent, Dividend Disbursing Agent
and Registrar; Legal Opinions; Experts
21. Brokerage Allocation and
Other Practices............. Portfolio Transactions
22. Tax Status................... Taxes; Automatic Dividend Reinvestment Plan
23. Financial Statements......... Independent Auditors' Report; Statement of
Assets, Liabilities and Capital
</TABLE>
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 18, 1998
PROSPECTUS
10,100,000 SHARES
DEBT STRATEGIES FUND II, INC.
COMMON STOCK
------------
Debt Strategies Fund II, Inc. (the "Fund") is a newly organized, diversified,
closed-end management investment company that seeks to provide current income
by investing primarily in a diversified portfolio of U.S. companies' debt
instruments, including corporate loans, that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's Investor
Service, Inc. ("Moody's") or BBB or lower by Standard & Poor's ("S&P")) or
unrated debt instruments of comparable quality. Such securities generally
involve greater volatility of price and risks to principal and income than
securities in the higher rating categories. As a secondary objective, the Fund
will seek capital appreciation. Up to 20% of the Fund's total assets may be
invested in debt instruments which, at the time of investment, are the subject
of bankruptcy proceedings or otherwise in default as to the repayment of
principal or payment of interest or are rated in the lowest rating categories
(Ca or lower by Moody's and CC or lower by S&P) or unrated debt instruments of
comparable quality. The Fund may invest up to 20% of its total assets in
financial instruments of issuers domiciled outside the United States or that
are denominated in various foreign currencies and multinational foreign
currency units. The Fund does not currently intend to hedge its non-U.S. dollar
denominated portfolio investments. For these reasons, an investment in the Fund
may be speculative in that it involves a high degree of risk and should not
constitute a complete investment program. See "Risk Factors and Special
Considerations." The Fund may engage in various portfolio strategies to enhance
income or capital appreciation and to hedge its portfolio against investment,
interest rate and foreign currency risks, including the utilization of
leverage, the use of options and futures transactions and the use of foreign
currency swaps. There can be no assurance that the investment objectives of the
Fund will be realized.
Because the Fund is newly organized, its shares have no history of public
trading, and shares of closed-end investment companies frequently trade at a
discount from their net asset value. The risk of loss may be greater for
initial investors expecting to sell their shares in a relatively short period
after completion of the public offering. See "Risk Factors and Special
Considerations."
(continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO SALES LOAD PROCEEDS TO
PUBLIC(1) (1)(2) FUND(3)
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<S> <C> <C> <C>
Per Share................................. $10.00 None $10.00
- --------------------------------------------------------------------------------
Total(4).................................. $101,000,000 None $101,000,000
</TABLE>
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- --------------------------------------------------------------------------------
(footnotes on next page)
------------
The shares are offered by the Underwriter, subject to prior sale, when, as
and if issued by the Fund and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares will be made in New York, New York on or about March ,
1998.
------------
MERRILL LYNCH & CO.
------------
The date of this Prospectus is March , 1998.
<PAGE>
(continued from previous page)
At times, the Fund expects to utilize leverage through borrowings, including
the issuance of short-term debt securities, or the issuance of shares of
preferred stock. Under current market conditions, the Fund intends to utilize
leverage in an amount equal to approximately 33 1/3% of its total assets
(including the amount obtained from leverage). The Fund will generally not
utilize leverage if it anticipates that the Fund's leveraged capital structure
would result in a lower return to holders of the Common Stock than that
obtainable if the Common Stock were unleveraged for any significant amount of
time. Use of leverage creates an opportunity for increased income and capital
appreciation, but, at the same time, creates special risks. See "Risk Factors
and Special Considerations" and "Other Investment Policies--Leverage."
Prior to this offering, there has been no public market for the Fund's
shares. Application has been made to list the Fund's shares of Common Stock on
the New York Stock Exchange. However, during an initial period which is not
expected to exceed two weeks from the date of this Prospectus, the Fund's
shares will not be listed on any securities exchange. During such period, the
Underwriter does not intend to make a market in the Fund's shares.
Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period.
This Prospectus sets forth in concise form the information about the Fund
that a prospective investor should know before investing in the Fund.
Investors should read and retain this Prospectus for future reference. Fund
Asset Management, L.P. is the Fund's investment adviser (the "Investment
Adviser"). The address of the Fund is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, and its telephone number is (609) 282-2800.
The Underwriter may engage in transactions that stabilize, maintain, or
otherwise affect the price of the Fund's Common Stock. Such transactions may
include stabilizing, the purchase of the Fund's Common Stock to cover short
positions and the imposition of penalty bids. For a description of these
activities, see "Underwriting."
------------
(footnotes from previous page)
(1) The Investment Adviser or an affiliate will pay the Underwriter a
commission in the amount of % of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby. See
"Underwriting."
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deducting organizational and offering expenses payable by the Fund
estimated at $ .
(4) The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to an additional 1,515,000 shares to
cover over-allotments. If all such shares are purchased, the total Price
to Public and Proceeds to Fund will be $116,150,000. See "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with the detailed
information appearing elsewhere in this Prospectus.
THE FUND Debt Strategies Fund II, Inc. (the "Fund") is a newly
organized, diversified, closed-end management investment
company. See "The Fund."
THE
OFFERING The Fund is offering 10,100,000 shares of Common Stock at an
initial offering price of $10.00 per share. The Common Stock is
being offered by Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch" or the "Underwriter"). The
Underwriter has been granted an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to 1,515,000
additional shares of Common Stock to cover over-allotments. See
"Underwriting."
INVESTMENT The primary investment objective of the Fund is to seek to
OBJECTIVES provide current income by investing primarily in a diversified
AND portfolio of U.S. companies' debt instruments, including
POLICIES corporate loans, which are rated in the lower rating categories
of the established rating services (Baa or lower by Moody's or
BBB or lower by S&P) or unrated debt instruments which are in
the judgment of the Investment Adviser of equivalent quality.
Such investments generally involve greater volatility of price
and risks to principal and income than securities in the higher
rating categories. As a secondary objective, the Fund will seek
capital appreciation. Up to 20% of the Fund's total assets may
be invested in publicly offered or privately placed debt
securities and corporate loans which, at the time of
investment, are the subject of bankruptcy proceedings or
otherwise in default as to the repayment of principal or
payment of interest or are rated in the lowest rating
categories (Ca or lower by Moody's and CC or lower by S&P) or
which, if unrated, are in the judgment of the Investment
Adviser of equivalent quality ("Distressed Securities"). Up to
20% of the Fund's total assets may be invested in financial
instruments of issuers domiciled outside the United States or
that are denominated in various foreign currencies and
multinational foreign currency units, provided that the foreign
issuers of any non-U.S. dollar denominated instruments
purchased by the Fund are domiciled in a country that is a
member of the Organisation for Economic Co-operation and
Development ("OECD"). The Fund does not currently intend to
hedge its non-U.S. dollar denominated portfolio investments.
For these reasons, an investment in the Fund may be speculative
in that it involves a high degree of risk and should not
constitute a complete investment program. See "Risk Factors and
Special Considerations." Up to 20% of the Fund's total assets
can be invested in convertible debt instruments and preferred
stock, each of which may be converted into common stock or
other securities of the same or a different issuer, and non-
convertible preferred stock. No assurance can be given that the
Fund's investment objectives will be achieved. See "Investment
Objectives and Policies".
The Fund's investment policies permit investment in the
following asset classes: (i) senior and subordinated corporate
loans, both secured and unsecured ("Corporate Loans"), issued
either directly by the borrower or in the form of participation
interests in Corporate Loans made by banks and other financial
institutions; (ii) publicly offered and privately placed high-
yield debt securities, senior and subordinated, both secured
and unsecured (commonly known as "high-
3
<PAGE>
yield securities" or "junk bonds"); and (iii) convertible debt
instruments and preferred stock, each of which may be
convertible into common stock or other securities of the same
or a different issuer, and non-convertible preferred stock. The
debt securities and Corporate Loans in which the Fund invests
may pay interest at fixed rates or at rates that float at a
margin above a generally recognized base lending rate such as
the prime rate ("Prime Rate") of a designated U.S. bank, or
that adjusts periodically at a margin above the Certificate of
Deposit ("CD") rate or the London Interbank Offered Rate
("LIBOR").
At times, the Fund expects to utilize leverage through
borrowings, including the issuance of short-term debt
securities, or the issuance of shares of preferred stock. Under
current market conditions, the Fund intends to utilize leverage
in an amount up to approximately 33 1/3% of its total assets
(including the amount obtained from leverage). The Fund intends
to utilize leverage to provide the holders of Common Stock with
a potentially higher return. The Fund will generally not
utilize leverage if it anticipates that the Fund's leveraged
capital structure would result in a lower return to holders of
the Common Stock than that obtainable if the Common Stock were
unleveraged for any significant amount of time. Use of leverage
creates an opportunity for increased income and capital
appreciation, but, at the same time, creates special risks. See
"Risk Factors and Special Considerations" and "Other Investment
Policies--Leverage."
The Fund may engage in various portfolio strategies to seek to
increase its return and to hedge its portfolio against
movements in interest rates or foreign currencies through the
use of interest rate or foreign currency swap transactions, the
purchase of call and put options on securities, the sale of
covered call and put options on its portfolio securities and
transactions in financial futures and related options on such
futures. See "Other Investment Policies."
Investment in shares of Common Stock of the Fund offers several
benefits. The Fund offers investors the opportunity to receive
current income and capital appreciation by investing in a
professionally managed portfolio that, to the extent the
portfolio is comprised of Corporate Loans, is a type of
investment typically not available to individual investors. In
managing such portfolio, the Investment Adviser provides the
Fund and its shareholders with professional credit analysis.
The Fund also relieves the investor of the burdensome
administrative details involved in managing a portfolio of such
investments. Additionally, the Investment Adviser will seek to
enhance the return on the Common Stock by leveraging the Fund's
capital structure through the borrowing of money or the
issuance of short-term debt securities or shares of preferred
stock. The benefits are at least partially offset by the
expenses involved in operating an investment company. Such
expenses primarily consist of the advisory fee and operational
costs. Additionally, the use of leverage involves certain
expenses and risk considerations. See "Risk Factors and Special
Considerations" and "Other Investment Policies--Leverage."
LISTING
Prior to this offering, there has been no public market for the
shares of Common Stock of the Fund. Application has been made
to list the Fund's shares of Common Stock on the New York Stock
Exchange. However, during an initial period which is not
expected to exceed two weeks from the date of this Prospectus,
the Fund's shares will not be listed on any securities
exchange.
4
<PAGE>
During such period, the Underwriter does not intend to make a
market in the Fund's shares. Consequently, it is anticipated
that an investment in the Fund will be illiquid during such
period. See "Underwriting."
INVESTMENT
ADVISER Fund Asset Management, L.P. is the Fund's investment adviser
(the "Investment Adviser") and is responsible for the
management of the Fund's investment portfolio and for providing
administrative services to the Fund. For its services, the Fund
pays the Investment Adviser a monthly fee at the annual rate of
0.60 of 1% of the Fund's average weekly net assets plus the
proceeds of any outstanding borrowings used for leverage. The
Investment Adviser is an affiliate of Merrill Lynch Asset
Management, L.P. ("MLAM"), which is owned and controlled by
Merrill Lynch & Co., Inc. ("ML & Co."). The Investment Adviser,
or MLAM, acts as the investment adviser for over 140 other
registered management investment companies. The Investment
Adviser also offers portfolio management and portfolio analysis
services to individual and institutional accounts. As of
January 31, 1998, the Investment Adviser and MLAM had a total
of approximately $287 billion in investment company and other
portfolio assets under management, including accounts of
certain affiliates of the Investment Adviser. See "Investment
Advisory and Management Arrangements."
DIVIDENDS
AND
DISTRIBUTIONS
The Fund intends to distribute dividends of substantially all
of its net investment income monthly to holders of Common
Stock. All net realized capital gains, if any, will be
distributed to the Fund's shareholders at least annually. See
"Dividends and Distributions."
The Fund expects that it will commence paying dividends within
90 days of the date of this Prospectus.
AUTOMATIC All dividend and capital gains distributions will be
DIVIDEND automatically reinvested in additional shares of Common Stock
REINVESTMENTof the Fund unless a shareholder elects to receive cash.
PLAN Shareholders whose shares are held in the name of a broker or
nominee should contact such broker or nominee to confirm that
they may participate in the Fund's dividend reinvestment plan.
See "Automatic Dividend Reinvestment Plan."
MUTUAL Purchasers of shares of Common Stock of the Fund through
FUND Merrill Lynch in this offering will have an investment option
INVESTMENT consisting of the right to reinvest the net proceeds from a
OPTION sale of such shares (the "Original Shares") in Class D initial
sales charge shares of certain Merrill Lynch-sponsored open-end
mutual funds ("Eligible Class D Shares") at their net asset
value, without the imposition of the initial sales charge, if
the conditions set forth below are satisfied. First, the sale
of the Original Shares must be made through Merrill Lynch, and
the net proceeds therefrom must be immediately reinvested in
Eligible Class D Shares. Second, the Original Shares must have
been either acquired in this offering or be shares representing
reinvested dividends from shares of Common Stock acquired in
this offering. Third, the Original Shares must have been
continuously maintained in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to be eligible
for the investment option. Class D shares of the mutual funds
are subject to an account maintenance fee at an annual rate of
up to 0.25% of the average daily net asset value of such mutual
fund. See "Mutual Fund Investment Option."
5
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a newly organized, diversified, closed-end management investment
company and has no operating history. As described under "Prospectus Summary--
Listing," it is anticipated that an investment in the Fund will be illiquid
prior to listing of the Fund's shares of Common Stock on the New York Stock
Exchange. See "Underwriting." Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. Accordingly, the Common Stock
of the Fund is designed primarily for long-term investors and should not be
considered a vehicle for trading purposes. The net asset value of the Fund's
shares of Common Stock will fluctuate with interest rate changes as well as
with price changes of the Fund's portfolio securities and these fluctuations
are likely to be greater in the case of a fund having a leveraged capital
structure, as contemplated for the Fund. See "Investment Objectives and
Policies."
Corporate Loans. The Fund may invest in senior and subordinated Corporate
Loans, both secured and unsecured. A Corporate Loan which is unsecured is not
supported by any specific pledge of collateral and therefore constitutes only a
general obligation of the borrower. In addition to being unsecured, a Corporate
Loan in which the Fund may invest may be subordinate in right of payment to the
senior debt obligations of the borrower. Upon a liquidation or bankruptcy of
the borrower the senior debt obligations of the borrower are often required to
be paid in full before the subordinated debtholders are permitted to receive
any distribution on behalf of their claim. Distributions, if any, to
subordinated debtholders in such situations may consist in whole or in part in
non-income producing securities, including common stock. Accordingly, following
an event of default or liquidation or bankruptcy of a borrower, there can be no
assurance that the assets of the borrower will be sufficient to satisfy the
claims of unsecured and subordinated debtholders or that such debtholders will
receive income producing debt securities in satisfaction of their claims. As a
result, the Fund might not receive payments to which it is entitled and thereby
may experience a decline in the value of its investment and possibly, its net
asset value.
The Fund may invest in Corporate Loans made in connection with highly
leveraged transactions. Corporate Loans made in connection with highly
leveraged transactions are subject to greater credit risks than other Corporate
Loans in which the Fund may invest. These credit risks include a greater
possibility of default or bankruptcy of the borrower and the assertion that the
pledging of collateral, if any, to secure the loan constituted a fraudulent
conveyance or preferential transfer which can be nullified or subordinated to
the rights of other creditors of the borrower under applicable law. Highly
leveraged Corporate Loans also may be less liquid than other Corporate Loans.
The success of the Fund depends to a great degree, on the skill with which
the agent banks administer the terms of the Corporate Loan agreements, monitor
borrower compliance with covenants, collect principal, interest and fee
payments from borrowers and, where necessary, enforce creditor remedies against
borrowers. Typically, the agent bank will have broad discretion in enforcing a
Corporate Loan agreement. The financial status of the agent bank and co-lenders
and participants interposed between the Fund and a borrower may affect the
ability of the Fund to receive payments of interest and principal.
Lower-Rated Securities. Junk bonds and high-yield Corporate Loans are
regarded as being predominantly speculative as to the issuer's ability to make
payments of principal and interest. Investment in such securities involves
substantial risk. Issuers of junk bonds and high-yield Corporate Loans may be
highly leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of
such issuers generally are greater than is the case with higher-rated
securities. For
6
<PAGE>
example, during an economic downturn or a sustained period of rising interest
rates, issuers of junk bonds and high-yield Corporate Loans may be more likely
to experience financial stress, especially if such issuers are highly
leveraged. During periods of economic downturn, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing.
Therefore, there can be no assurance that in the future there will not exist a
higher junk bond and high-yield Corporate Loan default rate relative to the
rates currently existing in the junk bond and high-yield Corporate Loan
markets. The risk of loss due to default by the issuer is significantly greater
for the holders of junk bond and high-yield Corporate Loans because such
securities may be unsecured and may be subordinate to other creditors of the
issuer. Other than with respect to Distressed Securities, the junk bonds and
high-yield Corporate Loans in which the Fund may invest do not include
instruments which, at the time of investment, are in default or the issuers of
which are in bankruptcy. However, there can be no assurance that such events
will not occur after the Fund purchases a particular security, in which case
the Fund may experience losses and incur costs.
Junk bonds frequently have call or redemption features that would permit an
issuer to repurchase the security from the Fund. If a call were exercised by
the issuer during a period of declining interest rates, the Fund is likely to
have to replace such called security with a lower yielding security, thus
decreasing the net investment income to the Fund and dividends to shareholders.
Junk bonds and high-yield Corporate Loans tend to be more volatile than
higher-rated debt instruments, so that adverse economic events may have a
greater impact on the prices of junk bonds and high-yield Corporate Loans than
on high-rated debt instruments. Factors adversely affecting the market value of
such securities are likely to affect adversely the Fund's net asset value.
Recently, demand for junk bonds and high-yield Corporate Loans has increased
significantly and the difference between the yields paid by such securities and
investment grade bonds (i.e., the "spread") has narrowed. To the extent this
differential increases, the value of junk bonds and high-yield Corporate Loans
in the Fund's portfolio could be adversely affected.
Like higher-rated debt instruments, junk bonds and high-yield Corporate Loans
generally are purchased and sold through dealers who make a market in such
securities for their own accounts. However, there are fewer dealers in the junk
bond and high-yield Corporate Loan markets, which markets may be less liquid
than the market for higher-rated debt instruments, even under normal economic
conditions. Also, there may be significant disparities in the prices quoted for
junk bonds and high-yield Corporate Loans by various dealers. As a result,
during periods of high demand in the junk bond and high-yield Corporate Loan
markets, it may be difficult to acquire junk bonds and high-yield Corporate
Loans appropriate for investment by the Fund. Adverse economic conditions and
investor perceptions thereof (whether or not based on economic fundamentals)
may impair liquidity in the junk bond and high-yield Corporate Loan markets and
may cause the prices the Fund receives for its junk bonds and high-yield
Corporate Loans to be reduced. In addition, the Fund may experience difficulty
in liquidating a portion of its portfolio when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as
deterioration in the creditworthiness of the issuers. Under such conditions,
judgment may play a greater role in valuing certain of the Fund's portfolio
instruments than in the case of instruments trading in a more liquid market. In
addition, the Fund may incur additional expense to the extent that it is
required to seek recovery upon a default on a portfolio holding or to
participate in the restructuring of the obligation.
Distressed Securities. The Fund may invest up to 20% of its total assets in
Distressed Securities. Distressed Securities are high yield/high risk
securities, including Corporate Loans purchased in the secondary market, which
are the subject of bankruptcy proceedings or otherwise in default as to the
repayment of principal
7
<PAGE>
and/or payment of interest at the time of acquisition by the Fund or are rated
in the lower rating categories (Ca or lower by Moody's and CC or lower by S&P)
or which, if unrated, are in the judgment of the Investment Adviser of
equivalent quality. Investment in Distressed Securities is speculative and
involves significant risk. Distressed Securities frequently do not produce
income while they are outstanding and may require the Fund to bear certain
extraordinary expenses in order to protect and recover its investment.
Therefore, to the extent the Fund pursues its secondary objective of capital
appreciation through investment in Distressed Securities, the Fund's ability to
achieve current income for its shareholders may be diminished. The Fund also
will be subject to significant uncertainty as to when and in what manner and
for what value the obligations evidenced by the Distressed Securities will
eventually be satisfied; e.g., through a liquidation of the obligor's assets,
an exchange offer or plan of reorganization involving the Distressed Securities
or a payment of some amount in satisfaction of the obligation. In addition,
even if an exchange offer is made or plan of reorganization is adopted with
respect to Distressed Securities held by the Fund, there can be no assurance
that the securities or other assets received by the Fund in connection with
such exchange offer or plan of reorganization will not have a lower value or
income potential than may have been anticipated when the investment was made.
Moreover, any securities received by the Fund upon completion of an exchange
offer or plan of reorganization may be restricted as to resale. As a result of
the Fund's participation in negotiations with respect to any exchange offer or
plan of reorganization with respect to an issuer of Distressed Securities, the
Fund may be restricted from disposing of such securities.
Leverage. The use of leverage by the Fund creates an opportunity for
increased net income and capital appreciation for the Common Stock, but, at the
same time, creates special risks. The Fund intends to utilize leverage to
provide the holders of Common Stock with a potentially higher return. Leverage
creates risks for holders of Common Stock, including the likelihood of greater
volatility of net asset value and market price of shares of the Common Stock,
and the risk that fluctuations in interest rates on borrowings and short-term
debt or in the dividend rates on any preferred stock may affect the return to
holders of Common Stock. To the extent the income or capital appreciation
derived from securities purchased with funds received from leverage exceeds the
cost of leverage, the Fund's return will be greater than if leverage had not
been used. Conversely, if the income or capital appreciation from the
securities purchased with such funds is not sufficient to cover the cost of
leverage, the return to the Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to shareholders as
dividends and other distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment may nevertheless determine to maintain
the Fund's leveraged position if it expects that the benefits to the Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return. Certain types of borrowings by the Fund may result in the Fund
being subject to covenants in credit agreements relating to asset coverage and
portfolio composition requirements. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more nationally
recognized statistical ratings organization which may issue ratings for the
short-term corporate debt securities or preferred stock issued by the Fund.
These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the Investment
Company Act of 1940, as amended (the "Investment Company Act"). It is not
anticipated that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objectives and policies. See "Other Investment Policies--Leverage."
The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace. As discussed
under "Investment Advisory and Management Arrangements," the fee paid to the
Investment Adviser will be calculated on the basis of the Fund's assets
including proceeds from borrowings for leverage and the issuance of preferred
stock.
8
<PAGE>
Other Investment Management Techniques. The Fund may use various other
investment management techniques that also involve special considerations,
including engaging in interest rate transactions, utilization of options and
futures transactions, utilization of foreign currency swaps, making forward
commitments and lending its portfolio securities. For further discussion of
these practices and the associated risks and special considerations, see "Other
Investment Policies."
Non-U.S. Securities. The Fund may invest up to 20% of its total assets in
financial instruments of issuers domiciled outside the United States or that
are denominated in various foreign currencies and multinational foreign
currency units, provided that the foreign issuers of any non-U.S. dollar
denominated instruments purchased by the Fund are domiciled in a country that
is a member of the OECD. Investing in securities issued by non-U.S. issuers
involves certain special risks not typically involved in U.S. investments,
including fluctuations in foreign exchange rates, future political and economic
developments, the possible imposition of exchange controls or other foreign or
U.S. governmental laws or restrictions applicable to such loans. With respect
to certain countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, currency devaluations, or diplomatic
developments which could affect the Fund's investments in those financial
instruments. Moreover, an individual country's economy may differ favorably or
unfavorably from the U.S. economy in such respects as, but not limited to,
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. In addition,
information with respect to non-U.S. issuers may differ from that available
with respect to U.S. issuers, since non-U.S. issuers are not generally subject
to uniform accounting, auditing and financial reporting standards, practices
and requirements comparable to those applicable to U.S. issuers. The Fund does
not currently intend to hedge its non-U.S. dollar denominated portfolio
investments. Additionally, the Fund may invest in Corporate Loans made to U.S.
Borrowers with significant non-dollar denominated revenues.
Concentration in Financial Institutions. As a result of the Fund's investment
in Corporate Loans, the Fund may be deemed to be concentrated in securities of
issuers in the industry group consisting of financial institutions and their
holding companies, including commercial banks, thrift institutions, insurance
companies and finance companies. Consequently, the Fund is subject to certain
risks associated with such institutions, including, among other things, changes
in governmental regulation, interest rate levels and general economic
conditions. See "Investment Objectives and Policies--Description of Corporate
Loans" and "--Description of Participation Interests."
Illiquid Securities. The Fund may invest in securities that lack an
established secondary trading market or are otherwise considered illiquid. Some
or all of the Corporate Loans in which the Fund invests will be considered to
be illiquid. Liquidity of a security relates to the ability to easily dispose
of the security and the price to be obtained and does not generally relate to
the credit risk or likelihood of receipt of cash at maturity. Illiquid
corporate bonds and notes may trade at a discount from comparable, more liquid
investments.
Antitakeover Provisions. The Fund's Articles of Incorporation include
provisions that could have the effect of limiting the ability of other entities
or persons to acquire control of the Fund or to change the composition of its
Board of Directors and could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund. See
"Description of Capital Stock--Certain Provisions of the Articles of
Incorporation."
For these reasons, an investment in Common Stock of the Fund may be
speculative in that it involves a high degree of risk and should not constitute
a complete investment program.
9
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment and Plan Fees................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to shares of
Common Stock)
Management Fees(a)(b)................................................. 0.60%
Interest Payments on Borrowed Funds(b)................................ None
Other Expenses(b)..................................................... 0.13%
----
Total Annual Expenses(b)............................................ 0.73%
====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) total annual expenses
of 0.73% (assuming no leverage) and 3.93% (assuming
leverage of 33 1/2% of the Fund's total assets) and
(2) a 5% annual return throughout the periods:
Assuming No Leverage................................ $ 7 $ 23 $ 41 $ 91
Assuming Leverage................................... $40 $120 $202 $415
</TABLE>
- --------
(a) See "Investment Advisory and Management Arrangements"--page 32.
(b) In the event the Fund utilizes leverage by borrowing in an amount of
approximately 33 1/3% of the Fund's total assets, it is estimated that the
Management Fees would be 0.90%, Interest Payments on Borrowed Funds would
be 2.90% and Total Annual Expenses would be 3.93%. See "Risk Factors and
Special Considerations--Leverage" and "Other Investment Policies--
Leverage."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as mandated
by Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND
ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED
FOR PURPOSES OF THE EXAMPLE.
10
<PAGE>
THE FUND
Debt Strategies Fund II, Inc. (the "Fund") is a newly organized,
diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on December 10, 1997, and
has registered under the Investment Company Act. See "Description of Capital
Stock." The Fund's principal office is located at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and its telephone number is (609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as mutual funds) in that closed-end investment companies do not
redeem their securities at the option of the shareholder, whereas open-end
companies issue securities redeemable at net asset value at any time at the
option of the shareholder and typically engage in a continuous offering of
their shares. Accordingly, open-end companies are subject to continuous asset
in-flows and out-flows that can complicate portfolio management. However,
shares of closed-end investment companies frequently trade at a discount from
net asset value. This risk may be greater for initial investors expecting to
sell their shares in a relatively short period after completion of the public
offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment
option in full) after payment of organizational and offering costs.
Due to significant current demand for Corporate Loans and high yield debt
securities, investments that, in the judgment of the Investment Adviser, are
appropriate investments for the Fund may not be immediately available.
Therefore, the Fund expects that there will be an initial investment period of
up to six months following the completion of its Common Stock offering before
it is invested in accordance with its investment objectives and policies.
Pending such investment, it is anticipated that all or a portion of the
proceeds will be invested in U.S. government securities or high grade, short-
term money market instruments. See "Investment Objectives and Policies."
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek to provide current income
by investing primarily in a diversified portfolio of U.S. companies' debt
instruments, including Corporate Loans, which are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's or BBB
or lower by S&P) or unrated debt instruments which are in the judgment of the
Investment Adviser of equivalent quality. Such investments generally involve
greater volatility of price and risks to principal and income than securities
in the higher rating categories. As a secondary objective, the Fund will seek
capital appreciation. Up to 20% of the Fund's total assets may be invested in
Distressed Securities, which includes publicly offered or privately placed
debt securities and Corporate Loans which, at the time of investment, are the
subject of bankruptcy proceedings or otherwise in default as to the repayment
of principal or payment of interest or are rated in the lowest rating
categories (Ca or lower by Moody's and CC or lower by S&P) or which, if
unrated, are in the judgment of the Investment Adviser of equivalent quality.
Up to 20% of the Fund's total assets may be invested in financial instruments
of issuers domiciled outside the United States or that are denominated in
various foreign currencies and multinational foreign currency units, provided
that the foreign issuers of any non-U.S. dollar denominated instruments
purchased by the Fund are domiciled in a country that is a member of the OECD.
The Fund does
11
<PAGE>
not currently intend to hedge its non-U.S. dollar denominated portfolio
investments. For these reasons, an investment in the Fund may be speculative
in that it involves a high degree of risk and should not constitute a complete
investment program. See "Risk Factors and Special Considerations." Up to 20%
of the Fund's total assets can be invested in convertible debt instruments and
preferred stock, each of which may be converted into common stock or other
securities of the same or a different issuer, and non-convertible preferred
stock. As a result of conversions of convertible securities or upon an
exchange offer or bankruptcy plan of reorganization, a significant portion of
the Fund's total assets may be invested in common stock at certain points in
time. Under normal market conditions, at least 65% of the Fund's total assets
will be invested in debt instruments. The Fund's investment objectives are
fundamental policies and may not be changed without the approval of a majority
of the outstanding voting securities of the Fund (as defined in the Investment
Company Act). There can be no assurance that the investment objectives of the
Fund will be realized.
The Fund's investment policies permit investment in the following asset
classes which are described in greater detail below: (i) senior and
subordinated Corporate Loans, both secured and unsecured, issued either
directly by the borrower or in the form of participation interests in
Corporate Loans made by banks and other financial institutions; (ii) publicly
offered and privately placed high-yield debt securities, senior and
subordinated, both secured and unsecured; and (iii) convertible debt
instruments and preferred stock, each of which may be converted into common
stock or other securities of the same or a different issuer, and non-
convertible preferred stock. The debt securities and Corporate Loans in which
the Fund invests may pay interest at fixed rates or at rates that float at a
margin above a generally recognized base lending rate such as the prime rate
of a designated U.S. bank, or that adjust periodically at a margin above the
CD rate or LIBOR.
Subject to other investment restrictions applicable to the Fund, up to 10%
of the Fund's assets may be invested in debt instruments, including Corporate
Loans, of investment companies (which may or may not be registered under the
Investment Company Act) whose portfolio securities consist entirely of (i)
corporate debt or equity securities acceptable to the Fund's Investment
Adviser or (ii) money market instruments.
Under unusual market or economic conditions or for temporary or defensive or
liquidity purposes, the Fund may invest up to 100% of its assets in securities
issued or guaranteed by the U.S. Government or its instrumentalities or
agencies, certificates of deposits, banker's acceptances, and other bank
obligations, commercial paper rated in the highest category by a nationally
recognized statistical rating organization or other fixed-income securities
deemed by the Investment Adviser to be consistent with a defensive posture.
The yield on such securities may be lower than the yield on lower-rated fixed-
income securities.
Although the Fund will invest primarily in lower-rated securities, other
than with respect to Distressed Securities (which are discussed below) it will
not invest in securities in the lowest rating categories (Ca or below by
Moody's and CC or below by S&P) unless the Investment Adviser believes that
the financial condition of the issuer or the protection afforded to the
particular securities is stronger than would otherwise be indicated by such
low ratings.
The Fund's investment philosophy is based on the belief that, under varying
economic and market conditions, certain debt instruments will perform better
than other debt instruments. The Fund's fully managed approach puts maximum
emphasis on the flexibility of the Investment Adviser to analyze various
opportunities among debt instruments and to make judgments regarding which
debt instruments provide, in the opinion of the Investment Adviser, the
highest potential opportunity for current income and, secondarily, capital
appreciation. This approach distinguishes the Fund from other funds which
often seek either capital growth or current income or are restricted to fixed-
rate securities or floating rate instruments. Consistent with this approach,
when changing
12
<PAGE>
economic conditions and other factors cause the yield difference between
lower-rated and higher-rated securities to narrow, the Fund may purchase
higher-rated securities if the Investment Adviser believes that the risk of
loss of income and principal may be substantially reduced with only a
relatively small reduction in yield.
Investment in the Common Stock of the Fund offers the individual investor
several potential benefits. First, the Fund offers the opportunity to
participate in a portfolio which may contain investments, such as Corporate
Loans, that historically have been available mainly to institutional
investors. In managing such a portfolio, the Investment Adviser provides
professional management which includes the extensive credit analysis needed to
invest in Corporate Loans, junk bonds and Distressed Securities. The Fund also
relieves the investor of the burdensome administrative details involved in
managing a portfolio of such investments. Additionally, the Investment Adviser
may seek to enhance the yield or capital appreciation of the Fund's Common
Stock by leveraging the Fund's capital structure through the borrowing of
money or the issuance of short-term debt securities or shares of preferred
stock. The benefits are at least partially offset by the expenses involved in
running an investment company. Such expenses primarily consist of advisory
fees and operational costs. The use of leverage also involves certain expenses
and risk considerations. See "Risk Factors and Special Considerations" and
"Other Investment Policies--Leverage."
The Fund may engage in various portfolio strategies to seek to increase its
return and to hedge its portfolio against movements in interest rates or
foreign currencies through the use of interest rate or foreign currency swap
transactions, the purchase of call and put options on securities, the sale of
covered call and put options on its portfolio securities and transactions in
financial futures and related options on such futures. Each of these portfolio
strategies is described below. There can be no assurance that the Fund will
employ these strategies or that, if employed, they will be effective.
The Fund may invest in, among other things, the types of instruments
described below:
DESCRIPTION OF CORPORATE LOANS
The Corporate Loans in which the Fund may invest generally consist of direct
obligations of a borrower ("Borrower") undertaken to finance the growth of the
Borrower's business internally or externally, or to finance a capital
restructuring. Corporate Loans may also include obligations of a Borrower
issued in connection with a restructuring or a bankruptcy. A significant
portion of the Corporate Loans in which the Fund invests are highly leveraged
loans, such as leveraged buy-out loans, leveraged recapitalization loans and
other types of acquisition loans. Such Corporate Loans may be structured to
include both term loans, which are generally fully funded at the time of the
Fund's investment and revolving credit facilities, which would require the
Fund to make additional investments in Corporate Loans as required under the
terms of the credit facility. Such Corporate Loans may also include
receivables purchase facilities, which are similar to revolving credit
facilities secured by a Borrower's receivables.
The Fund may invest in senior and subordinated Corporate Loans, both secured
and unsecured. The Corporate Loans in which the Fund invests may be senior
debt obligations of the Borrower and may, in some instances, hold the most
senior position in the capitalization structure of the Borrower (i.e. not
subordinated to other debt obligations in right of payment). Corporate Loans
which are senior debt obligations of the Borrower may be wholly or partially
secured by collateral, or may be unsecured. However, even in the case of a
secured Corporate Loan, upon an event of default the ability of a lender to
have access to the collateral, if any, or otherwise recover its investment may
be limited by bankruptcy and other insolvency laws. The value of the
13
<PAGE>
collateral may decline subsequent to the Fund's investment in the Corporate
Loan. Under certain circumstances, the collateral may be released with the
consent of the syndicate of lenders and the lender which is administering the
Corporate Loan on behalf of the syndicate ("Agent Bank") or pursuant to the
terms of the underlying credit agreement with the Borrower. There is no
assurance that the liquidation of the collateral would satisfy the Borrower's
obligations in the event of the nonpayment of scheduled interest or principal,
or that the collateral could be readily liquidated. As a result, the Fund
might not receive payments to which it is entitled and thereby may experience
a decline in the value of the investment and possibly, its net asset value.
In addition to senior and secured Corporate Loans, the Fund may invest in
Corporate Loans which are unsecured and subordinated. A Corporate Loan which
is unsecured is not supported by any specific pledge of collateral and
therefore constitutes only a general obligation of the Borrower. In addition
to being unsecured a Corporate Loan in which the Fund may invest may be
subordinate in right of payment to the senior debt obligations of the
Borrower. Upon a liquidation or bankruptcy of the Borrower the senior debt
obligations of the Borrower are often required to be paid in full before the
subordinated debtholders are permitted to receive any distribution on behalf
of their claim. Distributions, if any, to subordinated debtholders in such
situations may consist in whole or in part in non-income producing securities,
including common stock. Accordingly, following an event of default or
liquidation or bankruptcy of a Borrower, there can be no assurance that the
assets of the Borrower will be sufficient to satisfy the claims of unsecured
and subordinated debtholders or that such debtholders will receive income
producing debt securities in satisfaction of their claims. As a result, the
Fund might not receive payments to which it is entitled and thereby may
experience a decline in the value of its investment and possibly, its net
asset value.
Corporate Loans made in connection with highly leveraged transactions are
subject to greater risks than other Corporate Loans in which the Fund may
invest. These credit risks include a greater possibility of default or
bankruptcy of the Borrower, and the potential assertion that the pledging of
collateral, if any, to secure the loan constituted a fraudulent conveyance or
preferential transfer which can be nullified or subordinated to the rights of
other creditors of the Borrower under applicable law. Highly leveraged
Corporate Loans may also be less liquid than other Corporate Loans.
The rate of interest payable on floating or variable rate Corporate Loans is
established as the sum of a base lending rate used by commercial lenders plus
a specified margin. These base lending rates generally are the Prime Rate of a
designated U.S. bank, LIBOR, the CD rate or another base lending rate used by
commercial lenders. The interest rate on Prime Rate-based Corporate Loans
floats daily as the Prime Rate changes, while the interest rate on LIBOR-based
and CD-based Corporate Loans is reset periodically, typically every 30 days to
one year. Certain of the floating or variable rate Corporate Loans in which
the Fund will invest may permit the Borrower to select an interest rate reset
period of up to one year. A portion of the Fund's portfolio may be invested in
Corporate Loans with longer interest rate reset periods or fixed interest
rates which are generally more susceptible to interest rate risks in the event
of fluctuations in prevailing interest rates.
The Fund may receive and/or pay certain fees in connection with its
investments in Corporate Loans. These fees are in addition to interest
payments received and may include facility fees, commissions and prepayment
penalty fees. When the Fund buys a Corporate Loan it may receive a facility
fee and when it sells a Corporate Loan it may pay a facility fee. In certain
circumstances, the Fund may receive a prepayment penalty fee on the prepayment
of a Corporate Loan by a Borrower. These fees are intended to adjust the yield
on such Corporate Loans. In connection with the acquisition of Corporate
Loans, the Fund may also acquire warrants and other
14
<PAGE>
debt or equity securities of the Borrower or its affiliates. The acquisition
of such securities will only be incidental to the Fund's purchase of an
interest in a Corporate Loan.
In making an investment in a Corporate Loan, the Investment Adviser will
consider factors deemed by it to be appropriate to the analysis of the
Borrower and the Corporate Loan. Such factors include financial ratios of the
Borrower such as pre-tax interest coverage, leverage ratios, and the ratios of
cash flows to total debts and the ratio of tangible assets to debt. In its
analysis of these factors, the Investment Adviser also will be influenced by
the nature of the industry in which the Borrower is engaged, the nature of the
Borrower's assets and the Investment Adviser's assessments of the general
quality of the Borrower.
A Borrower also may be required to comply with various restrictive covenants
contained in any loan agreement between the Borrower and the lending syndicate
("Corporate Loan Agreement"). Such covenants, in addition to requiring the
scheduled payment of interest and principal, may include restrictions on
dividend payments and other distributions to stockholders, provisions
requiring the Borrower to maintain specific financial ratios or relationships
and limits on total debt. In addition, a Corporate Loan Agreement may contain
a covenant requiring the Borrower to prepay the Corporate Loan with any excess
cash flow. Excess cash flow generally includes net cash flow after scheduled
debt service payments and permitted capital expenditures, among other things,
as well as the proceeds from asset dispositions or sales of securities. A
breach of covenant (after giving effect to any cure period) which is not
waived by the Agent Bank and the lending syndicate normally is an event of
acceleration, i.e., the Agent Bank has the right to call the outstanding
Corporate Loan, generally at the request of the lending syndicate.
The Fund has no restrictions on portfolio maturity, but it is anticipated
that a majority of the Corporate Loans will have stated maturities ranging
from five to ten years. However, such Corporate Loans usually will require, in
addition to scheduled payments of interest and principal, the prepayment of
the Corporate Loans from excess cash flow, as discussed above, and may permit
the Borrower to prepay at its election. The degree to which Borrowers prepay
Corporate Loans, whether as a contractual requirement or at their election,
may be affected by general business conditions, the financial condition of the
Borrower and competitive conditions among lenders, among other factors.
Accordingly, prepayments cannot be predicted with accuracy.
Loans to non-U.S. Borrowers or to U.S. Borrowers with significant non-
dollar-denominated revenues may provide for conversion of all or part of the
loan from a dollar-denominated obligation into a foreign currency obligation
at the option of the Borrower.
DESCRIPTION OF PARTICIPATION INTERESTS
Corporate Loans in which the Fund may invest are typically originated,
negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting
of commercial banks, thrift institutions, insurance companies, finance
companies or other financial institutions, one or more of which acts as Agent
Bank. Co-Lenders may sell Corporate Loans to third parties called
"Participants." The Fund may invest in a Corporate Loan either by
participating as a Co-Lender at the time the loan is originated or by buying
an interest in the Corporate Loan from a Co-Lender or a Participant. Co-
Lenders and Participants interposed between the Fund and a Borrower, together
with Agent Banks, are referred to herein as "Intermediate Participants."
The Fund may invest in a Corporate Loan at origination as a Co-Lender or by
purchasing a Corporate Loan from an Intermediate Participant by means of a
novation, an assignment or a participation. In a novation, the
15
<PAGE>
Fund would assume all of the rights of the Intermediate Participant in a
Corporate Loan, including the right to receive payments of principal and
interest and other amounts directly from the Borrower and to enforce its
rights as lender directly against the Borrower and would assume all of the
obligations of the Intermediate Participant, including any obligation to make
future advances to the Borrower. As a result, therefore, the Fund would have
the status of a Co-Lender. As an alternative, the Fund may purchase an
assignment of all or a portion of an Intermediate Participant's interest in a
Corporate Loan, in which case the Fund may be required generally to rely on
the assigning lender to demand payment and enforce its rights against the
Borrower, but would otherwise be entitled to all of such lender's rights in
the Corporate Loan. The Fund also may purchase a participation in a portion of
the rights of an Intermediate Participant in a Corporate Loan by means of a
participation agreement with such Intermediate Participant. A participation in
the rights of an Intermediate Participant is similar to an assignment in that
the Intermediate Participant transfers to the Fund all or a portion of an
interest in a Corporate Loan. Unlike an assignment, however, a participation
does not establish any direct relationship between the Fund and the Borrower.
In such a case, the Fund would be required to rely on the Intermediate
Participant that sold the participation not only for the enforcement of the
Fund's rights against the Borrower but also for the receipt and processing of
payments due to the Fund under the Corporate Loan. The Fund will not act as an
Agent Bank, guarantor, sole negotiator or sole structurer with respect to a
Corporate Loan.
Because it may be necessary to assert through an Intermediate Participant
such rights as may exist against the Borrower, in the event that the Borrower
fails to pay principal and interest when due, the Fund may be subject to
delay, expense and risks that are greater than those that would be involved if
the Fund could enforce its rights directly against the Borrower. Moreover,
under the terms of the participation, the Fund may be regarded as a creditor
of the Intermediate Participant (rather than of the Borrower), so that the
Fund may also be subject to the risk that the Intermediate Participant may
become insolvent. Similar risks may arise with respect to the Agent Bank, as
described below. Further, in the event of the bankruptcy or insolvency of the
Borrower, the obligation of the Borrower to repay the Corporate Loan may be
subject to certain defenses that can be asserted by such Borrower as result of
improper conduct by the Agent Bank or Intermediate Participant.
Because the Fund will regard the issuer of a Corporate Loan as including the
Borrower under a Corporate Loan Agreement, the Agent Bank and any Intermediate
Participant, the Fund may be deemed to be concentrated in securities of
issuers in the industry group consisting of financial institutions and their
holding companies, including commercial banks, thrift institutions, insurance
companies and finance companies. As a result, the Fund is subject to certain
risks associated with such institutions. Banking and thrift institutions are
subject to extensive governmental regulations which may limit both the amounts
and types of loans and other financial commitments which such institutions may
make and the profitability of these institutions is largely dependent on the
availability and cost of capital funds. In addition, general economic
conditions are important to the operation of these institutions, with exposure
to credit losses resulting from possible financial difficulties of borrowers
potentially having an adverse effect. Insurance companies are also affected by
economic and financial conditions and are subject to extensive government
regulation, including rate regulations. Individual companies may be exposed to
material risks, including reserve inadequacy.
In a typical Corporate Loan, the Agent Bank administers the terms of the
Corporate Loan Agreement and is responsible for the collection of principal
and interest and fee payments from the Borrower and the apportionment of these
payments to the credit of all investors which are parties to the Corporate
Loan Agreement. The Fund generally will rely on the Agent Bank or an
Intermediate Participant to collect its portion of the payments on the
Corporate Loan. Furthermore, the Fund will rely on the Agent Bank to enforce
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<PAGE>
appropriate creditor remedies against the Borrower. Typically, under Corporate
Loan Agreements, the Agent Bank is given broad discretion in enforcing the
Corporate Loan Agreement, and it is obliged to use only the same care it would
use in the management of its own property. For these services the Borrower
compensates the Agent Bank. Such compensation may include special fees paid on
structuring and funding the Corporate Loan and other fees paid on a continuing
basis.
In the event that an Agent Bank becomes insolvent, or has a receiver,
conservator, or similar official appointed for it by the appropriate bank
regulatory authority or becomes a debtor in a bankruptcy proceeding, assets
held by the Agent Bank under the Corporate Loan Agreement should remain
available to holders of Corporate Loans. If, however, assets held by the Agent
Bank for the benefit of the Fund are determined by an appropriate regulatory
authority or court to be subject to the claims of the Agent Bank's general or
secured creditors, the Fund might incur certain costs and delays in realizing
payment on a Corporate Loan, or suffer a loss of principal and/or interest. In
situations involving Intermediate Participants similar risks may arise, as
described above.
Intermediate Participants may have certain obligations pursuant to a
Corporate Loan Agreement, which may include the obligation to make future
advances to the Borrower in connection with revolving credit facilities in
certain circumstances. The Fund currently intends to reserve against such
contingent obligations by segregating sufficient investments in liquid
instruments. The Fund will not invest in Corporate Loans that would require
the Fund to make any additional investments in connection with such future
advances if such commitments would exceed 20% of the Fund's total assets or
would cause the Fund to fail to meet the diversification requirements
described under "Investment Objectives and Policies."
DESCRIPTION OF HIGH-YIELD SECURITIES
The Fund may invest in high-yield corporate debt securities, including
Corporate Loans, which are rated in the lower rating categories of the
established rating services (Baa or lower by Moody's and BBB or lower by S&P),
or in unrated securities considered by the Investment Adviser to be of
comparable quality. Securities rated below Baa by Moody's or below BBB by S&P,
and unrated securities of comparable quality, are commonly known as "junk
bonds." See Appendix--"Description of Corporate Bond Ratings" for additional
information concerning rating categories.
Although high-yield securities can be expected to provide higher yields,
such securities may be subject to greater market fluctuations and risk of loss
of income and principal than lower-yielding, higher-rated fixed-income
securities. As described under "Risk Factors and Special Considerations,"
economic conditions and interest rate levels may impact significantly the
values of high-yield securities. In addition, high-yield securities are often
unsecured and subordinated obligations of the issuer. Accordingly, following
an event of default or liquidation or bankruptcy of the issuer, the Fund might
not receive payments to which it is entitled, or may receive distributions of
non-income producing securities, including common stock, and thereby may
experience a decline in the value of its investment and possibly its net asset
value.
Selection and supervision of high-yield securities by the Investment Adviser
involves continuous analysis of individual issuers, general business
conditions and other factors which may be too time-consuming or too costly for
the average investor. The furnishing of these services does not, of course,
guarantee successful results. The Investment Adviser's analysis of issuers
includes, among other things, historic and current financial conditions,
current and anticipated cash flow and borrowing requirements, value of assets
in relation to historical
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<PAGE>
costs, strength of management, responsiveness to business conditions, credit
standing and current and anticipated results of operations. Analysis of
general conditions and other factors may include anticipated change in
economic activity and interest rates, the availability of new investment
opportunities and the economic outlook for specific industries. While the
Investment Adviser considers as one factor in its credit analysis the ratings
assigned by the rating services, the Investment Adviser performs its own
independent credit analysis of issuers and, consequently, the Fund may invest,
without limit, in unrated securities. As a result, the Fund's ability to
achieve its investment objectives may depend to a greater extent on the
Investment Adviser's own credit analysis than investment companies which
invest in higher-rated securities. Although the Fund will invest primarily in
lower-rated securities, other than with respect to Distressed Securities
(which are discussed below) it will not invest in securities in the lowest
rating categories (Ca or below by Moody's and CC or below by S&P) unless the
Investment Adviser believes that the financial condition of the issuers or the
protection afforded to the particular securities is stronger than would
otherwise be indicated by such ratings. Securities which subsequently are
downgraded may continue to be held by the Fund and will be sold only if, in
the judgment of the Investment Adviser, it is advantageous to do so.
In connection with its investments in corporate debt securities, or
restructuring of investments owned by the Fund, the Fund may receive warrants
or other non-income producing debt or equity securities. The Fund may retain
such securities until the Investment Adviser determines it is appropriate in
light of current market conditions to effect a disposition of such securities.
When changing economic and other factors cause the yield difference between
lower-rated and higher-rated securities to narrow, the Fund may purchase
higher-rated securities if the Investment Adviser believes that the risk of
loss of income and principal may be reduced substantially with only a
relatively small reduction in yield.
DESCRIPTION OF DISTRESSED SECURITIES
The Fund may invest up to 20% of its total assets in Distressed Securities.
Distressed Securities are high yield/high risk securities, including Corporate
Loans purchased in the secondary market, which are the subject of bankruptcy
proceedings or otherwise in default as to the repayment of principal and/or
payment of interest at the time of acquisition by the Fund or are rated in the
lower rating categories (Ca or lower by Moody's and CC or lower by S&P) or
which, if unrated, are in the judgment of the Investment Adviser of equivalent
quality. Investment in Distressed Securities is speculative and involves
significant risk. Distressed Securities frequently do not produce income while
they are outstanding and may require the Fund to bear certain extraordinary
expenses in order to protect and recover its investment. Therefore, to the
extent the Fund pursues its secondary objective of capital appreciation
through investment in Distressed Securities, the Fund's ability to achieve
current income for its shareholders may be diminished. The Fund also will be
subject to significant uncertainty as to when and in what manner and for what
value the obligations evidenced by the Distressed Securities will eventually
be satisfied; e.g., through a liquidation of the obligor's assets, an exchange
offer or plan of reorganization involving the Distressed Securities or a
payment of some amount in satisfaction of the obligation. In addition, even if
an exchange offer is made or plan of reorganization is adopted with respect to
Distressed Securities held by the Fund, there can be no assurance that the
securities or other assets received by the Fund in connection with such
exchange offer or plan of reorganization will not have a lower value or income
potential than may have been anticipated when the investment was made.
Moreover, any securities received by the Fund upon completion of an exchange
offer or plan of reorganization may be restricted as to resale. As a result of
the Fund's participation in negotiations with respect to any exchange offer or
plan of reorganization with respect to an issuer of Distressed Securities, the
Fund may be restricted from disposing of such securities. See "Risk Factors
and Special Considerations."
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<PAGE>
DESCRIPTION OF CONVERTIBLE SECURITIES AND PREFERRED STOCK
A convertible security is a bond, debenture, note or preferred stock that
may be converted into or exchanged for a prescribed amount of common stock or
other securities of the same or a different issuer within a particular period
of time at a specified price or formula. A convertible security entitles the
holder to receive interest generally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have several unique investment
characteristics such as (i) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (ii) a lesser degree of fluctuation
in value than the underlying stock since they have fixed income
characteristics, and (iii) the potential for capital appreciation if the
market price of the underlying common stock increases. Holders of convertible
securities have a claim on the assets of the issuer prior to the common
stockholders but may be subordinated to similar non-convertible securities of
the same issuer. A convertible security might be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument. If a convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to redeem the
security, convert it into the underlying common stock or other securities or
sell it to a third party.
The Fund may invest in non-convertible preferred stock which generally
entitles the holders to receive a dividend payment. Holders of preferred stock
have a claim on the assets of the issuer prior to the common stockholders but
subordinate to the creditors and holders of debt instruments of the same
issuer. Preferred stock may be subject to redemption at the option of the
issuer at a price established in the preferred stock governing instrument.
ILLIQUID SECURITIES
Corporate Loans, junk bonds, and other securities held by the Fund may not
be readily marketable and may be subject to restrictions on resale. Although
Corporate Loans are transferred among certain financial institutions, as
described above, the Corporate Loans in which the Fund invests may not have
the liquidity of conventional debt securities traded in the secondary market
and may be considered illiquid. As the market for Corporate Loans becomes more
seasoned, the Investment Adviser expects that liquidity will improve. The Fund
has no limitation on the amount of its investments which are not readily
marketable or are subject to restrictions on resale.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
LEVERAGE
At times, the Fund expects to utilize leverage through borrowings, including
the issuance of short-term debt securities, or the issuance of shares of
preferred stock. Under current market conditions, the Fund intends to utilize
leverage in an amount equal to approximately 33 1/3% of its total assets
(including the amount obtained from leverage). The Fund will generally not
utilize leverage if it anticipates that the Fund's leveraged capital structure
would result in a lower return to holders of the Common Stock than that
obtainable if the Common Stock were unleveraged for any significant amount of
time. The Fund may also borrow money as a temporary measure for extraordinary
or emergency purposes, including the payment of dividends and the settlement
of securities transactions which may otherwise require untimely dispositions
of Fund securities. The Fund at times may borrow from affiliates of the
Investment Adviser, provided that the terms of such borrowings are no less
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<PAGE>
favorable than those available from comparable sources of funds in the
marketplace. As discussed under "Investment Advisory and Management
Arrangements," the fee paid to the Investment Adviser will be calculated on
the basis of the Fund's assets including proceeds from borrowings for leverage
and the issuance of preferred stock.
The concept of leveraging is based on the premise that the cost of the
assets to be obtained from leverage will be based on short-term rates which
normally will be lower than the return earned by the Fund on its longer term
portfolio investments. Since the total assets of the Fund (including the
assets obtained from leverage) will be invested in higher yielding portfolio
investments or portfolio investments with the potential for capital
appreciation, the holders of Common Stock will be the beneficiaries of the
incremental return. Should the differential between the return on the
underlying assets and the cost of leverage narrow, the incremental return
"pick up" will be reduced. Furthermore, if long-term rates rise, the Common
Stock net asset value will reflect the decline in the value of portfolio
holdings resulting therefrom.
Leverage creates risks for the holders of Common Stock, including the
likelihood of greater volatility of net asset value and market price of shares
of the Common Stock, and the risk that fluctuations in interest rates on
borrowings or in the dividend rates on any preferred stock may affect the
return to the holders of Common Stock. To the extent the income or capital
appreciation derived from securities purchased with funds received from
leverage exceeds the cost of leverage, the Fund's return will be greater than
if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such funds is not sufficient
to cover the cost of leverage, the return of the Fund will be less than if
leverage had not been used, and therefore the amount available to shareholders
as dividends and other distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment may nevertheless determine to maintain
the Fund's leveraged position if it expects that the benefits to the Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
Capital raised through leverage will be subject to interest costs or
dividend payments which may or may not exceed the income and appreciation on
the assets purchased. The Fund also may be required to maintain minimum
average balances in connection with borrowings or to pay a commitment or other
fee to maintain a line of credit. Either of these requirements will increase
the cost of borrowing over the stated interest rate. The issuance of preferred
stock involves offering expenses and other costs and may limit the Fund's
freedom to pay dividends on shares of Common Stock or to engage in other
activities. Borrowings and the issuance of preferred stock having priority
over the Fund's Common Stock create an opportunity for greater return per
share of Common Stock, but at the same time such borrowing or issuance of
preferred stock is a speculative technique in that it will increase the Fund's
exposure to capital risk. Such risks may be reduced through the use of
borrowings and preferred stock that have floating rates of interest. Unless
the income and appreciation, if any, on assets acquired with borrowed funds or
offering proceeds exceeds the cost of borrowing or issuing additional classes
of securities, the use of leverage will diminish the investment performance of
the Fund compared with what it would have been without leverage.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more nationally recognized
statistical rating organizations which may issue ratings for the short-term
corporate debt securities or preferred stock. These guidelines may impose
asset coverage or portfolio composition requirements that are more stringent
than those imposed by the Investment Company Act. It is not anticipated that
these covenants or guidelines will impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies.
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Under the Investment Company Act, the Fund is not permitted to incur
indebtedness unless immediately after such incurrence the Fund has an asset
coverage of 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the Fund's
total assets). Additionally, under the Investment Company Act the Fund may not
declare any dividend or other distribution upon any class of its capital
stock, or purchase any such capital stock, unless the aggregate indebtedness
of the Fund has, at the time of the declaration of any such dividend or
distribution or at the time of any such purchase, an asset coverage of at
least 300% after deducting the amount of such dividend, distribution, or
purchase price, as the case may be. Under the Investment Company Act, the Fund
is not permitted to issue shares of preferred stock unless immediately after
such issuance the net asset value of the Fund's portfolio is at least 200% of
the liquidation value of the outstanding preferred stock (i.e., such
liquidation value may not exceed 50% of the Fund's total assets). In addition,
the Fund is not permitted to declare any cash dividend or other distribution
on its Common Stock unless, at the time of such declaration, the net asset
value of the Fund's portfolio (determined after deducting the amount of such
dividend or distribution) is a least 200% of such liquidation value. In the
event shares of preferred stock are issued, the Fund intends, to the extent
possible, to purchase or redeem shares of preferred stock from time to time to
maintain coverage of any preferred stock of at least 300%.
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount it will borrow or issue, will depend on
many factors, the most important of which are investment outlook, market
conditions and interest rates. Successful use of a leveraging strategy depends
on the Investment Adviser's ability to predict correctly interest rates and
market movements, and there is no assurance that a leveraging strategy will be
successful during any period in which it is employed.
Assuming the utilization of leverage by borrowings in the amount of
approximately 33 1/3% of the Fund's total assets, and an annual interest rate
of 5.875% payable on such leverage based on market rates as of the date of
this Prospectus, the annual return that the Fund's portfolio must experience
(net of expenses) in order to cover such interest payments would be 1.47%.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of the leverage obtained by borrowings in
the amount of approximately 33 1/3% of the Fund's total assets, assuming
hypothetical annual returns of the Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and greater than the cost of leverage and
decreases the return when the portfolio return is negative or less than the
cost of leverage. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of expenses)......... (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return.................. (15)% (9)% (2)% 5% 11%
</TABLE>
Until the Fund borrows or issues shares of preferred stock, the Fund's
Common Stock will not be leveraged, and the risks and special considerations
related to leverage described in this Prospectus will not apply. Such
leveraging of the Common Stock cannot be fully achieved until the proceeds
resulting from the use of leverage have been invested in longer-term debt
instruments in accordance with the Fund's investment objectives and policies.
INTEREST RATE TRANSACTIONS
In order to hedge the value of the Fund's portfolio against interest rate
fluctuations or to enhance the Fund's income the Fund may enter into various
interest rate transactions, such as interest rate swaps and the purchase or
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<PAGE>
sale of interest rate caps and floors. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date. The
Fund intends to use these transactions primarily as a hedge and not as a
speculative investment. However, the Fund may also invest in interest rate
swaps to enhance income or increase the Fund's yield, for example, during
periods of steep interest rate yield curves (i.e., wide differences between
short term and long term interest rates).
In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Fund holds a
debt instrument with an interest rate that is reset only once each year, it
may swap the right to receive interest at this fixed rate for the right to
receive interest at a rate that is reset every week. This would enable the
Fund to offset a decline in the value of the debt instrument due to rising
interest rates but would also limit its ability to benefit from falling
interest rates. Conversely, if the Fund holds a debt instrument with an
interest rate that is reset every week and it would like to lock in what it
believes to be a high interest rate for one year, it may swap the right to
receive interest at this variable weekly rate for the right to receive
interest at a rate that is fixed for one year. Such a swap would protect the
Fund from a reduction in yield due to falling interest rates and may permit
the Fund to enhance its income through the positive differential between one
week and one year interest rates, but would preclude it from taking full
advantage of rising interest rates.
The Fund usually will enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of
the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis, and an
amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account
by the Fund's custodian. If the interest rate swap transaction is entered into
on other than a net basis, the full amount of the Fund's obligations will be
accrued on a daily basis, and the full amount of the Fund's obligations will
be maintained in a segregated account by the Fund's custodian.
The Fund may also engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (the reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the difference
of the index and the predetermined rate on a notional principal amount from
the party selling such interest rate floor. The Fund will not enter into caps
or floors if, on a net basis, the aggregate notional principal amount with
respect to such agreements exceeds the net assets of the Fund.
Typically, the parties with which the Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. The Fund
will not enter into any interest rate swap, cap or floor transaction unless
the unsecured senior debt or the claims-paying ability of the other party
thereto is rated investment grade quality by at least one nationally
recognized statistical rating organization at the time of entering into such
transaction or whose creditworthiness is believed by the Investment Adviser to
be equivalent to such rating. If there is a default by the other party to such
a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large
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<PAGE>
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid in comparison with other similar instruments
traded in the interbank market. Caps and floors, however, are more recent
innovations and are less liquid than swaps. Certain Federal income tax
requirements may limit the Fund's ability to engage in certain interest rate
transactions. Gains from transactions in interest rate swaps distributed to
shareholders will be taxable as ordinary income or, in certain circumstances,
as long-term capital gains to shareholders. See "Taxes."
FOREIGN CURRENCY SWAPS
Although the Fund has no current intention to do so, the Fund may enter into
foreign currency swaps in order to hedge non-U.S. dollar denominated portfolio
investments.
Foreign currency swaps involve the exchange by the lenders, including the
Fund, with another party (the "counterparty") of the right to receive the
currency in which the loan is denominated for the right to receive dollars.
The Fund will generally enter into a transaction subject to a foreign currency
swap only if, at the time of entering into such swap, the outstanding debt
obligations of the counterparty are investment grade; i.e., rated BBB or A-3
or higher by S&P, Baa or B3 or higher by Moody's, BBB or F4 or higher by Fitch
Investors Service, Inc., or are determined to be of comparable quality in the
judgment of the Investment Adviser. The amounts of dollar payments to be
received by the lenders and the foreign currency payments to be received by
the counterparty are fixed at the time the swap arrangement is entered into.
Accordingly, the swap protects the Fund from fluctuations in exchange rates
and locks in the right to receive payments under the loan in a predetermined
amount of dollars. If there is a default by the counterparty the Fund will
have contractual remedies pursuant to the swap arrangement. However, the
dollar value of the Fund's right to foreign currency payments under the loan
will be subject to fluctuations in the applicable exchange rate to the extent
that a replacement swap arrangement is unavailable or the Fund is unable to
recover damages from the defaulting counterparty. If the Borrower defaults on
or prepays the underlying Corporate Loan, the Fund may be required pursuant to
the swap arrangements to compensate the counterparty to the extent of
fluctuations in exchange rates adverse to the counterparty. In the event of
such a default or prepayment, an amount of cash or liquid instruments having
an aggregate net asset value at least equal to the amount of compensation that
must be paid to the counterparty pursuant to the swap arrangements will be
maintained in a segregated account by the Fund's custodian.
OPTIONS ON PORTFOLIO SECURITIES
Call Options on Portfolio Securities. The Fund may purchase call options on
any of the types of securities in which it may invest. A purchased call option
gives the Fund the right to buy, and obligates the seller to sell, the
underlying security at the exercise price at any time during the option
period. The Fund also is authorized to write (i.e., sell) covered call options
on the securities in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered call option is
an option where the Fund, in return for a premium, gives another party a right
to buy specified securities owned by the Fund at a specified future date and
price set at the time of the contract. The principal reason for writing call
options is attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call
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<PAGE>
options also serve as a partial hedge against the price of the underlying
security declining. The Fund may also purchase and sell call options on
indices. Index options are similar to options on securities except that,
rather than taking or making delivery of securities underlying the option at a
specified price upon exercise, an index option gives the holder the right to
receive cash upon exercise of the option if the level of the index upon which
the option is based is greater than the exercise price of the option.
Put Options on Portfolio Securities. The Fund is authorized to purchase put
options to hedge against a decline in the value of its securities. By buying a
put option, the Fund has a right to sell the underlying security at the
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. The Fund also has authority to write (i.e., sell) put
options on the types of securities which may be held by the Fund, provided
that such put options are covered, meaning that such options are secured by
segregated, liquid instruments. The Fund will receive a premium for writing a
put option, which increases the Fund's return. The Fund will not sell puts if,
as a result, more than 50% of the Fund's assets would be required to cover its
potential obligations under its hedging and other investment transactions. The
Fund may purchase and sell put options on indices. Index options are similar
to options on securities except that, rather than taking or making delivery of
securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option
if the level of the index upon which the option is based is less than the
exercise price of the option.
FINANCIAL FUTURES AND OPTIONS THEREON
The Fund is authorized to engage in transactions in financial futures
contracts ("futures contracts") and related options on such futures contracts
either as a hedge against adverse changes in the market value of its portfolio
securities and interest rates or to enhance the Fund's income. A futures
contract is an agreement between two parties which obligates the purchaser of
the futures contract to buy and the seller of a futures contract to sell a
security for a set price on a future date or, in the case of an index futures
contract to make and accept a cash settlement based upon the difference in
value of the index between the time the contract was entered into and the time
of its settlement. A majority of transactions in futures contracts, however,
do not result in the actual delivery of the underlying instrument or cash
settlement, but are settled through liquidation, i.e., by entering into an
offsetting transaction. Futures contracts have been designed by boards of
trade which have been designated "contract markets" by the Commodities Futures
Trading Commission ("CFTC"). Transactions by the Fund in futures contracts and
financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions."
The Fund may sell financial futures contracts in anticipation of an increase
in the general level of interest rates. Generally, as interest rates rise, the
market values of securities which may be held by the Fund will fall, thus
reducing the net asset value of the Fund. However, as interest rates rise, the
value of the Fund's short position in the futures contract will also tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of the Fund's investments which are being hedged. While the Fund will
incur commission expenses
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<PAGE>
in selling and closing out futures positions, these commissions are generally
less than the transaction expenses which the Fund would have incurred had the
Fund sold portfolio securities in order to reduce its exposure to increases in
interest rates. The Fund also may purchase financial futures contracts in
anticipation of a decline in interest rates when it is not fully invested in a
particular market in which it intends to make investments to gain market
exposure that may in part or entirely offset an increase in the cost of
securities it intends to purchase. It is anticipated that, in a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contract.
The Fund also has authority to purchase and write call and put options on
futures contracts. Generally, these strategies are utilized under the same
market and market sector conditions (i.e., conditions relating to specific
types of investments) in which the Fund enters into futures transactions. The
Fund may purchase put options or write call options on futures contracts
rather than selling the underlying futures contract in anticipation of a
decrease in the market value of securities or an increase in interest rates.
Similarly, the Fund may purchase call options, or write put options on futures
contracts, as a substitute for the purchase of such futures to hedge against
the increased cost resulting from an increase in the market value or a decline
in interest rates of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on exchanges and
options in the over-the-counter markets ("OTC options"). In general, exchange-
traded contracts are third-party contracts (i.e., performance of the parties'
obligation is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Restrictions on the Use of Futures Transactions. Under regulations of the
CFTC, the futures trading activity described herein will not result in the
Fund being deemed a "commodity pool," as defined under such regulations,
provided that the Fund adheres to certain restrictions. In particular, the
Fund may purchase and sell futures contracts and options thereon (i) for bona
fide hedging purposes, and (ii) for non-hedging purposes, if the aggregate
initial margin and premiums required to establish positions in such contracts
and options does not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized losses
on any such contracts and options. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash or liquid instruments will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated, plus the amount of variation margin held in the account
of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
An order has been obtained from the Securities and Exchange Commission (the
"Commission") which exempts the Fund from certain provisions of the Investment
Company Act in connection with transactions involving futures contracts and
options thereon.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. OTC options and assets used to cover OTC options written by the
Fund are considered by the staff of the Commission to be illiquid. The
illiquidity of such options or assets may prevent a successful
25
<PAGE>
sale of such options or assets, result in a delay of sale, or reduce the
amount of proceeds that might otherwise be realized.
RISK FACTORS IN INTEREST RATE TRANSACTIONS AND OPTIONS AND FUTURES
TRANSACTIONS
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. Interest rate transactions involve
the risk of an imperfect correlation between the index used in the hedging
transaction and that pertaining to the securities which are the subject of
such transaction. If the Investment Adviser is incorrect in its forecasts of
market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it would have been
if these investment techniques were not used. In addition, interest rate
transactions that may be entered into by the Fund do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk
of loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the
security underlying an interest rate swap is prepaid and the Fund continues to
be obligated to make payments to the other party to the swap, the Fund would
have to make such payments from another source. If the other party to an
interest rate swap defaults, the Fund's risk of loss consists of the net
amount of interest payments that the Fund contractually is entitled to
receive. In the case of a purchase by the Fund of an interest rate cap or
floor, the amount of loss is limited to the fee paid. Since interest rate
transactions are individually negotiated, the Investment Adviser expects to
achieve an acceptable degree of correlation between the Fund's rights to
receive interest on securities and its rights and obligations to receive and
pay interest pursuant to interest rate swaps.
Utilization of options and futures transactions to hedge the portfolio
involves the risk of imperfect correlation in movements in the price of
options and futures and movements in the prices of the securities which are
the subject of the hedge. If the price of the options or futures moves more or
less than the price of the subject of the hedge, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. This risk particularly applies to the Fund's use of
futures and options thereon since it will generally use such instruments as a
so called "cross-hedge," which means that the security that is the subject of
the futures contract is different from the security being hedged by the
contract.
Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. However, there can be no
assurance that a liquid secondary market will exist at any specific time.
Thus, it may not be possible to close an options or futures position. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or an option related to a futures contract.
OTHER INVESTMENT STRATEGIES
Repurchase Agreements. The Fund may enter into repurchase agreements with
respect to its permitted investments with financial institutions that (i)
have, in the opinion of the Investment Adviser, substantial capital relative
to the Fund's exposure, or (ii) have provided the Fund with a third-party
guaranty or other credit enhancement. Under a repurchase agreement the Fund
buys a security at one price and simultaneously promises
26
<PAGE>
to sell that same security back to the seller at a higher price. The Fund's
repurchase agreements will provide that the value of the collateral underlying
the repurchase agreement will always be at least equal to the repurchase
price, including any accrued interest earned on the repurchase agreement, and
will be marked to market daily. The repurchase date usually is within seven
days of the original purchase date. Repurchase agreements are deemed to be
loans under the Investment Company Act. In all cases, the Investment Adviser
must be satisfied with the creditworthiness of the other party to the
agreement before entering into a repurchase agreement. In the event of the
bankruptcy (or other insolvency proceeding) of the other party to a repurchase
agreement, the Fund might experience delays in recovering its cash. To the
extent that, in the meantime, the value of the securities the Fund purchases
may have declined, the Fund could experience a loss.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with respect to its portfolio investments subject to the investment
restrictions set forth herein. Reverse repurchase agreements involve the sale
of securities held by the Fund with an agreement by the Fund to repurchase the
securities at an agreed upon price, date and interest payment. The use by the
Fund of reverse repurchase agreements involves many of the same risks of
leverage described under "Risk Factors and Special Considerations" and "Other
Investment Policies--Leverage" since the proceeds derived from such reverse
repurchase agreements may be invested in additional securities. At the time
the Fund enters into a reverse repurchase agreement, it may establish and
maintain a segregated account with the custodian containing cash or liquid
instruments having a value not less than the repurchase price (including
accrued interest). If the Fund establishes and maintains such a segregated
account, a reverse repurchase agreement will not be considered a borrowing by
the Fund; however, under circumstances in which the Fund does not establish
and maintain such a segregated account, such reverse repurchase agreement will
be considered a borrowing for the purpose of the Fund's limitation on
borrowings. Reverse repurchase agreements involve the risk that the market
value of the securities acquired in connection with the reverse repurchase
agreement may decline below the price of the securities the Fund has sold but
is obligated to repurchase. Also, reverse repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale by the
Fund in connection with the reverse repurchase agreement may decline in price.
In the event the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its trustee or
receiver may receive an extension of time to determine whether to enforce the
Fund's obligation to repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision. Also, the Fund would bear the risk of loss to the
extent that the proceeds of the reverse repurchase agreement are less than the
value of the securities subject to such agreement.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities which will be maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If
cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for lending its portfolio securities.
In either event, the total yield on the Fund's portfolio is increased by loans
of its portfolio securities. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans.
27
<PAGE>
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. When such transactions are negotiated, the price,
which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at
a later date. When-issued securities and forward commitments may be sold prior
to the settlement date, but the Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. If the Fund disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it can incur a gain or loss.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it will segregate with the custodian cash or liquid
instruments with a value not less than the value of the when-issued or forward
commitment securities. The value of these assets will be monitored daily to
ensure that their marked to market value will at all times exceed the
corresponding obligations of the Fund. There is always a risk that the
securities may not be delivered, and the Fund may incur a loss. Settlements in
the ordinary course, which may take substantially more than five business days
for mortgage-related securities, are not treated by the Fund as when-issued or
forward commitment transactions and accordingly are not subject to the
foregoing restrictions.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of any preferred stock, may not be changed without the approval of
the holders of a majority of the Fund's outstanding shares of Common Stock
(which for this purpose and under the Investment Company Act means the lesser
of (i) 67% of the shares of Common Stock represented at a meeting at which
more than 50% of the outstanding shares of Common Stock are represented or
(ii) more than 50% of the outstanding shares). Subsequent to the issuance of a
class of preferred stock, the following investment restrictions may not be
changed without the approval of a majority of the outstanding shares of Common
Stock and of the preferred stock, voting together as a class, and the approval
of a majority of the outstanding shares of preferred stock, voting separately
by class. The Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
4. Issue senior securities or borrow money except as permitted by Section
18 of the Investment Company Act.
5. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
6. Make loans to other persons, except (i) to the extent that the Fund
may be deemed to be making loans by purchasing Corporate Loans, as a Co-
Lender or otherwise, and other debt securities and entering into repurchase
agreements in accordance with its investment objectives, policies and
limitations, and
28
<PAGE>
(ii) the Fund may lend its portfolio securities in an amount not in excess
of 33 1/3% of its total assets, taken at market value, provided that such
loans shall be made in accordance with the guidelines set forth in this
Prospectus.
7. Invest more than 25% of its total assets in the securities of issuers
in any one industry; provided that this limitation shall not apply with
respect to obligations issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities; and provided further that to the extent
that the Fund invests in Corporate Loans the Fund may invest more than 25%
and may invest up to 100% of its assets in securities of issuers in the
industry group consisting of financial institutions and their holding
companies, including commercial banks, thrift institutions, insurance
companies and finance companies. For purposes of this restriction, the term
"issuer" includes the Borrower, the Agent Bank and any Intermediate
Participant (as defined under "Investment Objectives and Policies").
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors, provide that the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(4) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on portfolio securities and related
indices or otherwise in connection with bona fide hedging activities.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
Because of the affiliation of Merrill Lynch with the Investment Adviser, the
Fund is prohibited from engaging in certain transactions involving Merrill
Lynch except pursuant to an exemptive order or otherwise in compliance with
the provisions of the Investment Company Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases from
or sales to Merrill Lynch of securities in transactions in which it acts as
principal. See "Portfolio Transactions."
29
<PAGE>
The Fund has established procedures for blocking the use of inside
information in securities transactions (commonly referred to as "Chinese Wall
procedures"). As a result, the Fund's purchase of a security in a private
placement may deprive the Fund of investment in certain publicly traded
securities of the same issuer and the Fund's purchase of a publicly traded
security may deprive the Fund of the opportunity to purchase certain privately
placed securities of the same issuer. Also, in relation to other funds managed
by the same portfolio manager as the Fund, if one fund buys a security that is
publicly traded or privately placed, respectively, the other fund may be
deprived of the opportunity to buy a security of the same issuer that is
privately placed or publicly traded, respectively.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (65)--President and Director (1)(2)--Chairman of the
Investment Adviser and MLAM (which terms, as used herein, include their
corporate predecessors) since 1997; President of the Investment Adviser and
MLAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997, Director since 1993 and President from 1993 to 1997;
Executive Vice President of ML & Co. since 1990.
Ronald Forbes (57)--Director (2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York
at Albany since 1989.
Cynthia A. Montgomery (45)--Director (2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate
School of Business Administration, The University of Michigan from 1979 to
1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.
Charles C. Reilly (66)--Director (2)-- 9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Kevin A. Ryan (65)--Director (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director and Professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
30
<PAGE>
Richard R. West (60)--Director (2)--Box 604, Genoa, Nevada 89411, Professor
of Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus
of New York University, Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company) and Alexander's Inc. (real estate company).
Terry K. Glenn (57)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of 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. since 1988.
Joseph T. Monagle, Jr. (49)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1990; Department Head of
the Global Fixed Income Division of the Investment Adviser and MLAM since
1997; Senior Vice President of Princeton Services since 1993.
R. Douglas Henderson (40)--Senior Vice President and Portfolio Manager
(1)(2)--First Vice President of MLAM since 1997; Vice President of MLAM from
1989 to 1997.
Donald C. Burke (37)--Vice President (1)(2)-- First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of MLFD since
1981 and Treasurer since 1984.
Patrick D. Sweeney (43)--Secretary (1)(2)-- First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
other investment companies for which the Investment Adviser, MLAM or their
affiliates act as investment adviser.
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors,
and the remaining Directors will be elected by all holders of capital stock,
voting as a single class. See "Description of Capital Stock."
The Fund pays each Director not affiliated with the Investment Adviser an
annual fee of $4,500 plus $400 per meeting attended, together with such
Director'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 Directors not affiliated with the Investment Adviser, an annual fee of
$1,400. The Chairman of the Audit Committee receives an additional annual fee
of $1,000.
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31, 1997 the
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<PAGE>
aggregate compensation paid by all investment companies advised by the
Investment Adviser, MLAM and their affiliates ("FAM/MLAM Advised Funds") to
the non-affiliated Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM
COMPENSATION ACCRUED AS PART OF ADVISED FUNDS PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSE TO DIRECTORS
- ----------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Ronald W. Forbes (1)........ $7,500 None $153,500
Cynthia A. Montgomery (1)... $7,500 None $153,500
Charles C. Reilly (1)....... $8,500 None $313,000
Kevin A. Ryan (1)........... $7,500 None $153,500
Richard R. West (1)......... $7,500 None $299,000
</TABLE>
- --------
(1) The Directors serve on the boards of other FAM/MLAM Advised Funds as
follows: Mr. Forbes (26 registered investment companies consisting of 39
portfolios); Ms. Montgomery (26 registered investment companies consisting
of 39 portfolios); Mr. Reilly (44 registered investment companies
consisting of 57 portfolios); Mr. Ryan (26 registered investment companies
consisting of 39 portfolios); and Mr. West (45 registered investment
companies consisting of 67 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM, which is owned and
controlled by ML & Co. The Investment Adviser will provide the Fund with
investment advisory and management services. The Investment Adviser, or MLAM,
acts as the investment adviser for over 140 other registered investment
companies. The Investment Adviser also offers portfolio management and
portfolio analysis services to individual and institutional accounts. As of
January 31, 1998, the Investment Adviser and MLAM had a total of approximately
$287 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of the Investment
Adviser. The principal business address of the Investment Adviser is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the supervision of
the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. R. Douglas Henderson is
the portfolio manager for the Fund and is primarily responsible for the Fund's
day-to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at the annual rate of 0.60
of 1% of the Fund's average weekly net assets plus the proceeds of any
outstanding borrowings used for leverage ("average weekly net assets" means
the average weekly value of the total assets of the Fund, including proceeds
from the issuance of preferred stock, minus the sum of
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<PAGE>
(i) accrued liabilities of the Fund, (ii) any accrued and unpaid interest on
outstanding borrowings and (iii) accumulated dividends on shares of preferred
stock). For purposes of this calculation, average weekly net assets is
determined at the end of each month on the basis of the average net assets of
the Fund for each week during the month. 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.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, listing
fees, costs of printing proxies, stock certificates and shareholder reports,
charges of the custodian and the transfer, dividend disbursing agent and
registrar, Securities and Exchange Commission fees, fees and expenses of
unaffiliated Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Accounting services
are provided to the Fund by the Investment Adviser, and the Fund reimburses
the Investment Adviser, for its costs in connection with such services.
Securities held by the Fund also may be held by or be appropriate
investments for other funds for which the Investment Adviser or MLAM acts as
an adviser or by investment advisory clients of MLAM. Because of different
investment objectives or other factors, a particular security may be bought
for one or more clients when one or more clients are selling the same
security. If purchases or sales or securities for the Fund or other funds for
which the Investment Adviser or MLAM acts as investment adviser or for their
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or MLAM during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors 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.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act that incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on Fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed
33
<PAGE>
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot"
initial public offering and a prohibition from profiting on short-term trading
securities. In addition, no employee may purchase or sell any security that at
the time is being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any fund advised
by the Investment Adviser. Furthermore, the Codes provide for trading
"blackout periods" that prohibit trading by investment personnel of the Fund
within periods of trading by the Fund in the same (or equivalent) security (15
or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors 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, the firm's risk in positioning a block of securities and the
provision of supplemental investment research by the firm. While the
Investment Adviser generally seeks reasonably competitive fees, commissions or
spreads, the Fund does not necessarily pay the lowest fee, commission or
spread available.
The Fund has no obligation to deal with any 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.
The Fund will purchase Corporate Loans in individually negotiated
transactions with commercial banks, thrifts, insurance companies, finance
companies and other financial institutions. In selecting such financial
institutions, the Investment Adviser may consider, among other factors, the
financial strength, professional ability, level of service and research
capability of the institution. See "Investment Objectives and Policies--
Description of Corporate Loans." While such financial institutions generally
are not required to repurchase Corporate Loans which they have sold, they may
act as principal or on an agency basis in connection with the Fund's
disposition of Corporate Loans.
Other securities in which the Fund may invest, such as publicly traded
corporate bonds and notes, are traded primarily in the over-the-counter
markets, and the Fund intends to deal directly with the dealers who make
markets in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Under the Investment Company
Act, except as permitted by exemptive order, persons affiliated with the Fund
are prohibited from dealing with the Fund as principal in the purchase and
sale of securities. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principal for their own account,
the Fund will not deal with affiliated persons, including Merrill Lynch and
its affiliates, in connection with such transactions. In addition, the Fund
may not purchase securities for the Fund during the existence of any
underwriting syndicate of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as a placement agent except pursuant
to procedures approved by the Board of Directors of the Fund which comply with
rules adopted by the Commission or with interpretations of the Commission
staff. An affiliated person of the Fund may serve as its broker in over-the-
counter transactions conducted on an agency basis.
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PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such actions for defensive or other reasons,
appear advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances, will be
less than 100%. (The portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by the monthly average of the value of the portfolio securities owned by
the Fund during the particular fiscal year. For purposes of determining this
rate, all securities whose maturities at the time of acquisition are one year
or less are excluded.)
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute dividends of substantially all of its net
investment income monthly. All net realized capital gains, if any, will be
distributed to the Fund's shareholders at least annually.
Under the Investment Company Act, the Fund is not permitted to incur
indebtedness unless immediately after such incurrence the Fund has an asset
coverage of 300% of the aggregate outstanding principal balance of
indebtedness. Additionally, under the Investment Company Act, the Fund may not
declare any dividend or other distribution upon any class of its capital
stock, or purchase any such capital stock, unless the aggregate indebtedness
of the Fund has, at the time of the declaration of any such dividend or
distribution or at the time of any such purchase, an asset coverage of at
least 300% after deducting the amount of such dividend, distribution, or
purchase price, as the case may be. While any shares of preferred stock are
outstanding, the Fund may not declare any cash dividend or other distribution
on its Common Stock, unless at the time of such declaration, (i) all
accumulated preferred stock dividends have been paid and (ii) the net asset
value of the Fund's portfolio (determined after deducting the amount of such
dividend or other distribution) is at least 200% of the liquidation value of
the outstanding preferred stock (expected to be equal to original purchase
price per share plus any accumulated and unpaid dividends thereon). In
addition to the limitations imposed by the Investment Company Act described in
this paragraph, certain lenders may impose additional restrictions on the
payment of dividends or distributions on the Fund's Common Stock in the event
of a default on the Fund's borrowings. Any limitation on the Fund's ability to
make distributions on its Common Stock could under certain circumstances
impair the ability of the Fund to maintain its qualification for taxation as a
regulated investment company. See "Other Investment Policies--Leverage" and
"Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
matter in which dividends and distributions to holders of Common Stock may be
automatically reinvested in shares of Common Stock of the Fund. Dividends and
distributions will be taxable to shareholders whether they are reinvested in
shares of the Fund or received in cash.
The Fund expects that it will commence paying dividends within 90 days of
the date of this Prospectus.
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TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, in any taxable year in which it distributes at least 90% of its
net income (see below), the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Fund intends to
distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in swaps, futures and options) ("capital gain dividends")
are taxable to shareholders as long-term capital gains, regardless of the
length of time the shareholder has owned Fund shares. Any loss upon the sale
or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends (including the amount
of capital gain dividends in the different categories of capital gain referred
to above), as well as any dividends eligible for the dividends received
deduction.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions attributable to any dividend
income earned by the Fund will be eligible for the dividends received
deduction allowed to corporations under the Code, if certain requirements are
met. If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which the dividend was declared.
The Internal Revenue Service (the "Service") has taken the position in a
revenue ruling that if a RIC has more than one class of shares, it may
designate distributions made to each class in any year as consisting of no
more than such class's proportionate share of particular types of income,
including the different categories of capital gain referred to above. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC during such
year that was paid to such class. Consequently, if both Common Stock and
preferred stock are outstanding, the Fund intends to designate distributions
made to the classes as consisting of particular types of income in accordance
with the classes' proportionate shares of such income. Thus, capital gain
dividends including the different categories of capital gain referred to above
will be allocated between the holders of Common Stock and preferred stock in
proportion to the total dividends paid to each class during the taxable year,
or otherwise as required by applicable law.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the Investment Company Act, the
Fund will be required to suspend distributions to holders of Common Stock
until the asset coverage is restored. See "Dividends and Distributions." This
may prevent the
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Fund from distributing at least 90% of its net income, and may therefore
jeopardize the Fund's qualification for taxation as a RIC or may subject the
Fund to the 4% excise tax described below. Upon any failure to meet the asset
coverage requirement of the Investment Company Act, the Fund may, in its sole
discretion, redeem shares of preferred stock in order to maintain or restore
the requisite asset coverage and avoid the adverse consequences to the Fund
and its shareholders of failing to qualify as a RIC. There can be no
assurance, however, that any such action would achieve these objectives.
As noted above, the Fund must distribute annually at least 90% of its net
investment income. A distribution will only be counted for this purpose if it
qualifies for the dividends paid deduction under the Code. Some types of
preferred stock that the Fund has the authority to issue may raise an issue as
to whether distributions on such preferred stock are "preferential" under the
Code and therefore not eligible for the dividends paid deduction. In the event
the Fund determines to issue preferred stock, the Fund intends to issue
preferred stock that counsel advises will not result in the payment of a
preferential dividend and may seek a private letter ruling from the Service to
that effect. If the Fund ultimately relies solely on a legal opinion in the
event it issues such preferred stock, there is no assurance that the Service
would agree that dividends on the preferred stock are not preferential. If the
Service successfully disallowed the dividends paid deduction for dividends on
the preferred stock, the Fund could be disqualified as a RIC.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Interest income from non-U.S. securities may be subject to withholding taxes
imposed by the country in which the issuer is located. The Fund will not be
able to pass through to its shareholders foreign tax credits or deductions
with respect to these taxes.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund will invest in securities rated in the lower rating categories of
nationally recognized rating organizations, in unrated securities (together
with lower rated securities, "junk bonds") and in high yield Corporate Loans,
as previously described. Some of these junk bonds and high yield Corporate
Loans may be purchased at a discount and may therefore cause the Fund to
accrue and distribute income before amounts due under the obligations are
paid. In addition, a portion of the interest payments on such junk bonds and
high yield
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Corporate Loans may be treated as dividends for Federal income tax purposes;
in such case, if the issuer of the junk bonds or high yield Corporate Loans is
a domestic corporation, dividend payments by the Fund will be eligible for the
dividends received deduction to the extent of the deemed dividend portion of
such interest payments.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may engage in interest rate transactions, write (i.e., sell)
covered call and covered put options on its portfolio securities, purchase
call and put options on securities, and engage in transactions in financial
futures and related options on such futures. In general, unless an election is
available to the Fund or an exception applies, such options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
options or futures contract will be treated as sold for its fair market value
on the last day of the taxable year, and any gain or loss attributable to such
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may
alter the timing and character of distributions to shareholders. The mark-to-
market rules outlined above, however, will not apply to certain transactions
entered into by the Fund solely to reduce the risk of changes in price or
interest or currency exchange rates with respect to its investments.
The Federal income tax rules governing the taxation of swaps are not
entirely clear and may require the Fund to treat payments received under such
arrangements as ordinary income and to amortize such payments under certain
circumstances. The Fund does not anticipate that its activity in this regard
will affect its qualification as a RIC.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and options, futures and swap
transactions. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain sales of securities
and certain closing transactions in options, futures and swap transactions.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e, unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains and losses in connection with certain of the
Fund's debt instruments and the Fund's foreign currency swaps, if any, will be
treated as ordinary income or loss under Code Section 988 and will increase or
decrease the amount of the Fund's investment company taxable income available
to be distributed to shareholders as ordinary income. Additionally, if Code
Section 988 losses exceed other investment company taxable income during a
taxable year, the Fund would not be able to make any ordinary income dividend
distributions, and any distributions made before the losses were realized but
in the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund shares,
and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset). These rules, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
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Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a shareholder otherwise elects, all dividend and capital gains
distributions will be automatically reinvested by The Bank of New York, as
agent for shareholders in administering the Plan (the "Plan Agent"), in
additional shares of Common Stock of the Fund. Shareholders who elect not to
participate in the Plan will receive all dividends and distributions in cash
paid by check mailed directly to the shareholder of record (or, if the shares
are held in street or other nominee name, then to such nominee) by The Bank of
New York, as dividend paying agent. The Fund is not responsible for any
failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed dividend or distribution
checks. Such participants may elect not to participate in the Plan and to
receive all distributions of dividends and capital gains in cash by sending
written instructions to The Bank of New York, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely voluntary and
may be terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise such termination will be effective with respect to any
subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares of Common
Stock. The shares will be acquired by the Plan Agent for the participant's
account, depending upon the circumstances described below, either (i) through
receipt of additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market ("open-market purchases") on the New York
Stock Exchange or elsewhere. If on the payment date for the dividend, the net
asset value per share of the Common Stock is equal to or less than the market
price per share of the Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be credited
to the participant's account will be determined by dividing the dollar amount
of the dividend by the net asset value per share on the date the shares are
issued, provided that the maximum discount from the then current market price
per share on the date of issuance may not exceed 5%. If on the dividend
payment date the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Plan Agent
will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, participants in the
Plan will receive any dividends in newly issued shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date
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on the dividend through the date before the next "ex-dividend" date which
typically will be approximately ten days. If, before the Plan Agent has
completed its open-market purchases, the market price of a share of Common
Stock exceeds the net asset value per share, the average per share purchase
price paid by the Plan Agent may exceed the net asset value of the Fund's
shares, resulting in the acquisition of fewer shares than if the dividend had
been paid in newly issued shares on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan provides
that if the Plan Agent is unable to invest the full dividend amount in open-
market purchases during the purchase period or if the market discount shifts
to a market premium during the purchase period, the Plan Agent will cease
making open-market purchases and will invest the uninvested portion of the
dividend amount in newly issued shares at the close of business on the last
purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent on behalf of the Plan
participant, and each shareholder's proxy will include those shares purchased
or received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 101 Barclay Street, New York, New York 10286.
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MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of Common Stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares (the "Original Shares")
in Class D initial sales charge shares of certain Merrill Lynch-sponsored
open-end mutual funds ("Eligible Class D Shares") at their net asset value,
without the imposition of the initial sales charge, if the conditions set
forth below are satisfied. First, the sale of the Original Shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class D Shares. Second, the Original Shares must have
been either acquired in this offering or be shares representing reinvested
dividends from shares of Common Stock acquired in this offering. Third, the
Original Shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class D shares of the mutual funds are
subject to an account maintenance fee at an annual rate of up to 0.25% of the
average daily net asset value of such mutual fund. The Eligible Class D Shares
may be redeemed at any time at the next determined net asset value, subject in
certain cases to a redemption fee. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, the distributor for the
mutual funds will advise Merrill Lynch Financial Consultants as to those
mutual funds that offer the investment option described above.
NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
p.m., New York time), on the last business day in each week. For purposes of
determining the net asset value of a share of Common Stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of any outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The Fund determines and makes available for publication the net asset value
of its shares of Common Stock weekly. Currently, the net asset values of
shares of publicly traded closed-end investment companies investing in debt
securities are published in Barrons, the Monday edition of The Wall Street
Journal and the Monday and Saturday editions of The New York Times.
Corporate Loans will be valued in accordance with guidelines established by
the Board of Directors. Under the Fund's current guidelines, Corporate Loans
for which an active secondary market exists to a reliable degree in the
opinion of the Investment Adviser and for which the Investment Adviser can
obtain at least two quotations from banks or dealers in Corporate Loans will
be valued by the Investment Adviser by calculating the mean of the last
available bid and asked prices in the market for such Corporate Loans, and
then using the mean of those two means. If only one quote for a particular
Corporate Loan is available, such Corporate Loan will be valued on the basis
of the mean of the last available bid and asked prices in the market. For
Corporate Loans for which an active secondary market does not exist to a
reliable degree in the opinion of the Investment Adviser, such Corporate Loans
will be valued by the Investment Adviser at fair value, which is intended to
approximate market value. In valuing a Corporate Loan at fair value, the
Investment Adviser will consider, among other factors, (i) the
creditworthiness of the Borrower and any Intermediate Participants, (ii) the
current interest rate, period until next interest rate reset and maturity of
the Corporate Loan, (iii) recent prices in the market for similar Corporate
Loans, if any, and (iv) recent prices in the market for instruments of similar
quality, rate, period until next interest rate reset and maturity.
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Other portfolio securities (other than short-term obligations but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities are valued at the last sale price on the exchange that is the
primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps, caps and floors is determined in accordance with a
formula and then confirmed periodically by obtaining a bank quotation.
Positions in options are valued at the last sale price on the market where any
such option is principally traded. Obligations with remaining maturities of 60
days or less are valued at amortized cost unless this method no longer
produces fair valuations. Repurchase agreements are valued at cost plus
accrued interest. Rights or warrants to acquire stock, or stock acquired
pursuant to the exercise of a right or warrant, may be valued taking into
account various factors such as original cost to the Fund, earnings and net
worth of the issuer, market prices for securities of similar issuers,
assessment of the issuer's future prosperity, liquidation value or third party
transactions involving the issuer's securities. Securities for which there
exist no price quotations or valuations and all other assets are valued at
fair value as determined in good faith by or on behalf of the Board of
Directors of the Fund.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify and
reclassify any unissued shares of capital stock into one or more additional or
other classes or series as may be established from time to time by setting or
changing in any one or more respects the designations, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock
and pursuant to such classification or reclassification to increase or
decrease the number of authorized shares of any existing class or series. The
Fund may reclassify an amount of unissued Common Stock as preferred stock and
at that time offer shares of preferred stock representing up to approximately
33 1/3% of the Fund's total assets immediately after the issuance of such
preferred stock.
COMMON STOCK
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
In the event that the Fund issues preferred stock and so long as any shares
of the Fund's preferred stock are outstanding, holders of Common Stock will
not be entitled to receive any net income of or other distributions from the
Fund unless all accumulated dividends on preferred stock have been paid, and
unless asset coverage (as defined in Investment Company Act) with respect to
preferred stock would be at least 200% after giving effect to such
distributions. See "Other Investment Policies--Leverage."
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders of record.
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of Common Stock of the Fund for $100,000. As of the
date of this Prospectus, the Investment Adviser owned 100% of the outstanding
shares of Common Stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
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CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of any opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A Director may be removed
from office with or without cause but only by vote of the holders of at least
66 2/3% of the shares entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 66 2/3% of the Fund's shares to approve, adopt or
authorize the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations;
(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities); or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with
the by-laws, in which case the affirmative vote of a majority of the Fund's
shares of capital stock is required. Following any issuance of preferred stock
by the Fund, it is anticipated that the approval, adoption or authorization of
the foregoing would also require the favorable vote of a majority of the
Fund's shares of preferred stock then entitled to be voted, voting as a
separate class.
In addition, conversion of the fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares (including
any preferred stock) entitled to be voted on the matter, voting as a single
class (or a majority of such shares if the amendment was previously approved,
adopted or authorized by two-thirds of the total number of Directors fixed in
accordance with the by-laws), and, assuming preferred stock is issued, the
affirmative vote of a majority of outstanding shares of preferred stock of the
Fund, voting as a separate class. Such a vote also would satisfy a separate
requirement in the Investment Company Act that the change be approved by the
shareholders. Shareholders of an open-end investment company may require the
company to redeem their shares of common stock at any time (except in certain
circumstances as authorized by or under the Investment Company Act) at their
net asset value, less such redemption charge, if any, as might be in effect at
the time of a redemption. All redemptions would usually be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and the
shares would no longer be listed on a stock exchange. Conversion to an open-
end investment company would also require changes in certain of the Fund's
investment policies and restrictions, such as those relating to the borrowing
of money and the purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the Investment Company Act, are in the best interests of
shareholders generally. Reference should be made to the Articles of
Incorporation on file with the Securities and Exchange Commission for the full
text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodian agreement with The
Bank of New York, 110 Washington Street, New York, New York 10286.
43
<PAGE>
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of a
Purchase Agreement with the Fund and the Investment Adviser, to purchase
10,100,000 shares of Common Stock from the Fund. The Underwriter is committed
to purchase all of such shares if any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of Common Stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of Common Stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $ per share on
sales by such dealers. After the initial public offering, the public offering
price and other selling terms may be changed. Investors must pay for shares of
Common Stock purchased in the offering on or before March , 1998.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 1,515,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
Common Stock.
If the Underwriter creates a short position in the shares of Common Stock in
connection with the offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriter may
reduce that short position by purchasing shares of Common Stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter may also impose a penalty bid on certain syndicate and
selling group members. This means that if the Underwriter purchases shares of
Common Stock in the open market to reduce the Underwriter's short position or
to stabilize the price of the shares of Common Stock, it may reclaim the
amount of the selling concession from the selling group members who sold those
shares of Common Stock as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of Common Stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
44
<PAGE>
Prior to this offering, there has been no public market for the shares of
the Common Stock. Application has been made to list the Fund's shares of
Common Stock on the New York Stock Exchange. However, during an initial
period, which is not expected to exceed two weeks from the date of this
Prospectus, the Fund's shares will not be listed on any securities exchange.
Additionally, during such period, the Underwriter does not intend to make a
market in the Fund's shares, although a limited market may develop.
Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period. In order to meet the requirements for listing,
the Underwriter has undertaken to sell lots of 100 or more shares to a minimum
of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as
broker in connection with the execution of its portfolio transactions.
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of the Fund is The Bank of New York, 110 Washington Street, New York, New York
10286.
LEGAL OPINIONS
Certain legal matters in connection with the shares offered hereby will be
passed upon for the Fund and the Underwriter by Brown & Wood LLP, New York,
New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund included in
this Prospectus has been so included in reliance on the report of ,
independent auditors, and on their authority as experts in auditing and
accounting. The selection of independent auditors is subject to ratification
by shareholders of the Fund.
45
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholder ofDebt Strategies Fund II, Inc.
We have audited the accompanying statement of assets, liabilities and capital,
of Debt Strategies Fund II, Inc. as of March , 1998. This financial
statement is the responsibility of the Fund's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of Debt Strategies
Fund II, Inc. as of March , 1998, in conformity with generally accepted
accounting principles.
46
<PAGE>
DEBT STRATEGIES FUND II, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
MARCH , 1998
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,000
--------
Deferred organization and offering costs (Note 1)...................
--------
Total Assets......................................................
========
LIABILITIES
Deferred organization and offering costs payable (Note 1)...........
--------
NET ASSETS............................................................ $100,000
--------
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares autho-
rized; 10,000 shares issued and outstanding (Note 1)............... $ 1,000
--------
Paid-in Capital in excess of par.................................... 99,000
--------
Total Capital--Equivalent to $10.00 net asset value per share of
Common Stock
(Note 1)......................................................... $100,000
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on
December 10, 1997, as a closed-end, diversified management investment company
and has had no operations other than the sale to Fund Asset Management, L.P.
(the "Investment Adviser") of an aggregate of 10,000 shares for $100,000 on
March , 1998. The general partner of the Investment Adviser is an indirectly
wholly-owned subsidiary of Merrill Lynch & Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a five-year period beginning with the commencement of operations of the Fund.
Direct costs relating to the public offering of the Fund's shares will be
charged to capital at the time of issuance of shares.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee at the annual rate of 0.60 of 1% of the Fund's average weekly net
assets plus the proceeds of any outstanding borrowings used for leverage.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on a taxable
income (including realized capital gains) that is distributed to shareholders.
47
<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
DESCRIPTION OF CORPORATE BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
The modifier 1 indicates that the bond ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its rating
category.
A-1
<PAGE>
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S, A DIVISION OF THE
MCGRAW-HILL COMPANIES, INC.:
AAA--Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than bonds in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than in higher rated categories.
BB--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C--The C rating is reserved for income bonds on which no interest is being
paid.
D--Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
NR--Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of bond as a matter of policy.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
A-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
STATE OR JURISDICTION OF THE U.S. OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UN-
LAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 6
Fee Table.................................................................. 10
The Fund................................................................... 11
Use of Proceeds............................................................ 11
Investment Objectives and Policies......................................... 11
Other Investment Policies.................................................. 19
Investment Restrictions.................................................... 28
Directors and Officers..................................................... 30
Investment Advisory and Management Arrangements............................ 32
Portfolio Transactions..................................................... 34
Dividends and Distributions................................................ 35
Taxes...................................................................... 36
Automatic Dividend Reinvestment Plan....................................... 39
Mutual Fund Investment Option.............................................. 41
Net Asset Value............................................................ 41
Description of Capital Stock............................................... 42
Custodian.................................................................. 43
Underwriting............................................................... 44
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 45
Legal Opinions............................................................. 45
Experts.................................................................... 45
Independent Auditor's Report............................................... 46
Statement of Assets, Liabilities and Capital............................... 47
Appendix................................................................... A-1
</TABLE>
---------------
UNTIL JUNE , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,100,000 SHARES
DEBT STRATEGIES FUND II, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
MARCH , 1998
CODE 19023-0298
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of March , 1998
(2) Exhibits:
<TABLE>
<C> <S>
(a) --Articles of Incorporation (a)
(b) --By-Laws (a)
(c) --Not applicable
(d)(1) --Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant (b)
(d)(2) --Form of specimen certificate for shares of Common Stock of the
Registrant (a)
(e) --Form of Dividend Reinvestment Plan (a)
(f) --Not applicable
(g) --Form of Investment Advisory Agreement between the Registrant and
the Investment Adviser
(h)(1) --Form of Purchase Agreement
(h)(2) --Merrill Lynch Standard Dealer Agreement
(i) --Not applicable
(j) --Custodian Contract between the Registrant and The Bank of New
York
(k) --Registrar, Transfer Agency and Service Agreement between the
Registrant and The Bank of New York
(l) --Opinion and Consent of Brown & Wood LLP, counsel to the
Registrant*
(m) --Not applicable
(n) --Consent of , independent auditors for the Registrant*
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.*
(q) --Not applicable
</TABLE>
- --------
(a) Filed on January 12, 1998 as an Exhibit to the Registrant's Registration
Statement on Form N-2 (File No. 333-44051).
(b) Reference is made to Article V, Article VI (sections 2,3,4,5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit (a)
to this Registration Statement; and to Article II, Article III (sections
1,2,3,5 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to this
Registration Statement.
*To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
C-1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees.................................................. $ *
Stock Exchange listing fee......................................... *
Printing (other than stock certificates)........................... *
Engraving and printing stock certificates.......................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
NASD fees.......................................................... *
Miscellaneous...................................................... *
--------
Total............................................................ $ *
========
</TABLE>
- --------
* To be filed by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the caption "Investment Advisory and
Management Arrangements" and in Note 1 to the Statement of Assets, Liabilities
and Capital is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which will be filed as Exhibit (g)(1) to this
Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to directors, officers
and controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund 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 Fund of expenses incurred or paid by a director, officer or controlling
person of the Fund in connection with any successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund 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.
Reference is made to Section Six of the Purchase Agreement, a form of which
will be filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
C-2
<PAGE>
ITEM 30. Business and Other Connections of the Investment Adviser.
Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following open-end registered 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., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers 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 for the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield
Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc, MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida
Insured Fund II, MuniHoldings New York Insured Fund, Inc., MuniInsured Fund,
Inc., MuniVest Florida Fund, MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey 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 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 New York Insured Fund II, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible 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 Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Growth 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 Global Value Fund,
Inc., Merrill Lynch Growth Fund, Inc., Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch Intermediate Government Bond 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 Ready Assets Trust, Merrill Lynch Real
Estate Fund, 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., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Convertible
Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as subadviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisory Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646.
The address of the Investment Adviser, MLAM, Merrill Lynch Funds Distributor,
Inc. ("MLFD"), Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. also is P.O. Box 9011, Princeton, New Jersey 08543-
C-3
<PAGE>
9011. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York: 10281-
1201.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of all or substantially all of the investment companies
described in the preceding paragraphs and also hold the same positions with
all or substantially all of the investment companies advised by MLAM as they
do with those advised by the Investment Adviser. Messrs. Giordano, Harvey,
Kirstein and Monagle are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITION WITH
INVESTMENT OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME ADVISER VOCATION OR EMPLOYMENT
---- -------------- ---------------------------------------
<C> <C> <S>
ML & Co............ Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services. General Partner General Partner of MLAM
Arthur Zeikel...... Chairman Chairman of MLAM; President of MLAM and
FAM (from 1977 to 1997); Chairman and
Director of Princeton Services;
President of Princeton Services (from
1993 to 1997); Executive Vice President
of ML & Co.
Jeffrey M. Peek.... President President of MLAM since 1997; President
and Director of Princeton Services;
Executive Vice President of ML & Co.
Terry K. Glenn..... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and Director of
Princeton Services; President and
Director of MLFD; President of Princeton
Administrators, L.P.
Linda L. Federici.. Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services
Vincent R. Senior Vice Senior Vice President of MLAM; Senior
Giordano........... President Vice President of Princeton Services
Elizabeth A. Senior Vice Senior Vice President of MLAM; Senior
Griffin............ President Vice President of Princeton Services
Norman R. Harvey... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services
Michael J. Senior Vice Senior Vice President of MLAM; Senior
Hennewinkel........ President Vice President of the MLAM International
Group
Philip L. Kirstein. Senior Vice Senior Vice President, General Counsel
President, and Secretary of MLAM; Senior Vice
General Counsel President, General Counsel Director and
and Secretary Secretary of Princeton Services
Ronald M. Kloss.... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services
Debra W. Landsman- Senior Vice Senior Vice President of MLAM; Senior
Yaros.............. President Vice President of Princeton Services;
Vice President of MLFD
Stephen M. M. Senior Vice Executive Vice President of Princeton
Miller............. President Administrators L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Senior Vice Senior Vice President of MLAM; Senior
Jr. ............... President Vice President of Princeton Services
Michael L. Quinn... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989 to
1995
Richard L. Reller.. Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services and
Director of MLFD
Gerald M. Richard.. Senior Vice Senior Vice President and Treasurer of
President and MLAM; Senior Vice President and
Treasurer Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Gregory D. Upah.... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services
Ronald L. Welburn.. Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services
</TABLE>
C-4
<PAGE>
ITEM 31. LOCATION OF ACCOUNT 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
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this registration statement, its net
asset value per share of Common Stock declines more than 10 percent from
its net asset value per share of Common Stock as of the effective date of
this Registration Statement, or (2) its net asset value per share of Common
Stock increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 497(h)
under the 1933 Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and 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 17th day of
February, 1998.
Debt Strategies Fund II, Inc.
(Registrant)
By /s/ Arthur Zeikel
------------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn or Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his or her behalf, individually and in each capacity stated below, any
amendment to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following person in the capacities and
on the date indicated.
SIGNATURES TITLE DATE
/s/ Arthur Zeikel President (Principal February 17,
- ------------------------------------ Executive Officer) 1998
(ARTHUR ZEIKEL) and Director
/s/ Gerald M. Richard Treasurer (Principal February 17,
- ------------------------------------ Financial and 1998
(GERALD M. RICHARD) Accounting Officer)
/s/ Ronald W. Forbes Director February 17,
- ------------------------------------ 1998
(RONALD W. FORBES)
Director
- ------------------------------------
(CYNTHIA A. MONTGOMERY)
/s/ Charles C. Reilly Director February 17,
- ------------------------------------ 1998
(CHARLES C. REILLY)
/s/ Kevin A. Ryan Director February 17,
- ------------------------------------ 1998
(KEVIN A. RYAN)
/s/ Richard R. West Director February 17,
- ------------------------------------ 1998
(RICHARD R. WEST)
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
(g) --Form of Investment Advisory Agreement between the Registrant and
the Investment Adviser
(h)(1) --Form of Purchase Agreement
(h)(2) --Merrill Lynch Standard Dealer Agreement
(j) --Custodian Contract between the Registrant and The Bank of New York
(k) --Registrar, Transfer Agency and Service Agreement between the
Registrant and The Bank of New York
</TABLE>
<PAGE>
EXHIBIT (g)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the ____ day of March, 1998, by and between DEBT
STRATEGIES FUND II, INC., a Maryland corporation (the "Fund"), and FUND 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, diversified,
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 premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE>
ARTICLE I
---------
Duties of the Investment Adviser
--------------------------------
The Fund hereby employs the Investment Adviser to act as investment adviser
of 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 Directors 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.
(a) Administrative Services. The Investment Adviser shall perform, or
-----------------------
arrange for its affiliates to perform, the management and administrative
services necessary for the operation of the Fund, including administering
shareholder accounts and handling shareholder relations pursuant to an
Administration Agreement of even date herewith.
(b) Investment Advisory Services. The Investment Adviser shall provide,
----------------------------
or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the
2
<PAGE>
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 Articles of
Incorporation and the By-Laws of the Fund, as amended from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in filings made by the Fund under the Federal securities
laws. 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 Board of Directors at any time, however, make any definite determination as
to investment policy and notify the Investment Adviser thereof in writing, the
Investment Adviser shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked. The Investment Adviser shall take, on behalf of the Fund, 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
3
<PAGE>
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 Directors and set forth in filings made by the Fund
under the Federal securities laws. 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.
(c) Notice Upon Change in Partners of the Investment Adviser. The
--------------------------------------------------------
Investment Adviser is a 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
4
<PAGE>
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 of the Fund
and all Directors 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, stock certificates,
shareholder reports and prospectuses, charges of the custodian, any sub-
custodian and transfer agent, charges of any auction agent and broker dealers in
connection with preferred stock of the Fund, expenses of portfolio transactions,
Securities and Exchange Commission fees, expenses of registering the shares of
common stock and preferred stock under Federal, state and foreign laws, fees and
actual out-of-pocket expenses of Directors who are not affiliated persons of the
Investment Adviser, accounting and pricing costs (including the daily
calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or nonrecurring expenses, and other expenses
properly payable by the Fund. It also is understood that the Fund will
reimburse the Investment Adviser for its costs incurred in providing accounting
services to the Fund.
5
<PAGE>
ARTICLE III
-----------
Compensation of the Investment Adviser
--------------------------------------
(a) Investment Advisory Fee. For the services rendered, the
-----------------------
facilities furnished and the expenses assumed by the Investment Adviser, the
Fund shall pay to the Investment Adviser at the end of each calendar month a fee
based upon the average weekly value of the net assets of the Fund at the annual
rate of 0.60 of 1.0% (0.60%) of the average weekly net assets of the Fund plus
the proceeds of any outstanding borrowing used for leverage ("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, (ii) any accrued and unpaid
interest on outstanding borrowing and (iii) accumulated dividends on shares of
outstanding preferred stock), commencing on the day following effectiveness
hereof. For purposes of this calculation, average weekly net assets is
determined at the end of each month on the basis of the average net assets of
the Fund for each week during the month. 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. It is understood
that the liquidation preference of any outstanding preferred stock (other than
accumulated dividends) is not considered a liability in determining the Fund's
average weekly net assets. If this Agreement becomes effective subsequent to
the first day of a month or shall terminate before the last day of a month,
compensation for that part of the month this
6
<PAGE>
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fee as set forth above. Subject to the provisions of
subsection (b) hereof, payment of the Investment Adviser's compensation for the
preceding month shall be made as promptly as possible after completion of the
computations contemplated by subsection (b) hereof. During any period when the
determination of net asset value is suspended by the Board of Directors, the
average net asset value of a share for the last week prior to such suspension
shall for this purpose be deemed to be the net asset value at the close of each
succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the
-------------------
Fund, including amounts payable to the Investment Adviser pursuant to subsection
(a) hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its investment advisory fee by the extent of such excess and, if required
pursuant to any such laws or regulations, will reimburse the Fund in the amount
of such excess; provided, however, to the extent permitted by law, there shall
-------- -------
be excluded from such expenses the amount of any interest, taxes, distribution
fees, brokerage fees and commissions and extraordinary expenses (including but
not limited to legal claims and liabilities and litigation costs and any
7
<PAGE>
indemnification related thereto) paid or payable by the Fund. Whenever the
expenses of the Fund exceed a pro rata portion of the applicable annual expense
limitations, the estimated amount of reimbursement under such limitations shall
be applicable as an offset against the monthly payment of the fee due to the
Investment Adviser. Should two or more such expense limitations be applicable
as at the end of the last business day of the month, that expense limitation
which results in the largest reduction in the Investment Adviser's fee shall be
applicable.
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.
8
<PAGE>
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 Directors, 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 of 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 February 28, 2000, and thereafter, but
only so long as such continuance specifically is approved at least annually by
(i) the Board of Directors of the Fund, or by the vote of a majority of the
outstanding voting securities of the Fund, and (ii) by the vote of a majority of
9
<PAGE>
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund, or by the Investment Adviser, on
sixty (60) days' written notice to the other party. This Agreement shall
terminate automatically in the event of its assignment.
ARTICLE VII
-----------
Amendment of this Agreement
---------------------------
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions
10
<PAGE>
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.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
DEBT STRATEGIES FUND II, INC.
By: ______________________________
Authorized Signatory
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
12
<PAGE>
EXHIBIT (h)(1)
__________ Shares
DEBT STRATEGIES FUND II, INC.
(a Maryland corporation)
Common Stock
(Par Value $0.10 Per Share)
PURCHASE AGREEMENT
_________, 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1201
Dear Sirs and Mesdames:
Debt Strategies Fund II, Inc., a Maryland corporation (the "Fund"), and
Fund Asset Management, L.P., a Delaware limited partnership (the "Adviser"),
each confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the "Underwriter"), with respect to the sale by the
Fund and the purchase by the Underwriter of __________ shares of common stock,
par value $.10 per share, of the Fund (the "Common Stock"), and, with respect to
the grant by the Fund to the Underwriter of the option described in Section 2
hereof to purchase all or any part of _________ additional shares of Common
Stock to cover over-allotments. The aforesaid __________ shares (the "Initial
Shares"), together with all or any part of the _________ additional shares of
Common Stock subject to the option described in Section 2 hereof (the "Option
Shares"), hereinafter are referred to collectively as the "Shares".
Prior to the purchase and public offering of the Shares by the Underwriter,
the Fund and the Underwriter shall enter into an agreement substantially in the
form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may
take the form of an exchange of any standard form of written telecommunication
between the Fund and the Underwriter and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Shares
will be governed by this Agreement, as supplemented by the Pricing
<PAGE>
Agreement. From and after the date of the execution and delivery of the Pricing
Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No. 333-
44051) and a related preliminary prospectus for the registration of the Shares
under the Securities Act of 1933, as amended (the "1933 Act"), the Investment
Company Act, and the rules and regulations of the Commission under the 1933 Act
and the Investment Company Act (together, the "Rules and Regulations"), and has
filed such amendments to such registration statement on Form N-2, if any, and
such amended preliminary prospectuses as may have been required to the date
hereof. The Fund will prepare and file such additional amendments thereto and
such amended prospectuses as hereafter may be required. Such registration
statement (as amended at the time it becomes effective, if applicable) and the
prospectus constituting a part thereof (including in each case the information,
if any, deemed to be a part thereof pursuant to Rule 430A(b) or Rule 434 of the
Rules and Regulations), as from time to time amended or supplemented pursuant to
the 1933 Act, are referred to hereinafter as the "Registration Statement" and
the "Prospectus", respectively; except that if any revised prospectus shall be
provided to the Underwriter by the Fund for use in connection with the offering
of the Shares which differs from the Prospectus on file at the Commission at the
time the Registration Statement becomes effective (whether such revised
prospectus is required to be filed by the Fund pursuant to Rule 497(c) or Rule
497(h) of the Rules and Regulations), the term "Prospectus" shall refer to each
such revised prospectus from and after the time it is first provided to the
Underwriter for such use. If the Fund elects to rely on Rule 434 under the
Rules and Regulations, all references to the Prospectus shall be deemed to
include, without limitation, the form of prospectus and the term sheet, taken
together, provided to the Underwriter by the Fund in reliance on Rule 434 under
the 1933 Act (the "Rule 434 Prospectus"). If the Fund files a registration
statement to register a portion of the Shares and relies on Rule 462(b) for such
registration statement to become effective upon filing with the Commission (the
"Rule 462 Registration Statement"), then any reference to "Registration
Statement" herein shall be deemed to include both the registration statement
referred to above (No. 333-44051) and the Rule 462 Registration Statement, as
each such registration statement may be amended pursuant to the 1933 Act.
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after the
Registration Statement becomes effective and the Pricing Agreement has been
executed and delivered.
SECTION 1. Representations and Warranties. (a) The Fund and the Adviser
each severally represents and warrants to the Underwriter as of the date hereof
and as of the date of the Pricing Agreement (such later date hereinafter being
referred to as the "Representation Date") as follows:
2
<PAGE>
(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act, the Investment
Company Act and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective, at
the Representation Date and at Closing Time referred to in Section 2, the
Prospectus (unless the term "Prospectus" refers to a prospectus which has
been provided to the Underwriter by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file with the
Commission at the time the Registration Statement becomes effective, in
which case at the time such prospectus first is provided to the Underwriter
for such use) will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Fund in writing by the
Underwriter expressly for use in the Registration Statement or in the
Prospectus.
(ii) The accountants who certified the statement of assets,
liabilities and capital included in the Registration Statement are
independent public accountants as required by the 1933 Act and the Rules
and Regulations.
(iii) The statement of assets, liabilities and capital included in the
Registration Statement presents fairly the financial position of the Fund
as at the date indicated and said statement has been prepared in conformity
with generally accepted accounting principles.
(iv) Since the respective dates as of which information is given in the
Registration Statement and in the Prospectus, except as otherwise stated
therein, (A) there has been no material adverse change in the condition,
financial or otherwise, of the Fund, or in the earnings, business affairs
or business prospects of the Fund, whether or not arising in the ordinary
course of business, (B) there have been no transactions entered into by the
Fund which are material to the Fund other than those in the ordinary course
of business and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Fund on any class of its capital stock.
(v) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland with
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement; the Fund
is duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is required;
and the Fund has no subsidiaries.
3
<PAGE>
(vi) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, diversified, management investment company,
and no order of suspension or revocation of such registration has been
issued or proceedings therefor initiated or threatened by the Commission.
(vii) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Stock"; the Shares have been duly authorized for issuance and sale to the
Underwriter pursuant to this Agreement and, when issued and delivered by
the Fund pursuant to this Agreement against payment of the consideration
set forth in the Pricing Agreement, will be validly issued and fully paid
and nonassessable; the Shares conform in all material respects to all
statements relating thereto contained in the Registration Statement; and
the issuance of the Shares to be purchased by the Underwriter is not
subject to preemptive rights.
(viii) The Fund is not in violation of its articles of incorporation, as
amended (the "Charter"), or its by-laws, as amended (the "By-Laws"), or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which it is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement, the Pricing Agreement and the
Investment Advisory Agreement and the Custody Agreement referred to in the
Registration Statement (as used herein, the "Advisory Agreement" and the
"Custody Agreement", respectively) and the consummation of the transactions
contemplated herein and therein have been duly authorized by all necessary
corporate action and will not conflict with or constitute a breach of, or a
default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Fund pursuant to any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Fund is a party or by which it may be bound
or to which any of the property or assets of the Fund is subject, nor will
such action result in any violation of the provisions of the Charter or the
By-Laws of the Fund, or, to the best knowledge of the Fund and the Adviser,
any law, administrative regulation or administrative or court decree; and
no consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Fund of the
transactions contemplated by this Agreement, the Pricing Agreement, the
Advisory Agreement and the Custody Agreement, except such as has been
obtained under the Investment Company Act or as may be required under the
1933 Act or state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriter.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in
the Prospectus and the Fund has not received any notice
4
<PAGE>
of proceedings relating to the revocation or modification of any such
licenses, permits, covenants, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Fund, threatened against or affecting, the Fund, which
might result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Fund, or might
materially and adversely affect the properties or assets of the Fund; and
there are no material contracts or documents of the Fund which are required
to be filed as exhibits to the Registration Statement by the 1933 Act, the
Investment Company Act or the Rules and Regulations which have not been so
filed.
(xi) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required.
(xii) The Fund owns or possesses, or can acquire on reasonable terms,
adequate trademarks, service marks and trade names necessary to conduct its
business as described in the Registration Statement, and the Fund has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, service marks or trade names which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the conduct of the
business, operations, financial condition or income of the Fund.
(b) The Adviser represents and warrants to the Underwriter as of the date
hereof and as of the Representation Date as follows:
(i) The Adviser has been duly organized as a limited partnership
under the laws of the State of Delaware, with power and authority to
conduct its business as described in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Investment Advisers
Act"), and is not prohibited by the Investment Advisers Act or the
Investment Company Act, or the rules and regulations under such acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement has been duly authorized, executed and delivered by
the Adviser; the Advisory Agreement has been duly authorized, executed and
delivered by the Adviser and constitutes a valid and binding obligation of
the Adviser, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization or other laws
relating to or affecting creditors' rights and
5
<PAGE>
to general equitable principles; and neither the execution and delivery of
this Agreement or the Advisory Agreement, nor the performance by the
Adviser of its obligations hereunder or thereunder will conflict with, or
result in a breach of any of the terms and provisions of, or constitute,
with or without the giving of notice or the lapse of time or both, a
default under, any agreement or instrument to which the Adviser is a party
or by which it is bound, or any law, order, rule or regulation applicable
to it of any jurisdiction, court, Federal or state regulatory body,
administrative agency or other governmental body, stock exchange or
securities asso ciation having jurisdiction over the Adviser or its
respective properties or operations.
(iv) The Adviser has the financial resources available to it necessary
for the performance of its services and obligations as contemplated in the
Prospectus.
(v) Any advertisement approved by the Adviser for use in the public
offering of the Shares pursuant to Rule 482 under the Rules and Regulations
(an "Omitting Prospectus") complies with the requirements of such Rule 482.
(c) Any certificate signed by any officer of the Fund or the Adviser and
delivered to the Underwriter or to counsel to the Fund and the Underwriter shall
be deemed a representation and warranty by the Fund or the Adviser, as the case
may be, to the Underwriter, as to the matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, the Fund agrees to
sell the Initial Shares to the Underwriter and the Underwriter agrees to
purchase the Initial Shares from the Fund, at the price per share set forth in
the Pricing Agreement.
(i) If the Fund has elected not to rely upon Rule 430A under the
Rules and Regulations, the initial public offering prices and the purchase
price per share to be paid by the Underwriter for the Shares have been
determined and set forth in the Pricing Agreement, dated the date hereof,
and an amendment to the Registration Statement and the Prospectus will be
filed before the Registration Statement becomes effective.
(ii) If the Fund has elected to rely upon Rule 430A under the Rules and
Regulations, the purchase price per share to be paid by the Underwriter for
the Shares shall be an amount equal to the applicable initial public
offering price, less an amount per share to be determined by agreement
between the Underwriter and the Fund. The initial public offering price
per share shall be a fixed price based upon the number of Shares purchased
in a single transaction to be determined by agreement between the
Underwriter and the Fund. The initial public offering price and the
purchase price, when so determined, shall be set forth in the Pricing
Agreement. In the event that
6
<PAGE>
such prices have not been agreed upon and the Pricing Agreement has not
been executed and delivered by all parties thereto by the close of business
on the fourth business day following the date of this Agreement, this
Agreement shall terminate forthwith, without liability of any party to any
other party, except as provided in Section 4, unless otherwise agreed to by
the Fund, the Adviser and the Underwriter.
In addition, on the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the Fund
hereby grants an option to the Underwriter to purchase all or any part of the
Option Shares at the price per share set forth above. The option hereby granted
will expire 45 days after the date hereof (or, if the Fund has elected to rely
upon Rule 430A under the Rules and Regulations, 45 days after the execution of
the Pricing Agreement) and may be exercised only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Shares upon notice by the Underwriter to the Fund
setting forth the number of Option Shares as to which the Underwriter is then
exercising the option and the time, date and place of payment and delivery for
such Option Shares. Any such time and date of delivery (a "Date of Delivery")
shall be determined by the Underwriter but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to
Closing Time, as hereinafter defined, unless otherwise agreed upon by the
Underwriter and the Fund.
(b) Payment of the purchase price for, and delivery of certificates for,
the Initial Shares shall be made at the office of Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557, or at such other place as shall be
agreed upon by the Underwriter and the Fund, at 9:00 A.M. on the third business
day following the date the Registration Statement becomes effective or, if the
Fund has elected to rely upon Rule 430A under the Rules and Regulations, the
third business day after execution of the Pricing Agreement (or, if pricing
takes place after 4:30 P.M. on either the date the Registration Statement
becomes effective or the date of execution of the Pricing Agreement, as
applicable, the fourth business day after such applicable date), or such other
time not later than ten business days after such date as shall be agreed upon by
the Underwriter and the Fund (such time and date of payment and delivery herein
being referred to as "Closing Time"). In addition, in the event that any or all
of the Option Shares are purchased by the Underwriter, payment of the purchase
price for, and delivery of certificates for, such Option Shares shall be made at
the above-mentioned office of Brown & Wood LLP, or at such other place as shall
be agreed upon mutually by the Fund and the Underwriter, on each Date of
Delivery as specified in the notice from the Underwriter to the Fund. Payment
shall be made to the Fund by a Federal Funds check or checks or similar same-day
funds payable to the order of the Fund, against delivery to the Underwriter of
certificates for the Shares to be purchased by it. Certificates for the Initial
Shares and Option Shares shall be in such denominations and registered in such
names as the Underwriter may request in writing at least two business days
before Closing Time or the Date of Delivery, as the case may be. The
certificates for the Initial Shares and the Option Shares will be made available
by the Fund for examination by the Underwriter not later than 10:00 A.M. on the
last business day prior to Closing Time or the Date of Delivery, as the case may
be.
7
<PAGE>
SECTION 3. Covenants of the Fund. The Fund covenants with the Underwriter
as follows:
(a) The Fund will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and will advise the
Underwriter promptly as to the time at which the Registration Statement and
any amendments thereto (including any post-effective amendment) becomes so
effective and (ii) if required, to cause the issuance of any orders
exempting the Fund from any provisions of the Investment Company Act, and
the Fund will advise the Underwriter promptly as to the time at which any
such orders are granted.
(b) The Fund will notify the Underwriter immediately, and will
confirm the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendments thereto (including any post-effective
amendment), (ii) of the receipt of any comments from the Commission, (iii)
of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (v) of the issuance by
the Commission of an order of suspension or revocation of the notification
on Form N-8A of registration of the Fund as an investment company under the
Investment Company Act or the initiation of any proceeding for that
purpose. The Fund will make every reasonable effort to prevent the
issuance of any stop order described in subsection (vi) hereunder or any
order of suspension or revocation described in subsection (vii) hereunder
and, if any such stop order or order of suspension or revocation is issued,
to obtain the lifting thereof at the earliest possible moment. If the Fund
elects to rely on Rule 434 under the Rules and Regulations, the Fund will
prepare a term sheet that complies with the requirements of Rule 434 under
the Rules and Regulations and the Fund will provide the Underwriter with
copies of the form of Rule 434 Prospectus, in such number as the
Underwriter may reasonably request by the close of business in New York on
the business day immediately succeeding the date of the Pricing Agreement.
(c) The Fund will give the Underwriter notice of its intention to
file any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Fund proposes for use by the
Underwriter in connection with the offering of the Shares, which differs
from the prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether such revised prospectus is required to
be filed pursuant to Rule 497(c) or Rule 497(h) of the Rules and
Regulations or any term sheet prepared in reliance on Rule 434 of the Rules
and Regulations), whether pursuant to the Investment Company Act, the 1933
Act, or otherwise, and will furnish the Underwriter with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the
8
<PAGE>
case may be, and will not file any such amendment or supplement to which
the Underwriter reasonably shall object.
(d) The Fund will deliver to the Underwriter, as soon as practicable,
two signed copies of the notification of registration and registration
statement as originally filed and of each amendment thereto, in each case
with two sets of the exhibits filed therewith, and also will deliver to the
Underwriter a conformed copy of the registration statement as originally
filed and of each amendment thereto (but without exhibits to the
registration statement or any such amendment) for the Underwriter.
(e) The Fund will furnish to the Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the
1933 Act, such number of copies of the Prospectus (as amended or
supplemented) as the Underwriter reasonably may request for the purposes
contemplated by the 1933 Act, or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in
the opinion of counsel to the Fund and the Underwriter, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, the Fund forthwith will amend or supplement the Prospectus by
preparing and furnishing to the Underwriter a reasonable number of copies
of an amendment or amendments of or a supplement or supplements to, the
Prospectus (in form and substance satisfactory to counsel to the Fund and
the Underwriter), so that, as so amended or supplemented, the Prospectus
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading.
(g) The Fund will endeavor, in cooperation with the Underwriter, to
qualify the Shares for offering and sale under the applicable securities
laws of such states and other jurisdictions of the United States as the
Underwriter may designate, and will maintain such qualifications in effect
for a period of not less than one year after the date hereof. The Fund
will file such statements and reports as may be required by the laws of
each jurisdiction in which the Shares have been qualified as above
provided.
(h) The Fund will make generally available to its security holders as
soon as practicable, but no later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the Rules and Regulations) covering a twelve-
month period beginning not later than the first day of the Fund's fiscal
quarter next following the "effective" date (as defined in said Rule 158)
of the Registration Statement.
9
<PAGE>
(i) Between the date of this Agreement and the termination of any
trading restrictions or Closing Time, whichever is later, the Fund will
not, without your prior consent, offer or sell, or enter into any agreement
to sell, any equity or equity related securities of the Fund other than the
Shares and shares of Common Stock issued in reinvestment of dividends or
distributions.
(j) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance
upon Rule 430A of the Rules and Regulations, then immediately following the
execution of the Pricing Agreement, the Fund will prepare, and file or
transmit for filing with the Commission in accordance with such Rule 430A
and Rule 497(h) of the Rules and Regulations, copies of the amended
Prospectus, or, if required by such Rule 430A, a post-effective amendment
to the Registration Statement (including an amended Prospectus), containing
all information so omitted.
(k) The Fund will use its best efforts to effect the listing of the
Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than two weeks from the date of the Prospectus.
SECTION 4. Payment of Expenses. The Fund will pay all expenses incident
to the performance of its obligations under this Agreement, including, but not
limited to, expenses relating to (i) the printing and filing of the registration
statement as originally filed and of each amendment thereto, (ii) the printing
of this Agreement and the Pricing Agreement, (iii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriter, (iv) the fees
and disbursements of the Fund's counsel and accountants, (v) the qualification
of the Shares under securities laws in accordance with the provisions of Section
3(g) of this Agreement, including filing fees and any reasonable fees or
disbursements of counsel in connection therewith and in connection with the
preparation of the Blue Sky Survey, (vi) the printing and delivery to the
Underwriter of copies of the registration statement as originally filed and of
each amendment thereto, of the preliminary prospectus, and of the Prospectus and
any amendments or supplements thereto, (vii) the printing and delivery to the
Underwriter of copies of the Blue Sky Survey, (viii) the fees and expenses
incurred with respect to the filing with the National Association of Securities
Dealers, Inc. and (ix) the fees and expenses incurred with respect to the
listing of the Shares on the New York Stock Exchange.
If this Agreement is terminated by the Underwriter in accordance with the
provisions of Section 5 or Section 9(a)(i), the Fund or the Adviser shall
reimburse the Underwriter for all of its reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of counsel to the Fund and the
Underwriter. In the event the transactions contemplated hereunder are not
consummated, the Adviser agrees to pay all of the costs and expenses set forth
in the first paragraph of this Section 4 which the Fund would have paid if such
transactions had been consummated.
10
<PAGE>
SECTION 5. Conditions of Underwriter's Obligations. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser herein contained, to the performance by
the Fund and the Adviser of their respective obligations hereunder, and to the
following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., on the date of this Agreement, or at a later time and date
not later, however, than 5:30 P.M. on the first business day following the
date hereof, or at such later time and date as may be approved by the
Underwriter, and at Closing Time no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission. If the
Fund has elected to rely upon Rule 430A of the Rules and Regulations, the
price of the Shares and any price-related information previously omitted
from the effective Registration Statement pursuant to such Rule 430A shall
have been transmitted to the Commission for filing pursuant to Rule 497(h)
of the Rules and Regulations within the prescribed time period, and prior
to Closing Time the Fund shall have provided evidence satisfactory to the
Underwriter of such timely filing, or a post-effective amendment providing
such information shall have been filed promptly and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) At Closing Time, the Underwriter shall have received:
(1) The favorable opinion, dated as of Closing Time, of Brown &
Wood LLP, counsel to the Fund and the Underwriter, to the effect that:
(i) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland.
(ii) The Fund has corporate power and authority to own, lease
and operate its properties and conduct its business as described
in the Registration Statement and in the Prospectus.
(iii) The Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which such qualification is required.
(iv) The Shares have been duly authorized for issuance and
sale to the Underwriter pursuant to this Agreement and, when
issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in the Pricing
Agreement, will be validly issued and fully paid and
nonassessable; the issuance of the Shares is not subject to
preemptive rights; and the authorized capital stock
11
<PAGE>
conforms as to legal matters in all material respects to the
description thereof in the Registration Statement under the
caption "Description of Capital Stock".
(v) This Agreement and the Pricing Agreement each has been
duly authorized, executed and delivered by the Fund and each
complies with all applicable provisions of the Investment Company
Act.
(vi) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop
order suspending the effectiveness of the Registration Statement
has been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission.
(vii) At the time the Registration Statement became effective
and at the Representation Date, the Registration Statement (other
than the financial statements included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the Investment
Company Act and the Rules and Regulations. The Rule 434
Prospectus conforms to the requirements of Rule 434 in all
material respects.
(viii) To the best of their knowledge and information, there
are no legal or governmental proceedings pending or threatened
against the Fund which are required to be disclosed in the
Registration Statement, other than those disclosed therein.
(ix) To the best of their knowledge and information, there are
no contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments of the Fund required to be described
or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to
therein or filed as exhibits thereto, the descriptions thereof
are correct in all material respects, references thereto are
correct, and no default exists in the due performance or
observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument so described, referred
to or filed.
(x) No consent, approval, authorization or order of any
court or governmental authority or agency is required in
connection with the sale of the Shares to the Underwriter, except
such as has been obtained under the 1933 Act, the Investment
Company Act or the Rules and Regulations or such as may be
required under state securities laws; and
12
<PAGE>
to the best of their knowledge and information, the execution and
delivery of this Agreement, the Pricing Agreement, the Advisory
Agreement and the Custody Agreement and the consummation of the
transactions contemplated herein and therein will not conflict
with or constitute a breach of, or a default under, or result in
the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Fund pursuant to, any
contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Fund is a party or by which it may
be bound or to which any of the property or assets of the Fund is
subject, nor will such action result in any violation of the
provisions of the Charter or the By-Laws of the Fund, or any law
or administrative regulation, or, to the best of their knowledge
and information, administrative or court decree.
(xi) The Advisory Agreement and the Custody Agreement have
each been duly authorized and approved by the Fund and comply as
to form in all material respects with all applicable provisions
of the Investment Company Act, and each has been duly executed by
the Fund.
(xii) The Fund is registered with the Commission under the
Investment Company Act as a closed-end, diversified management
investment company, and all required action has been taken by the
Fund under the 1933 Act, the Investment Company Act and the Rules
and Regulations to make the public offering and consummate the
sale of the Shares pursuant to this Agreement; the provisions of
the Charter and the By-Laws of the Fund comply as to form in all
material respects with the requirements of the Investment Company
Act; and, to the best of their knowledge and information, no
order of suspension or revocation of such registration under the
Investment Company Act, pursuant to Section 8(e) of the
Investment Company Act, has been issued or proceedings therefor
initiated or threatened by the Commission.
(xiii) The information in the Prospectus under the caption
"Taxes", to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by them and is correct in
all material respects.
(2) The favorable opinion, dated as of Closing Time, of Philip
L. Kirstein, Esq., General Counsel to the Adviser, in form and
substance satisfactory to counsel to the Underwriter, to the effect
that:
13
<PAGE>
(i) The Adviser has been duly organized as a limited
partnership under the laws of the State of Delaware, with power
and authority to conduct its business as described in the
Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser
under the Investment Advisers Act and is not prohibited by the
Investment Advisers Act or the Investment Company Act, or the
rules and regulations under such Acts, from acting under the
Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the
Advisory Agreement constitutes a valid and binding obligation of
the Adviser, enforceable in accordance with its terms, subject,
as to enforcement, to bankruptcy, insolvency, reorganization or
other laws relating to or affecting creditors' rights and to
general equity principles; and, to the best of his knowledge and
information, neither the execution and delivery of this Agreement
or the Advisory Agreement nor the performance by the Adviser of
its obligations hereunder or thereunder will conflict with, or
result in a breach of, any of the terms and provisions of, or
constitute, with or without the giving of notice or the lapse of
time or both, a default under, any agreement or instrument to
which the Adviser is a party or by which the Adviser is bound, or
any law, order, rule or regulation applicable to the Adviser of
any jurisdiction, court, Federal or state regulatory body,
administrative agency or other governmental body, stock exchange
or securities association having jurisdiction over the Adviser or
its properties or operations.
(iv) To the best of his knowledge and information, the
description of the Adviser in the Registration Statement and in
the Prospectus does not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(3) In giving their opinion required by subsection (b)(1) of this
Section, Brown & Wood LLP additionally shall state that nothing has come to
their attention that would lead them to believe that the Registration
Statement (other than the financial statements included therein, as to
which no opinion need be rendered), at the time it became effective or at
the Representation Date, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (other than the financial statements included therein, as to
which no opinion need be
14
<PAGE>
rendered), at the Representation Date (unless the term "Prospectus" refers
to a prospectus which has been provided to the Underwriter by the Fund for
use in connection with the offering of the Shares which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective, in which case at the time it first is provided to the
Underwriter for such use) or at Closing Time, included an untrue statement
of a material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. Brown & Wood LLP may rely, as to
matters of fact, upon certificates and written statements of officers and
employees of and accountants for the Fund and the Adviser and of public
officials.
(c) At Closing Time, (i) the Registration Statement and the
Prospectus shall contain all statements which are required to be stated
therein in accordance with the 1933 Act, the Investment Company Act and the
Rules and Regulations and in all material respects shall conform to the
requirements of the 1933 Act, the Investment Company Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus
shall contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and no action,
suit or proceeding at law or in equity shall be pending or, to the
knowledge of the Fund or the Adviser, threatened against the Fund or the
Adviser which would be required to be set forth in the Prospectus other
than as set forth therein, (ii) there shall not have been, since the date
as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, of the Fund or in its
earnings, business affairs or business prospects, whether or not arising in
the ordinary course of business, from that set forth in the Prospectus,
(iii) the Adviser shall have the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Prospectus, and (iv) no proceedings shall be pending
or, to the knowledge of the Fund or the Adviser, threatened against the
Fund or the Adviser before or by any Federal, state or other commission,
board or administrative agency wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property,
financial condition or income of either the Fund or the Adviser other than
as set forth in the Prospectus, and the Underwriter shall have received, at
Closing Time, a certificate of the President or the Treasurer of the Fund
and of the President or a Vice President of the Adviser dated as of Closing
Time, evidencing compliance with the appropriate provisions of this
subsection (c).
(d) At Closing Time, the Underwriter shall have received
certificates, dated as of Closing Time, (i) of the President or the
Treasurer of the Fund to the effect that the representations and warranties
of the Fund contained in Section 1(a) are true and correct with the same
force and effect as though expressly made at and as of Closing Time and,
(ii) of the President or a Vice President of the Adviser to the effect that
the representations and warranties of the Adviser contained in Sections
1(a) and (b) are
15
<PAGE>
true and correct with the same force and effect as though expressly made at
and as of Closing Time.
(e) At the time of execution of this Agreement, the Underwriter shall
have received from _________________ a letter, dated such date in form and
substance satisfactory to the Underwriter, to the effect that:
(i) they are independent accountants with respect to the Fund
within the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the statement of assets, liabilities and
capital examined by them and included in the Registration Statement
complies as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the Investment Company Act
and the Rules and Regulations; and
(iii) they have performed specified procedures, not constituting an
audit, including a reading of the latest available interim financial
statements of the Fund, a reading of the minute books of the Fund,
inquiries of officials of the Fund responsible for financial
accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and
procedures nothing came to their attention that caused them to believe
that at the date of the latest available statement of assets,
liabilities and capital read by such accountants, or at a subsequent
specified date not more than three days prior to the date of this
Agreement, there was any change in the capital stock or net assets of
the Fund as compared with amounts shown on the statement of assets,
liabilities and capital included in the Prospectus.
(f) At Closing Time, the Underwriter shall have received from
_________________ a letter, dated as of Closing Time, to the effect that
they reaffirm the statements made in the letter furnished pursuant to
subsection (e) of this Section, except that the "specified date" referred
to shall be a date not more than three days prior to Closing Time.
(g) At Closing Time, counsel to the Underwriter shall have been
furnished with such documents and opinions as they may reasonably require
for the purpose of enabling them to pass upon the issuance and sale of the
Shares as herein contemplated and to pass upon related proceedings, or in
order to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Fund and the Adviser in connection with the
organization and registration of the Fund under the Investment Company Act
and the issuance and sale of the Shares as herein and therein contemplated
shall be satisfactory in form and substance to the Underwriter.
16
<PAGE>
(h) In the event the Underwriter exercises its option provided in
Section 2 hereof to purchase all or any portion of the Option Shares, the
representations and warranties of the Fund and the Adviser contained herein
and the statements in any certificate furnished by the Fund and the Adviser
hereunder shall be true and correct as of each Date of Delivery, and the
Underwriter shall have received:
(i) Certificates, dated the Date of Delivery, of the President
or the Treasurer of the Fund and of the President or a Vice President
of the Adviser confirming that the information contained in the
certificate delivered by each of them at Closing Time pursuant to
Section 5(c) or 5(d), as the case may be, remains true as of such Date
of Delivery.
(ii) The favorable opinions of Brown & Wood LLP, counsel to the
Fund and the Underwriter and Philip L. Kirstein, Esq., General Counsel
of the Adviser, each in form and substance satisfactory to the
Underwriter, dated such Date of Delivery, relating to the Option
Shares and otherwise to the same effect as the opinions required by
Sections 5(b)(1) and (2), respectively.
(iii) A letter from _________________, in form and substance
satisfactory to the Underwriter and dated such Date of Delivery,
substantially the same in scope and substance as the letter furnished
to the Underwriter pursuant to Section 5(e), except that the
"specified date" in the letter furnished pursuant to this Section 5(h)
shall be a date not more than three days prior to such Date of
Delivery.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Underwriter by notice to the Fund at any time at or prior to Closing Time, and
such termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8 hereof
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification. (a) The Fund and the Adviser jointly and
severally agree to indemnify and hold harmless the Underwriter and each person,
if any, who controls the Underwriter within the meaning of Section 15 of the
1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the information deemed to be part of
the Registration Statement pursuant to Rule 430A or Rule 434 of the Rules
and Regulations, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary
17
<PAGE>
prospectus or the Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever (including the fees and
disbursements of counsel chosen by the Underwriter) reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the information deemed to be part of the Registration
Statement pursuant to Rule 430A or Rule 434 of the Rules and Regulations, or any
preliminary prospectus or in the Prospectus (or any amendment or supplement
thereto).
Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director, officer or controlling
person of the Fund, such indemnity agreement is subject to the undertaking of
the Fund in the Registration Statement.
(b) The Underwriter agrees to indemnify and hold harmless the Fund and the
Adviser, their respective directors, each of the Fund's officers who signed the
Registration Statement, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act, against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or in any preliminary
prospectus or in the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), including the
18
<PAGE>
information deemed to be part of the Registration Statement pursuant to Rule
430A or Rule 434 of the Rules and Regulations, or any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Fund by the Underwriter
expressly for use in the Registration Statement (or any amendment thereto) or
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudicial as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for the fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6 (a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses incurred by such indemnified party, as incurred, (i) in such proportion
as is appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the
19
<PAGE>
offering of the Shares pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Fund and the Adviser on the one
hand and of the Underwriter on the other hand in connection with the statements
or omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares pursuant
to this Agreement (before deducting expenses) received by the Fund less the
total underwriting commission received by the Underwriter, and the total
underwriting commission received by the Underwriter, in each case as set forth
on the cover of the Prospectus, or, if Rule 434 is used, the corresponding
location on the term sheet, bear to the aggregate initial public offering price
of the Shares as set forth on such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
20
<PAGE>
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each officer or director of the
Fund and the Adviser, respectively, each director of the Fund who signed the
Registration Statement, and each person, if any, who controls the Fund and the
Adviser within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Fund.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
the Pricing Agreement, or contained in certificates of officers of the Fund or
of the Adviser submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriter or controlling person, or by or on behalf of the Fund or the Adviser
and shall survive delivery of the Shares to the Underwriter.
SECTION 9. Termination of Agreement. (a) The Underwriter, may terminate
this Agreement by written notice to the Fund, at any time at or prior to Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Fund or the Adviser,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States, any outbreak of hostilities or escalation thereof or other calamity or
crisis or any change or development involving a prospective change in national
or international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Underwriter
impracticable to market the Shares or enforce contracts for the sale of the
Shares, or (iii) if trading in the Common Stock has been suspended or materially
limited by the Commission or if trading generally on either the New York Stock
Exchange or the American Stock Exchange or in the NASDAQ National Market has
been suspended or materially limited, or minimum or maximum prices for trading
have been fixed, or maximum ranges for prices for securities have been required,
by any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by Federal or New
York authorities. As used in this subsection (a), the term "Prospectus" means
the Prospectus in the form first used to confirm sales of the Shares.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8
shall survive such termination and remain in full force and effect.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of written telecommunication. Notices to the
Underwriter shall be directed to Merrill
21
<PAGE>
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated at Merrill Lynch
World Headquarters, World Financial Center, North Tower, New York, New York
10281-1201, Attention: [Richard Bruce], Vice President; notices to the Fund or
to the Adviser shall be directed to each of them at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, Attention: Arthur Zeikel, President.
SECTION 11. Parties. This Agreement and the Pricing Agreement shall inure
to the benefit of and be binding upon the Underwriter, the Fund, the Adviser and
their respective successors. Nothing expressed or mentioned in this Agreement
or in the Pricing Agreement is intended or shall be construed to give any
person, firm or corporation, other than the parties hereto and their respective
successors and the controlling persons and officers and directors referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and the Pricing Agreement and all
conditions and provisions hereof are intended to be for the sole and exclusive
benefit of the parties hereto and thereto and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Shares from the Underwriter shall be deemed to be a successor
merely by reason of such purchase.
SECTION 12. Governing Law and Time. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the laws of the
State of New York applicable to agreements made and to be performed in said
State. Specified times of day refer to New York City time.
22
<PAGE>
If the foregoing is in accordance with your understanding of our Agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a single binding agreement between the
Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
DEBT STRATEGIES FUND II, INC.
By: ___________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: ___________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: __________________________
Authorized Officer
23
<PAGE>
Exhibit A
__________ Shares
Debt Strategies Fund II, Inc.
(a Maryland corporation)
Common Stock
(Par Value $.10 Per Share)
PRICING AGREEMENT
-----------------
__________, 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Dear Sirs and Mesdames:
Reference is made to the Purchase Agreement, dated __________, 1998 (the
"Purchase Agreement"), relating to the purchase by Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") of the above
shares of common stock, par value $.10 per share (the "Initial Shares"), of Debt
Strategies Fund II, Inc. (the "Fund") and relating to the option granted to the
Underwriter to purchase up to an additional _________ shares of common stock,
par value $.10 per share, of the Fund to cover over-allotments in connection
with the sale of the Initial Shares (the "Option Shares"). The Initial Shares
and all or any part of the Option Shares collectively are referred to herein as
the "Shares".
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with the
Underwriter as follows:
1. The initial public offering price per share for the Shares,
determined as provided in said Section 2, and the purchase price per share
for the Shares to be paid by the Underwriter, shall be $10.00.
2. Fund Asset Management, L.P. will pay, or arrange for an affiliate
to pay, a commission to the Underwriter in the amount of $ per share for the
Shares purchased by the Underwriter.
A-1
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund in accordance with its terms.
Very truly yours,
DEBT STRATEGIES FUND II, INC.
By:___________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: __________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ___________________________
Authorized Officer
A-2
<PAGE>
EXHIBIT (h)(2)
Revised October 29, 1990
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
-------------------------
Dear Sirs:
In connection with public offerings of securities underwritten by us, or by
a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute your
reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"). Upon our request, you
will advise us of the identity of any dealer to whom you allow such a discount
and any Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
<PAGE>
2. You represent that you are a dealer actually engaged in the investment
banking or securities business and that you are either (i) a member in good
standing of the NASD or (ii) a dealer with its principal place of business
located outside the United States, its territories or possessions and not
registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its territories or its possessions or to persons who are
nationals thereof or residents therein. Non-member foreign dealers and banks
agree, in making any sales, to comply with the NASD's interpretation with
respect to free-riding and withholding. In accepting a selling concession where
we are acting as Representative of the Underwriters, in accepting a reallowance
from us whether or not we are acting as such Representative, and in allowing a
discount to any other person, you agree to comply with the provisions of Section
24 of Article III of the Rules of Fair Practice of the NASD, and, in addition,
if you are a non-member foreign dealer or bank, you agree to comply, as though
you were a member of the NASD, with the provisions of Sections 8 and 36 of
Article III of such Rules of Fair Practice and to comply with Section 25 of
Article III thereof as that Section applies to a non-member foreign dealer or
bank. You represent that you are fully familiar with the above provisions of
the Rules of Fair Practice of the NASD.
3. If the securities have been registered under the Securities Act of 1933
(the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities of
an issuer that is not required to file reports under the Securities Exchange Act
of 1934 (the "1934 Act"), you agree that you will not sell any of the securities
to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such other place
as we may advise), at the offering price less the concession allowed to you, on
such date as we may
2
<PAGE>
advise, by certified or official bank check in New York Clearing House funds (or
such other funds as we may advise), payable to our order, against delivery of
the securities to be purchased by you. We shall have authority to make
appropriate arrangements for payment for and/or delivery through the facility of
The Depository Trust Company or any such other depository or similar facility
for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of securities
covered by this Agreement you will, upon our request as Representative of the
Underwriters, report to us the amount of securities purchased by you which then
remains unsold and will, upon our request, sell to us for the account of one or
more of the Underwriters such amount of such unsold securities as we may
designate, at the offering price less an amount to be determined by us not in
excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered by
this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
3
<PAGE>
11. Any notice from us shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunications to you at the
above address or at such other address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this Agreement,
the price restrictions contained in Paragraph 1 hereof and the provisions of
Paragraphs 6 and 7 hereof shall terminate as to such offering at the close of
business on the 45th day after the securities are released for sale or, as to
any or all such provisions, at such earlier time as we may advise. All other
provisions of this Agreement shall remain operative and in full force and effect
with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New York.
Please confirm your agreement hereto by signing the enclosed duplicate copy
hereof in the place provided below and returning such signed duplicate copy to
us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Fred F. Hessinger
-----------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
- ------------------------------------
Name of Dealer
- ------------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
4
<PAGE>
CUSTODY AGREEMENT
Agreement made as of this day of , 1998, between DEBT STRATEGIES
FUND II, INC., a Maryland corporation organized and existing under
the laws of the State of Maryland, having its principal office and
place of business at 800 Scudders Mill Road, Plainsboro, New Jersey
08536 (hereinafter called the "Fund"), and THE BANK OF NEW YORK, a
New York corporation authorized to do a banking business, having its
principal office and place of business at 48 Wall Street, New York,
New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:
1. "Authorized Persons" shall be deemed to include any person,
whether or not such person is an officer or employee of the Fund,
duly authorized by the Board of Trustees of the Fund to execute any
Certificate, instruction, notice or other instrument on behalf of the
Fund and listed in the Certificate annexed hereto as Appendix A or
such other Certificate as may be received by the Custodian from time
to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury
book-entry system for United States and federal agency securities,
its successor or successors and its nominee or nominees.
3. "Call Option" shall mean an exchange traded option with
respect to Securities other than Stock Index Options, Futures
Contracts, and Futures Contract Options entitling the holder, upon
timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying
Securities.
4. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this
<PAGE>
Agreement to be given to the Custodian which is actually received by
the Custodian and signed on behalf of the Fund by any two Authorized
Persons, and the term Certificate shall also include Instructions.
5. "Clearing Member" shall mean a registered broker-dealer which
is a clearing member under the rules of O.C.C. and a member of a
national securities exchange qualified to act as a custodian for an
investment company, or any broker-dealer reasonably believed by the
Custodian to be such a clearing member.
6. "Collateral Account" shall mean a segregated account so
denominated which is specifically allocated to a Series and pledged
to the Custodian as security for, and in consideration of, the
Custodian's issuance of (a) any Put Option guarantee letter or
similar document described in paragraph 8 of Article V herein, or (b)
any receipt described in Article V or VIII herein.
7. "Composite Currency Unit" shall mean the European Currency
Unit or any other composite unit consisting of the aggregate of
specified amounts of specified Currencies as such unit may be
constituted from time to time.
8. "Covered Call Option" shall mean an exchange traded option
entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer
thereof the specified underlying Securities (excluding Futures
Contracts) which are owned by the writer thereof and subject to
appropriate restrictions.
9. "Currency" shall mean money denominated in a lawful currency
of any country or the European Currency Unit.
10. "Depository" shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and
Exchange Commission, its successor or successors and its nominee or
nominees. The term "Depository" shall further mean and include any
other person authorized to act as a depository under the Investment
Company Act of 1940, its successor or successors and its nominee or
nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Directors specifically approving deposits
therein by the Custodian.
11. "Financial Futures Contract" shall mean the firm commitment
to buy or sell fixed income securities including, without limitation,
U.S. Treasury Bills, U.S. Treasury Notes, U.S. Treasury Bonds,
domestic bank certificates of deposit, and Eurodollar certificates of
deposit, during a specified month at an agreed upon price.
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12. "Futures Contract" shall mean a Financial Futures Contract
and/or Stock Index Futures Contracts.
13. "Futures Contract Option" shall mean an option with respect
to a Futures Contract.
14. "FX Transaction" shall mean any transaction for the purchase
by one party of an agreed amount in one Currency against the sale by
it to the other party of an agreed amount in another Currency.
15. "Instructions" shall mean instructions communications
transmitted by electronic or telecommunications media including
S.W.I.F.T., computer-to-computer interface, dedicated transmission
line, facsimile transmission (which may be signed by an Authorized
Person or unsigned) and tested telex.
16. "Margin Account" shall mean a segregated account in the name
of a broker, dealer, futures commission merchant, or a Clearing
Member, or in the name of the Fund for the benefit of a broker,
dealer, futures commission merchant, or Clearing Member, or
otherwise, in accordance with an agreement between the Fund, the
Custodian and a broker, dealer, futures commission merchant or a
Clearing Member (a "Margin Account Agreement"), separate and distinct
from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in
connection with such transactions as the Fund may from time to time
determine. Securities held in the Book-Entry System or the Depository
shall be deemed to have been deposited in, or withdrawn from, a
Margin Account upon the Custodian's effecting an appropriate entry in
its books and records.
17. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations
issued or guaranteed as to interest and principal by the government
of the United States or agencies or instrumentalities thereof, any
tax, bond or revenue anticipation note issued by any state or
municipal government or public authority, commercial paper,
certificates of deposit and bankers' acceptances, repurchase
agreements with respect to the same and bank time deposits, where the
purchase and sale of such securities normally requires settlement in
federal funds on the same day as such purchase or sale.
18. "O.C.C." shall mean the Options Clearing Corporation, a
clearing agency registered under Section 17A of the Securities
Exchange Act of 1934, its successor or successors, and its nominee or
nominees.
19. "Option" shall mean a Call Option, Covered Call Option,
Stock Index Option and/or a Put Option.
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20. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Authorized Person or from a person
reasonably believed by the Custodian to be an Authorized Person.
21. "Put Option" shall mean an exchange traded option with
respect to Securities other than Stock Index Options, Futures
Contracts, and Futures Contract Options entitling the holder, upon
timely exercise and tender of the specified underlying Securities, to
sell such Securities to the writer thereof for the exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement
pursuant to which the Fund sells Securities and agrees to repurchase
such Securities at a described or specified date and price.
23. "Security" shall be deemed to include, without limitation,
Money Market Securities, Call Options, Put Options, Stock Index
Options, Stock Index Futures Contracts, Stock Index Futures Contract
Options, Financial Futures Contracts, Financial Futures Contract
Options, Reverse Repurchase Agreements, common stocks and other
securities having characteristics similar to common stocks, preferred
stocks, debt obligations issued by state or municipal governments and
by public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial
development bonds), bonds, debentures, notes, mortgages or other
obligations, and any certificates, receipts, warrants or other
instruments representing rights to receive, purchase, sell or
subscribe for the same, or evidencing or representing any other
rights or interest therein, or any property or assets, and agreements
representing corporate loans and interests therein as defined from
time to time in the Fund's prospectus or statement of additional
information.
24. "Senior Security Account" shall mean an account maintained
and specifically allocated to a Series under the terms of this
Agreement as a segregated account, by recorda- tion or otherwise,
within the custody account in which certain Securities and/or other
assets of the Fund specifically allocated to such Series shall be
deposited and withdrawn from time to time in accordance with
Certificates received by the Custodian in connection with such
transactions as the Fund may from time to time determine.
25. "Series" shall mean the various portfolios, if any, of the
Fund listed on Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of capital stock of the Fund,
each of which is, in the case of a Fund having Series, allocated to a
particular Series.
27. "Stock Index Futures Contract" shall mean a bilateral
agreement pursuant to which the parties agree to
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take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the value of a particular
stock index at the close of the last business day of the contract and
the price at which the futures contract is originally struck.
28. "Stock Index Option" shall mean an exchange traded option
entitling the holder, upon timely exercise, to receive an amount of
cash determined by reference to the difference between the exercise
price and the value of the index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as
custodian of the Securities and money at any time owned by the Fund
during the period of this Agreement.
2. The Custodian hereby accepts appointment as such custodian
and agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article
and in Article VIII, the Fund will deliver or cause to be delivered
to the Custodian all Securities and all money owned by it, at any
time during the period of this Agreement, and shall specify with
respect to such Securities and money the Series to which the same are
specifically allocated. The Custodian shall segregate, keep and
maintain the assets of the Series separate and apart. The Custodian
will not be responsible for any Securities and money not actually
received by it. The Custodian will be entitled to reverse any credits
made on the Fund's behalf where such credits have been previously
made and money is not finally collected. The Fund shall deliver to
the Custodian a certified resolution of the Board of Directors of the
Fund, substantially in the form of Exhibit A hereto, approving,
authorizing and instructing the Custodian on a continuous and
on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the
same are specifically allocated and to utilize the Book-Entry System
to the extent possible in connection with its performance hereunder,
including, without limitation, in connection with settlements of
purchases and sales of Securities, loans of Securities and deliveries
and returns of Securities collateral. Prior to a deposit of
Securities specifically allocated to a Series in
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the Depository, the Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in
the form of Exhibit B hereto, approving, authorizing and instructing
the Custodian on a continuous and ongoing basis until instructed to
the contrary by a Certificate actually received by the Custodian to
deposit in the Depository all Securities specifically allocated to
such Series eligible for deposit therein, and to utilize the
Depository to the extent possible with respect to such Securities in
connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of
Securities, loans of Securities, and deliveries and returns of
Securities collateral. Securities and money deposited in either the
Book-Entry System or the Depository will be represented in accounts
which include only assets held by the Custodian for customers,
including, but not limited to, accounts in which the Custodian acts
in a fiduciary or representative capacity and will be specifically
allocated on the Custodian's books to the separate account for the
applicable Series. Prior to the Custodian's accepting, utilizing and
acting with respect to Clearing Member confirmations for Options and
transactions in Options for a Series as provided in this Agreement,
the Custodian shall have received a certified resolution of the
Fund's Board of Directors, substantially in the form of Exhibit C
hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a
Certificate actually received by the Custodian, to accept, utilize
and act in accordance with such confirmations as provided in this
Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts,
in the name of each Series, and shall credit to the separate account
for each Series all money received by it for the account of the Fund
with respect to such Series. Money credited to a separate account for
a Series shall be disbursed by the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and
address of the person to whom the payment is to be made, the Series
account from which payment is to be made and the purpose for which
payment is to be made; or
(c) In payment of the fees and in reimbursement of the
expenses and liabilities of the Custodian attributable to such
Series.
3. Promptly after the close of business on each day, the
Custodian shall furnish the Fund with confirmations and a summary, on
a per Series basis, of all transfers to or from the account of the
Fund for a Series, either hereunder or with any co-custodian or
sub-custodian appointed in accordance with
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this Agreement during said day. Where Securities are transferred to
the account of the Fund for a Series, the Custodian shall also by
book-entry or otherwise identify as belonging to such Series a
quantity of Securities in a fungible bulk of Securities registered in
the name of the Custodian (or its nominee) or shown on the
Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian
shall furnish the Fund with a detailed statement, on a per Series
basis, of the Securities and money held by the Custodian for the
Fund.
4. Except as otherwise provided in paragraph 7 of this Article
and in Article VIII, all Securities held by the Custodian hereunder,
which are issued or issuable only in bearer form, except such
Securities as are held in the Book-Entry System, shall be held by the
Custodian in that form; all other Securities held hereunder may be
registered in the name of the Fund, in the name of any duly appointed
registered nominee of the Custodian as the Custodian may from time to
time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or
nominees. The Fund agrees to furnish to the Custodian appropriate
instruments to enable the Custodian to hold or deliver in proper form
for transfer, or to register in the name of its registered nominee or
in the name of the Book-Entry System or the Depository any Securities
which it may hold hereunder and which may from time to time be
registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in
the Book-Entry System or in the Depository in a separate account in
the name of such Series physically segregated at all times from those
of any other person or persons.
5. Except as otherwise provided in this Agreement and unless
otherwise instructed to the contrary by a Certificate, the Custodian
by itself, or through the use of the Book-Entry System or the
Depository with respect to Securities held hereunder and therein
deposited, shall with respect to all Securities held for the Fund
hereunder in accordance with preceding paragraph 4:
(a) Collect all income, dividends and distributions
due or payable;
(b) Give notice to the Fund and present payment and collect
the amount payable upon such Securities which are called, but only if
either (i) the Custodian receives a written notice of such call, or
(ii) notice of such call appears in one or more of the publications
listed in Appendix C annexed hereto, which may be amended at any time
by the Custodian without the prior notification or consent of the
Fund;
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(c) Present for payment and collect the amount payable upon
all Securities which mature;
(d) Surrender Securities in temporary form for definitive
Securities;
(e) Execute, as custodian, any necessary declarations or
certificates of ownership under the Federal Income Tax Laws or the
laws or regulations of any other taxing authority now or hereafter in
effect;
(f) Hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the
account of a Series, all rights and similar securities issued with
respect to any Securities held by the Custodian for such Series
hereunder; and
(g) Deliver to the Fund all notices, proxies, proxy
soliciting materials, consents and other written information
(including, without limitation, notices of tender offers and exchange
offers, pendency of calls, maturities of Securities and expiration of
rights) relating to Securities held pursuant to this Agrement which
are actually received by the Custodian, such proxies and other
similar materials to be executed by the registered owner (if
Securities are registered otherwise than in the name of the Fund),
but without indicating the manner in which proxies or consents are to
be voted.
6. Upon receipt of a Certificate and not otherwise, the
Custodian, directly or through the use of the Book-Entry System or
the Depository, shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authorizations, and
any other instruments whereby the authority of the Fund as owner of
any Securities held by the Custodian hereunder for the Series
specified in such Certificate may be exercised;
(b) Deliver any Securities held by the Custodian hereunder
for the Series specified in such Certificate in exchange for other
Securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or
recapitalization of any corporation, or the exercise of any
conversion privilege and receive and hold hereunder specifically
allocated to such Series any cash or other Securities received in
exchange;
(c) Deliver any Securities held by the Custodian hereunder
for the Series specified in such Certificate to any protective
committee, reorganization committee or other person in connection
with the reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any
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corporation, and receive and hold hereunder specifically allocated to
such Series such certificates of deposit, interim receipts or other
instruments or documents as may be issued to it to evidence such
delivery;
(d) Make such transfers or exchanges of the assets of the
Series specified in such Certificate, and take such other steps as
shall be stated in such Certificate to be for the purpose of
effectuating any duly authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Fund; and
(e) Present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article
which may be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any
instrument or certificate representing any Futures Contract, any
Option, or any Futures Contract Option until after it shall have
determined, or shall have received a Certificate from the Fund
stating, that any such instruments or certificates are available. The
Fund shall deliver to the Custodian such a Certificate no later than
the business day preceding the availability of any such instrument or
certificate. Prior to such availability, the Custodian shall comply
with Section 17(f) of the Investment Company Act of 1940, as amended,
in connection with the purchase, sale, settlement, closing-out or
writing of Futures Contracts, Options, or Futures Contract Options by
making payments or deliveries specified in Certificates received by
the Custodian in connection with any such purchase, sale, writing,
settlement or closing-out upon its receipt from a broker, dealer, or
futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by
brokers, dealers, or futures commission merchants with respect to
such Futures Contracts, Options, or Futures Contract Options, as the
case may be, confirming that such Security is held by such broker,
dealer or futures commission merchant, in book-entry form or
otherwise, in the name of the Custodian (or any nominee of the
Custodian) as custodian for the Fund, provided, however, that
notwithstanding the foregoing, payments to or deliveries from the
Margin Account, and payments with respect to Securities to which a
Margin Account relates, shall be made in accordance with the terms
and conditions of the Margin Account Agreement. Whenever any such
instruments or certificates are available, the Custodian shall,
notwithstanding any provision in this Agreement to the contrary, make
payment for any Futures Contract, Option, or Futures Contract Option
for which such instruments or such certificates are available only
against the delivery to the Custodian of such instrument or such
certificate, and deliver any Futures Contract, Option or
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Futures Contract Option for which such instruments or such
certificates are available only against receipt by the Custodian of
payment therefor. Any such instrument or certificate delivered to the
Custodian shall be held by the Custodian hereunder in accordance
with, and subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other
than a purchase of an Option, a Futures Contract, or a Futures
Contract Option, the Fund shall deliver to the Custodian (i) with
respect to each purchase of Securities which are not Money Market
Securities, a Certificate, and (ii) with respect to each purchase of
Money Market Securities, a Certificate or Oral Instructions,
specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name
of the issuer and the title of the Securities; (c) the number of
shares or the principal amount purchased and accrued interest, if
any; (d) the date of purchase and settlement; (e) the purchase price
per unit; (f) the total amount payable upon such purchase; (g) the
name of the person from whom or the broker through whom the purchase
was made, and the name of the clearing broker, if any; and (h) the
name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund, pay
to the broker specified in the Certificate out of the money held for
the account of such Series the total amount payable upon such
purchase, provided that the same conforms to the total amount payable
as set forth in such Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other
than a sale of any Option, Futures Contract, Futures Contract Option,
or any Reverse Repurchase Agreement, the Fund shall deliver to the
Custodian (i) with respect to each sale of Securities which are not
Money Market Securities, a Certificate, and (ii) with respect to each
sale of Money Market Securities, a Certificate or Oral Instructions,
specifying with respect to each such sale: (a) the Series to which
such Securities were specifically allocated; (b) the name of the
issuer and the title of the Security; (c) the number of shares or
principal amount sold, and accrued interest, if any; (d) the date of
sale; (e) the sale price per unit; (f) the total amount payable to
the Fund upon such sale; (g) the name of the broker through whom or
the person to whom the sale was made, and the name of the clearing
broker, if any; and (h) the name of the broker to whom the Securities
are to be delivered. The Custodian shall deliver the Securities
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specifically allocated to such Series to the broker specified in the
Certificate against payment of the total amount payable to the Fund
upon such sale, provided that the same conforms to the total amount
payable as set forth in such Certificate or Oral Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the
Fund shall deliver to the Custodian a Certificate specifying with
respect to each Option purchased: (a) the Series to which such Option
is specifically allocated; (b) the type of Option (put or call); (c)
the name of the issuer and the title and number of shares subject to
such Option or, in the case of a Stock Index Option, the stock index
to which such Option relates and the number of Stock Index Options
purchased; (d) the expiration date; (e) the exercise price; (f) the
dates of purchase and settlement; (g) the total amount payable by the
Fund in connection with such purchase; (h) the name of the Clearing
Member through whom such Option was purchased; and (i) the name of
the broker to whom payment is to be made. The Custodian shall pay,
upon receipt of a Clearing Member's statement confirming the purchase
of such Option held by such Clearing Member for the account of the
Custodian (or any duly appointed and registered nominee of the
Custodian) as custodian for the Fund, out of money held for the
account of the Series to which such Option is to be specifically
allocated, the total amount payable upon such purchase to the
Clearing Member through whom the purchase was made, provided that the
same conforms to the total amount payable as set forth in such
Certificate.
2. Promptly after the sale of any Option purchased by the Fund
pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to each such sale:
(a) the Series to which such Option was specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer and the
title and number of shares subject to such Option or, in the case of
a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e)
the sale price; (f) the date of settlement; (g) the total amount
payable to the Fund upon such sale; and (h) the name of the Clearing
Member through whom the sale was made. The Custodian shall consent to
the delivery of the Option sold by the Clearing Member which
previously supplied the confirmation described in preceding paragraph
1 of this Article with respect to such Option against payment to the
Custodian of the total amount payable to the Fund, provided that the
same conforms to the total amount payable as set forth in such
Certificate.
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3. Promptly after the exercise by the Fund of any Call Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall
deliver to the Custodian a Certificate specifying with respect to
such Call Option: (a) the Series to which such Call Option was
specifically allocated; (b) the name of the issuer and the title and
number of shares subject to the Call Option; (c) the expiration date;
(d) the date of exercise and settlement; (e) the exercise price per
share; (f) the total amount to be paid by the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such
Call Option was exercised. The Custodian shall, upon receipt of the
Securities underlying the Call Option which was exercised, pay out of
the money held for the account of the Series to which such Call
Option was specifically allocated the total amount payable to the
Clearing Member through whom the Call Option was exercised, provided
that the same conforms to the total amount payable as set forth in
such Certificate.
4. Promptly after the exercise by the Fund of any Put Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall
deliver to the Custodian a Certificate specifying with respect to
such Put Option: (a) the Series to which such Put Option was
specifically allocated; (b) the name of the issuer and the title and
number of shares subject to the Put Option; (c) the expiration date;
(d) the date of exercise and settlement; (e) the exercise price per
share; (f) the total amount to be paid to the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such
Put Option was exercised. The Custodian shall, upon receipt of the
amount payable upon the exercise of the Put Option, deliver or direct
the Depository to deliver the Securities specifically allocated to
such Series, provided the same conforms to the amount payable to the
Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index
Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund
shall deliver to the Custodian a Certificate specifying with respect
to such Stock Index Option: (a) the Series to which such Stock Index
Option was specifically allocated; (b) the type of Stock Index Option
(put or call); (c) the number of Options being exercised; (d) the
stock index to which such Option relates; (e) the expiration date;
(f) the exercise price; (g) the total amount to be received by the
Fund in connection with such exercise; and (h) the Clearing Member
from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with
respect to such Covered Call Option: (a) the Series for which such
Covered Call Option was written; (b) the name of the issuer and the
title and number of shares for which the Covered Call Option was
written and which underlie the same; (c) the expiration date; (d) the
exercise price; (e) the premium to be received by the Fund; (f) the
date such
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Covered Call Option was written; and (g) the name of the Clearing
Member through whom the premium is to be received. The Custodian
shall deliver or cause to be delivered, in exchange for receipt of
the premium specified in the Certificate with respect to such Covered
Call Option, such receipts as are required in accordance with the
customs prevailing among Clearing Members dealing in Covered Call
Options and shall impose, or direct the Depository to impose, upon
the underlying Securities specified in the Certificate specifically
allocated to such Series such restrictions as may be required by such
receipts. Notwithstanding the foregoing, the Custodian has the right,
upon prior written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the Custodian
and not deposited with the Depository underlying a Covered Call
Option.
7. Whenever a Covered Call Option written by the Fund and
described in the preceding paragraph of this Article is exercised,
the Fund shall promptly deliver to the Custodian a Certificate
instructing the Custodian to deliver, or to direct the Depository to
deliver, the Securities subject to such Covered Call Option and
specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of
shares subject to the Covered Call Option; (c) the Clearing Member to
whom the underlying Securities are to be delivered; and (d) the total
amount payable to the Fund upon such delivery. Upon the return and/or
cancellation of any receipts delivered pursuant to paragraph 6 of
this Article, the Custodian shall deliver, or direct the Depository
to deliver, the underlying Securities as specified in the Certificate
against payment of the amount to be received as set forth in such
Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with
respect to such Put Option: (a) the Series for which such Put Option
was written; (b) the name of the issuer and the title and number of
shares for which the Put Option is written and which underlie the
same; (c) the expiration date; (d) the exercise price; (e) the
premium to be received by the Fund; (f) the date such Put Option is
written; (g) the name of the Clearing Member through whom the premium
is to be received and to whom a Put Option guarantee letter is to be
delivered; (h) the amount of cash, and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be
deposited in the Senior Security Account for such Series; and (i) the
amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be deposited into the Collateral Account
for such Series. The Custodian shall, after making the deposits into
the Collateral Account specified in the Certificate, issue a Put
Option guarantee letter substantially in the form utilized by the
Custodian on the date hereof, and deliver the same to the Clearing
Member
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specified in the Certificate against receipt of the premium specified
in said Certificate. Notwithstanding the foregoing, the Custodian
shall be under no obligation to issue any Put Option guarantee letter
or similar document if it is unable to make any of the
representations contained therein.
9. Whenever a Put Option written by the Fund and described in
the preceding paragraph is exercised, the Fund shall promptly deliver
to the Custodian a Certificate specifying: (a) the Series to which
such Put Option was written; (b) the name of the issuer and title and
number of shares subject to the Put Option; (c) the Clearing Member
from whom the underlying Securities are to be received; (d) the total
amount payable by the Fund upon such delivery; (e) the amount of cash
and/or the amount and kind of Securities specifically allocated to
such Series to be withdrawn from the Collateral Account for such
Series and (f) the amount of cash and/or the amount and kind of
Securities, specifically allocated to such Series, if any, to be
withdrawn from the Senior Security Account. Upon the return and/or
cancellation of any Put Option guarantee letter or similar document
issued by the Custodian in connection with such Put Option, the
Custodian shall pay out of the money held for the account of the
Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as
set forth in such Certificate against delivery of such Securities,
and shall make the withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with
respect to such Stock Index Option: (a) the Series for which such
Stock Index Option was written; (b) whether such Stock Index Option
is a put or a call; (c) the number of options written; (d) the stock
index to which such Option relates; (e) the expiration date; (f) the
exercise price; (g) the Clearing Member through whom such Option was
written; (h) the premium to be received by the Fund; (i) the amount
of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior
Security Account for such Series; (j) the amount of cash and/or the
amount and kind of Securities, if any, specifically allocated to such
Series to be deposited in the Collateral Account for such Series; and
(k) the amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in a
Margin Account, and the name in which such account is to be or has
been established. The Custodian shall, upon receipt of the premium
specified in the Certificate, make the deposits, if any, into the
Senior Security Account specified in the Certificate, and either (1)
deliver such receipts, if any, which the Custodian has specifically
agreed to issue, which are in accordance with the customs prevailing
among Clearing Members in Stock Index Options and make the deposits
into the Collateral Account
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specified in the Certificate, or (2) make the deposits into the
Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and
described in the preceding paragraph of this Article is exercised,
the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Stock Index Option: (a) the Series
for which such Stock Index Option was written; (b) such information
as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index
Option is being exercised; (d) the total amount payable upon such
exercise, and whether such amount is to be paid by or to the Fund;
(e) the amount of cash and/or amount and kind of Securities, if any,
to be withdrawn from the Margin Account; and (f) the amount of cash
and/or amount and kind of Securities, if any, to be withdrawn from
the Senior Security Account for such Series; and the amount of cash
and/or the amount and kind of Securities, if any, to be withdrawn
from the Collateral Account for such Series. Upon the return and/or
cancellation of the receipt, if any, delivered pursuant to the
preceding paragraph of this Article, the Custodian shall pay out of
the money held for the account of the Series to which such Stock
Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as
specified therein.
12. Whenever the Fund purchases any Option identical to a
previously written Option described in paragraphs, 6, 8 or 10 of this
Article in a transaction expressly designated as a "Closing Purchase
Transaction" in order to liquidate its position as a writer of an
Option, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to the Option being purchased:
(a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the issuer
and the title and number of shares subject to the Option, or, in the
case of a Stock Index Option, the stock index to which such Option
relates and the number of Options held; (d) the exercise price; (e)
the premium to be paid by the Fund; (f) the expiration date; (g) the
type of Option (put or call); (h) the date of such purchase; (i) the
name of the Clearing Member to whom the premium is to be paid; and
(j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin
Account, or the Senior Security Account for such Series. Upon the
Custodian's payment of the premium and the return and/or cancellation
of any receipt issued pursuant to paragraphs 6, 8 or 10 of this
Article with respect to the Option being liquidated through the
Closing Purchase Transaction, the Custodian shall remove, or direct
the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
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13. Upon the expiration, exercise or consummation of a Closing
Purchase Transaction with respect to any Option purchased or written
by the Fund and described in this Article, the Custodian shall delete
such Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein, and upon the return and/or
cancellation of any receipts issued by the Custodian, shall make such
withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a
Certificate received in connection with such expiration, exercise, or
consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the
Fund shall deliver to the Custodian a Certificate specifying with
respect to such Futures Contract, (or with respect to any number of
identical Futures Contract(s)): (a) the Series for which the Futures
Contract is being entered; (b) the category of Futures Contract (the
name of the underlying stock index or financial instrument); (c) the
number of identical Futures Contracts entered into; (d) the delivery
or settlement date of the Futures Contract(s); (e) the date the
Futures Contract(s) was (were) entered into and the maturity date;
(f) whether the Fund is buying (going long) or selling (going short)
on such Futures Contract(s); (g) the amount of cash and/or the amount
and kind of Securities, if any, to be deposited in the Senior
Security Account for such Series; (h) the name of the broker, dealer,
or futures commission merchant through whom the Futures Contract was
entered into; and (i) the amount of fee or commission, if any, to be
paid and the name of the broker, dealer, or futures commission
merchant to whom such amount is to be paid. The Custodian shall make
the deposits, if any, to the Margin Account in accordance with the
terms and conditions of the Margin Account Agreement. The Custodian
shall make payment out of the money specifically allocated to such
Series of the fee or commission, if any, specified in the Certificate
and deposit in the Senior Security Account for such Series the amount
of cash and/or the amount and kind of Securities specified in said
Certificate.
2. (a) Any variation margin payment or similar payment required
to be made by the Fund to a broker, dealer, or futures commission
merchant with respect to an outstanding Futures Contract, shall be
made by the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a
broker, dealer, or futures commission merchant to the
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Fund with respect to an outstanding Futures Contract, shall be
received and dealt with by the Custodian in accordance with the terms
and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder
is retained by the Fund until delivery or settlement is made on such
Futures Contract, the Fund shall deliver to the Custodian a
Certificate specifying: (a) the Futures Contract and the Series to
which the same relates; (b) with respect to a Stock Index Futures
Contract, the total cash settlement amount to be paid or received,
and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the broker,
dealer, or futures commission merchant to or from whom payment or
delivery is to be made or received; and (d) the amount of cash and/or
Securities to be withdrawn from the Senior Security Account for such
Series. The Custodian shall make the payment or delivery specified in
the Certificate, and delete such Futures Contract from the statements
delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to
offset a Futures Contract held by the Custodian hereunder, the Fund
shall deliver to the Custodian a Certificate specifying: (a) the
items of information required in a Certificate described in paragraph
1 of this Article, and (b) the Futures Contract being offset. The
Custodian shall make payment out of the money specifically allocated
to such Series of the fee or commission, if any, specified in the
Certificate and delete the Futures Contract being offset from the
statements delivered to the Fund pursuant to paragraph 3 of Article
III herein, and make such withdrawals from the Senior Security
Account for such Series as may be specified in such Certificate. The
withdrawals, if any, to be made from the Margin Account shall be made
by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
5. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a
futures commission merchant upon receipt of a Certificate from the
Fund specifying: (a) the name of the futures commission merchant; (b)
the specific cash and Securities to be delivered; (c) the date of
such delivery; and (d) the date of the agreement between the Fund and
such futures commission merchant entered pursuant to Rule 17f-6 under
the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall constitute (x) a representation and
warranty by the Fund that the Rule 17f-6 agreement has been duly
authorized, executed and delivered by the Fund and the futures
commission merchant and complies with Rule 17f-6, and (y) an
agreement by the Fund that the Custodian shall not be liable for the
acts or omissions of any such futures commission merchant.
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ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by
the Fund, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to such Futures Contract Option:
(a) the Series to which such Option is specifically allocated; (b)
the type of Futures Contract Option (put or call); (c) the type of
Futures Contract and such other information as may be necessary to
identify the Futures Contract underlying the Futures Contract Option
purchased; (d) the expiration date; (e) the exercise price; (f) the
dates of purchase and settlement; (g) the amount of premium to be
paid by the Fund upon such purchase; (h) the name of the broker or
futures commission merchant through whom such option was purchased;
and (i) the name of the broker, or futures commission merchant, to
whom payment is to be made. The Custodian shall pay out of the money
specifically allocated to such Series, the total amount to be paid
upon such purchase to the broker or futures commissions merchant
through whom the purchase was made, provided that the same conforms
to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall
promptly deliver to the Custodian a Certificate specifying with
respect to each such sale: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the type of Futures
Contract Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the Futures
Contract underlying the Futures Contract Option; (d) the date of
sale; (e) the sale price; (f) the date of settlement; (g) the total
amount payable to the Fund upon such sale; and (h) the name of the
broker or futures commission merchant through whom the sale was made.
The Custodian shall consent to the cancellation of the Futures
Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the
total amount payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund
pursuant to paragraph 1 is exercised by the Fund, the Fund shall
promptly deliver to the Custodian a Certificate specifying: (a) the
Series to which such Futures Contract Option was specifically
allocated; (b) the particular Futures Contract Option (put or call)
being exercised; (c) the type of Futures Contract underlying the
Futures Contract Option; (d) the date of exercise; (e)the name of the
broker or futures commission merchant through whom the Futures
Contract Option is exercised; (f) the net total amount, if any,
payable by the Fund; (g) the amount, if any, to be received by the
Fund; and
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(h) the amount of cash and/or the amount and kind of Securities to be
deposited in the Senior Security Account for such Series. The
Custodian shall make, out of the money and Securities specifically
allocated to such Series, the payments, if any, and the deposits, if
any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account
shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with
respect to such Futures Contract Option: (a) the Series for which
such Futures Contract Option was written; (b) the type of Futures
Contract Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the Futures
Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the
Fund; (g) the name of the broker or futures commission merchant
through whom the premium is to be received; and (h) the amount of
cash and/or the amount and kind of Securities, if any, to be
deposited in the Senior Security Account for such Series. The
Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the money and Securities specifically
allocated to such Series the deposits into the Senior Security
Account, if any, as specified in the Certificate. The deposits, if
any, to be made to the Margin Account shall be made by the Custodian
in accordance with the terms and conditions of the Margin Account
Agreement.
5. Whenever a Futures Contract Option written by the Fund which
is a call is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such
Futures Contract Option was specifically allocated; (b) the
particular Futures Contract Option exercised; (c) the type of Futures
Contract underlying the Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any,
payable to the Fund upon such exercise; (f) the net total amount, if
any, payable by the Fund upon such exercise; and (g) the amount of
cash and/or the amount and kind of Securities to be deposited in the
Senior Security Account for such Series. The Custodian shall, upon
its receipt of the net total amount payable to the Fund, if any,
specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in
the Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the terms
and conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written by the
Fund and which is a put is exercised, the Fund shall
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promptly deliver to the Custodian a Certificate specifying: (a) the
Series to which such Option was specifically allocated; (b) the
particular Futures Contract Option exercised; (c) the type of Futures
Contract underlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures
Contract Option is exercised; (e) the net total amount, if any,
payable to the Fund upon such exercise; (f) the net total amount, if
any, payable by the Fund upon such exercise; and (g) the amount and
kind of Securities and/or cash to be withdrawn from or deposited in,
the Senior Security Account for such Series, if any. The Custodian
shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the money and
Securities specifically allocated to such Series, the payments, if
any, and the deposits, if any, into the Senior Security Account as
specified in the Certificate. The deposits to and/or withdrawals from
the Margin Account, if any, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account
Agreement.
7. Whenever the Fund purchases any Futures Contract Option
identical to a previously written Futures Contract Option described
in this Article in order to liquidate its position as a writer of
such Futures Contract Option, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to the Futures
Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing
transaction; (c) the type of Futures Contract and such other
information as may be necessary to identify the Futures Contract
underlying the Futures Option Contract; (d) the exercise price; (e)
the premium to be paid by the Fund; (f) the expiration date; (g) the
name of the broker or futures commission merchant to whom the premium
is to be paid; and (h) the amount of cash and/or the amount and kind
of Securities, if any, to be withdrawn from the Senior Security
Account for such Series. The Custodian shall effect the withdrawals
from the Senior Security Account specified in the Certificate. The
withdrawals, if any, to be made from the Margin Account shall be made
by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or
purchased by the Fund and described in this Article, the Custodian
shall (a) delete such Futures Contract Option from the statements
delivered to the Fund pursuant to paragraph 3 of Article III herein
and, (b) make such withdrawals from and/or in the case of an exercise
such deposits into the Senior Security Account as may be specified in
a Certificate. The deposits to and/or withdrawals from the
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Margin Account, if any, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise
of a Futures Contract Option described in this Article shall be
subject to Article VI hereof.
10. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a
futures commission merchant upon receipt of a Certificate from the
Fund specifying: (a) the name of the futures commission merchant; (b)
the specific cash and Securities to be delivered; (c) the date of
such delivery; and (d) the date of the agreement between the Fund and
such futures commission merchant entered pursuant to Rule 17f-6 under
the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall constitute (x) a representation and
warranty by the Fund that the Rule 17f-6 agreement has been duly
authorized, executed and delivered by the Fund and the futures
commission merchant and complies with Rule 17f-6, and (y) an
agreement by the Fund that the Custodian shall not be liable for the
acts or omissions of any such futures commission merchant.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the
Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series for which such short sale was made; (b)
the name of the issuer and the title of the Security; (c) the number
of shares or principal amount sold, and accrued interest or
dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit; (f) the total amount credited to the Fund upon
such sale, if any, (g) the amount of cash and/or the amount and kind
of Securities, if any, which are to be deposited in a Margin Account
and the name in which such Margin Account has been or is to be
established; (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in a Senior Security Account, and
(i) the name of the broker through whom such short sale was made. The
Custodian shall upon its receipt of a statement from such broker
confirming such sale and that the total amount credited to the Fund
upon such sale, if any, as specified in the Certificate is held by
such broker for the account of the Custodian (or any nominee of the
Custodian) as custodian of the Fund, issue a receipt or make the
deposits into the Margin Account and the Senior Security Account
specified in the Certificate.
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2. In connection with the closing-out of any short sale, the
Fund shall promptly deliver to the Custodian a Certificate specifying
with respect to each such closing-out: (a) the Series for which such
transaction is being made; (b) the name of the issuer and the title
of the Security; (c) the number of shares or the principal amount,
and accrued interest or dividends, if any, required to effect such
closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the
net total amount payable to the Fund upon such closing-out; (g) the
net total amount payable to the broker upon such closing-out; (h) the
amount of cash and the amount and kind of Securities to be withdrawn,
if any, from the Margin Account; (i) the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from the
Senior Security Account; and (j) the name of the broker through whom
the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such
closing-out, and the return and/or cancellation of the receipts, if
any, issued by the Custodian with respect to the short sale being
closed-out, pay out of the money held for the account of the Fund to
the broker the net total amount payable to the broker, and make the
withdrawals from the Margin Account and the Senior Security Account,
as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters into a Reverse Repurchase
Agreement with respect to Securities and money held by the Custodian
hereunder, the Fund shall deliver to the Custodian a Certificate, or
in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions specifying: (a) the
Series for which the Reverse Repurchase Agreement is entered; (b) the
total amount payable to the Fund in connection with such Reverse
Repurchase Agreement and specifically allocated to such Series; (c)
the broker or dealer through or with whom the Reverse Repurchase
Agreement is entered; (d) the amount and kind of Securities to be
delivered by the Fund to such broker or dealer; (e) the date of such
Reverse Repurchase Agreement; and (f) the amount of cash and/or the
amount and kind of Securities, if any, specifically allocated to such
Series to be deposited in a Senior Security Account for such Series
in connection with such Reverse Repurchase Agreement. The Custodian
shall, upon receipt of the total amount payable to the Fund specified
in the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior Security
Account, specified in such Certificate or Oral Instructions.
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2. Upon the termination of a Reverse Repurchase Agreement
described in preceding paragraph 1 of this Article, the Fund shall
promptly deliver a Certificate or, in the event such Reverse
Repurchase Agreement is a Money Market Security, a Certificate or
Oral Instructions to the Custodian specifying: (a) the Reverse
Repurchase Agreement being terminated and the Series for which same
was entered; (b) the total amount payable by the Fund in connection
with such termination; (c) the amount and kind of Securities to be
received by the Fund and specifically allocated to such Series in
connection with such termination; (d) the date of termination; (e)
the name of the broker or dealer with or through whom the Reverse
Repurchase Agreement is to be terminated; and (f) the amount of cash
and/or the amount and kind of Securities to be withdrawn from the
Senior Securities Account for such Series. The Custodian shall, upon
receipt of the amount and kind of Securities to be received by the
Fund specified in the Certificate or Oral Instructions, make the
payment to the broker or dealer, and the withdrawals, if any, from
the Senior Security Account, specified in such Certificate or Oral
Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall
deliver or cause to be delivered to the Custodian a Certificate
specifying with respect to each such loan: (a) the Series to which
the loaned Securities are specifically allocated; (b) the name of the
issuer and the title of the Securities, (c) the number of shares or
the principal amount loaned, (d) the date of loan and delivery, (e)
the total amount to be delivered to the Custodian against the loan of
the Securities, including the amount of cash collateral and the
premium, if any, separately identified, and (f) the name of the
broker, dealer, or financial institution to which the loan was made.
The Custodian shall deliver the Securities thus designated to the
broker, dealer or financial institution to which the loan was made
upon receipt of the total amount designated as to be delivered
against the loan of Securities. The Custodian may accept payment in
connection with a delivery otherwise than through the Book-Entry
System or Depository only in the form of a certified or bank
cashier's check payable to the order of the Fund or the Custodian
drawn on New York Clearing House funds and may deliver Securities in
accordance with the customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by
the Fund, the Fund shall deliver or cause to be delivered to the
Custodian a Certificate specifying with
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respect to each such loan termination and return of Securities: (a)
the Series to which the loaned Securities are specifically allocated;
(b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be
returned, (d) the date of termination, (e) the total amount to be
delivered by the Custodian (including the cash collateral for such
Securities minus any offsetting credits as described in said
Certificate), and (f) the name of the broker, dealer, or financial
institution from which the Securities will be returned. The Custodian
shall receive all Securities returned from the broker, dealer, or
financial institution to which such Securities were loaned and upon
receipt thereof shall pay, out of the money held for the account of
the Fund, the total amount payable upon such return of Securities as
set forth in the Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits
to, or withdrawals from, a Senior Security Account as specified in a
Certificate received by the Custodian. Such Certificate shall specify
the Series for which such deposit or withdrawal is to be made and the
amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be deposited in, or withdrawn from, such
Senior Security Account for such Series. In the event that the Fund
fails to specify in a Certificate the Series, the name of the issuer,
the title and the number of shares or the principal amount of any
particular Securities to be deposited by the Custodian into, or
withdrawn from, a Senior Securities Account, the Custodian shall be
under no obligation to make any such deposit or withdrawal and shall
so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or
Clearing Member in whose name, or for whose benefit, the account was
established as specified in the Margin Account Agreement.
3. Amounts received by the Custodian as payments or
distributions with respect to Securities deposited in any Margin
Account shall be dealt with in accordance with the terms and
conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security
interest in and to any property at any time held by the Custodian in
any Collateral Account described herein. In accordance with
applicable law the Custodian may enforce its lien and realize on any
such property whenever the Custodian
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has made payment or delivery pursuant to any Put Option guarantee
letter or similar document or any receipt issued hereunder by the
Custodian. In the event the Custodian should realize on any such
property net proceeds which are less than the Custodian's obligations
under any Put Option guarantee letter or similar document or any
receipt, such deficiency shall be a debt owed the Custodian by the
Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund
with a statement with respect to each Margin Account in which money
or Securities are held specifying as of the close of business on the
previous business day: (a) the name of the Margin Account; (b) the
amount and kind of Securities held therein; and (c) the amount of
money held therein. The Custodian shall make available upon request
to any broker, dealer, or futures commission merchant specified in
the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in
which cash and/or Securities are maintained in a Collateral Account
for any Series, the Custodian shall furnish the Fund with a statement
with respect to such Collateral Account specifying the amount of cash
and/or the amount and kind of Securities held therein. No later than
the close of business next succeeding the delivery to the Fund of
such statement, the Fund shall furnish to the Custodian a Certificate
specifying the then market value of the Securities described in such
statement. In the event such then market value is indicated to be
less than the Custodian's obligation with respect to any outstanding
Put Option guarantee letter or similar document, the Fund shall
promptly specify in a Certificate the additional cash and/or
Securities to be deposited in such Collateral Account to eliminate
such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the
resolution of the Board of Directors of the Fund, certified by the
Secretary or any Assistant Secretary, either (i) setting forth with
respect to the Series specified therein the date of the declaration
of a dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the
shareholders of record as of that date and the total amount payable
to the Dividend Agent and any sub-dividend agent or co-dividend agent
of the Fund on the payment date, or (ii) authorizing with respect to
the Series specified therein the declaration of
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dividends and distributions on a daily basis and authorizing the
Custodian to rely on Oral Instructions or a Certificate setting forth
the date of the declaration of such dividend or distribution, the
date of payment thereof, the record date as of which shareholders
entitled to payment shall be determined, the amount payable per Share
of such Series to the shareholders of record as of that date and the
total amount payable to the Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall
pay out of the money held for the account of each Series the total
amount payable to the Dividend Agent and any sub-dividend agent or
co-dividend agent of the Fund with respect to such Series.
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to
the Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade
date, and price; and
(b) the amount of money to be received by the Custodian for
the sale of such Shares and specifically allocated to the separate
account in the name of such Series.
2. Upon receipt of such money from the Transfer Agent, the
Custodian shall credit such money to the separate account in the name
of the Series for which such money was received.
3. Upon issuance of any Shares of any Series described in the
foregoing provisions of this Article, the Custodian shall pay, out of
the money held for the account of such Series, all original issue or
other taxes required to be paid by the Fund in connection with such
issuance upon the receipt of a Certificate specifying the amount to
be paid.
4. Whenever the Fund desires the Custodian to make payment out
of the money held by the Custodian hereunder in connection with a
redemption of any Shares, it shall furnish to the Custodian:
(a) a resolution by the Board of Directors of the
Fund directing the Transfer Agent to redeem the
Shares; and
(b) a Certificate specifying the number and Series of
Shares redeemed; and
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(c) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting
forth the Series and number of Shares received by the Transfer Agent
for redemption and that such Shares are in good form for redemption,
the Custodian shall make payment to the Transfer Agent out of the
money held in the separate account in the name of the Series the
total amount specified in the Certificate issued pursuant to the
foregoing paragraph 4 of this Article.
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds
on behalf of any Series which results in an overdraft because the
money held by the Custodian in the separate account for such Series
shall be insufficient to pay the total amount payable upon a purchase
of Securities specifically allocated to such Series, as set forth in
a Certificate or Oral Instructions, or which results in an overdraft
in the separate account of such Series for some other reason, or if
the Fund is for any other reason indebted to the Custodian with
respect to a Series, including any indebtedness to The Bank of New
York under the Fund's Cash Management and Related Services Agreement,
(except a borrowing for investment or for temporary or emergency
purposes using Securities as collateral pursuant to a separate
agreement and subject to the provisions of paragraph 2 of this
Article), such overdraft or indebtedness shall be deemed to be a loan
made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum
(based on a 360-day year for the actual number of days involved)
equal to 1/2% over Custodian's prime commercial lending rate in
effect from time to time, such rate to be adjusted on the effective
date of any change in such prime commercial lending rate but in no
event to be less than 6% per annum. In addition, the Fund hereby
agrees that the Custodian shall have a continuing lien, security
interest, and security entitlement in and to any property including
any investment property or any financial asset specifically allocated
to such Series at any time held by it for the benefit of such Series
or in which the Fund may have an interest which is then in the
Custodian's possession or control or in possession or control of any
third party acting in the Custodian's behalf. The Fund authorizes the
Custodian, in its sole discretion, at any time to charge any such
overdraft or indebtedness together with interest due thereon against
any balance of account standing to such Series' credit on the
Custodian's books. In addition, the Fund hereby covenants that on
each Business Day on which either it intends to enter a Reverse
Repurchase Agreement and/or otherwise
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borrow from a third party, or which next succeeds a Business Day on
which at the close of business the Fund had outstanding a Reverse
Repurchase Agreement or such a borrowing, it shall prior to 9 a.m.,
New York City time, advise the Custodian, in writing, of each such
borrowing, shall specify the Series to which the same relates, and
shall not incur any indebtedness not so specified other than from the
Custodian.
2. The Fund will cause to be delivered to the Custodian by any
bank (including, if the borrowing is pursuant to a separate
agreement, the Custodian) from which it borrows money for investment
or for temporary or emergency purposes using Securities held by the
Custodian hereunder as collateral for such borrowings, a notice or
undertaking in the form currently employed by any such bank setting
forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to
each such borrowing: (a) the Series to which such borrowing relates;
(b) the name of the bank, (c) the amount and terms of the borrowing,
which may be set forth by incorporating by reference an attached
promissory note, duly endorsed by the Fund, or other loan
agreement,(d) the time and date, if known, on which the loan is to be
entered into, (e) the date on which the loan becomes due and payable,
(f) the total amount payable to the Fund on the borrowing date, (g)
the market value of Securities to be delivered as collateral for such
loan, including the name of the issuer, the title and the number of
shares or the principal amount of any particular Securities, and (h)
a statement specifying whether such loan is for investment purposes
or for temporary or emergency purposes and that such loan is in
conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date
specified in a Certificate the specified collateral and the executed
promissory note, if any, against delivery by the lending bank of the
total amount of the loan payable, provided that the same conforms to
the total amount payable as set forth in the Certificate. The
Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to
all rights therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such Securities
as additional collateral as may be specified in a Certificate to
collateralize further any transaction described in this paragraph.
The Fund shall cause all Securities released from collateral status
to be returned directly to the Custodian, and the Custodian shall
receive from time to time such return of collateral as may be
tendered to it. In the event that the Fund fails to specify in a
Certificate the Series, the name of the issuer, the title and number
of shares or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall not be
under any obligation to deliver any Securities.
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ARTICLE XV.
INSTRUCTIONS
1. With respect to any software provided by the Custodian to a
Fund in order for the Fund to transmit Instructions to the Custodian
(the "Software"), the Custodian grants to such Fund a personal,
nontransferable and nonexclusive license to use the Software solely
for the purpose of transmitting Instructions to, and receiving
communications from, the Custodian in connection with its account(s).
The Fund agrees not to sell, reproduce, lease or otherwise provide,
directly or indirectly, the Software or any portion thereof to any
third party without the prior written consent of the Custodian.
2. The Fund shall obtain and maintain at its own cost and
expense all equipment and services, including but not limited to
communications services, necessary for it to utilize the Software and
transmit Instructions to the Custodian. The Custodian shall not be
responsible for the reliability, compatibility with the Software or
availability of any such equipment or services or the performance or
nonperformance by any nonparty to this Custody Agreement.
3. The Fund acknowledges that the Software, all data bases made
available to the Fund by utilizing the Software (other than data
bases relating solely to the assets of the Fund and transactions with
respect thereto), and any proprietary data, processes, information
and documentation (other than which are or become part of the public
domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential
property of the Custodian. The Fund shall keep the Information
confidential by using the same care and discretion that the Fund uses
with respect to its own confidential property and trade secrets and
shall neither make nor permit any disclosure without the prior
written consent of the Custodian. Upon termination of this Agreement
or the Software license granted hereunder for any reason, the Fund
shall return to the Custodian all copies of the Information which are
in its possession or under its control or which the Fund distributed
to third parties.
4. The Custodian reserves the right to modify the Software from
time to time upon reasonable prior notice and the Fund shall install
new releases of the Software as the Custodian may direct. The Fund
agrees not to modify or attempt to modify the Software without the
Custodian's prior written consent. The Fund acknowledges that any
modifications to the Software, whether by the Fund or the Custodian
and whether with or without the Custodian's consent, shall become the
property of the Custodian.
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5. The Custodian makes no warranties or representations of any
kind with regard to the Software or the method(s) by which the Fund
may transmit Instructions to the Custodian, express or implied,
including but not limited to any implied warranties of
merchantability or fitness for a particular purpose.
6. Where the method for transmitting Instructions by the Fund
involves an automatic systems acknowledgment by the Custodian of its
receipt of such Instructions, then in the absence of such
acknowledgment the Custodian shall not be liable for any failure to
act pursuant to such Instructions, the Fund may not claim that such
Instructions were received by the Custodian, and the Fund shall
deliver a Certificate by some other means.
7. (a) The Fund agrees that where it delivers to the Custodian
Instructions hereunder, it shall be the Fund's sole responsibility to
ensure that only persons duly authorized by the Fund transmit such
Instructions to the Custodian. The Fund will cause all persons
transmitting Instructions to the Custodian to treat applicable user
and authorization codes, passwords and authentication keys with
extreme care, and irrevocably authorizes the Custodian to act in
accordance with and rely upon Instructions received by it pursuant
hereto.
(b) The Fund hereby represents, acknowledges and agrees
that it is fully informed of the protections and risks associated
with the various methods of transmitting Instructions to the
Custodian and that there may be more secure methods of transmitting
instructions to the Custodian than the method(s) selected by the
Fund. The Fund hereby agrees that the security procedures (if any) to
be followed in connection with the Fund's transmission of
Instructions provide to it a commercially reasonable degree of
protection in light of its particular needs and circumstances.
8. The Fund hereby represents, warrants and covenants to the
Custodian that this Agreement has been duly approved by a resolution
of its Board of Directors, and that its transmission of Instructions
pursuant hereto shall at all times comply with the Investment Company
Act of 1940, as amended.
9. The Fund shall notify the Custodian of any errors, omissions
or interruptions in, or delay or unavailability of, its ability to
send Instructions as promptly as practicable, and in any event within
24 hours after the earliest of (i) discovery thereof, (ii) the
Business Day on which discovery should have occurred through the
exercise of reasonable care and (iii) in the case of any error, the
date of actual receipt of the earliest notice which reflects such
error, it being agreed that discovery and receipt of notice may only
occur on a business day. The Custodian shall promptly advise the Fund
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whenever the Custodian learns of any errors, omissions or
interruption in, or delay or unavailability of, the Fund's ability to
send Instructions.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as
sub-custodian for each Series' Securities for which the primary
market is outside the United States ("Foreign Securities")and other
assets, the foreign banking institutions and foreign securities
depositories and clearing agencies designated on Schedule I hereto
("Foreign Sub-Custodians") to carry out their respective
responsibilities in accordance with the terms of the sub-custodian
agreement between each such Foreign Sub-Custodian and the Custodian,
copies of which have been previously delivered to the Fund and
receipt of which is hereby acknowledged (each such agreement, a
"Foreign Sub- Custodian Agreement"). Upon receipt of a Certificate,
together with a certified resolution acceptable to the Custodian of
the Fund's Board of Directors, the Fund may designate any additional
foreign sub-custodian with which the Custodian has an agreement for
such entity to act as the Custodian's agent, as its sub-custodian and
any such additional foreign sub-custodian shall be deemed added to
Schedule I. Upon receipt of a Certificate from the Fund, the
Custodian shall cease the employment of any one or more Foreign
Sub-Custodians for maintaining custody of the Fund's assets and such
Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substantially
in the form previously delivered to the Fund and will not be amended
in a way that materially adversely affects the Fund without the
Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to
each Series of the Fund the Foreign Securities of such Series held by
each Foreign Sub-Custodian. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect
to any claims by the Fund or any Series against a Foreign
Sub-Custodian as a consequence of any loss, damage, cost, expense,
liability or claim sustained or incurred by the Fund or any Series if
and to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with
the terms of the applicable Foreign Sub- Custodian Agreement, use
reasonable efforts to arrange for the
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independent accountants of the Fund to be afforded access to the
books and records of any Foreign Sub-Custodian insofar as such books
and records relate to the performance of such Foreign Sub-Custodian
under its agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as
mutually agreed upon, statements in respect of the securities and
other assets of each Series held by Foreign Sub-Custodians, including
but not limited to, an identification of entities having possession
of each Series' Foreign Securities and other assets, and advices or
notifications of any transfers of Foreign Securities to or from each
custodial account maintained by a Foreign Sub- Custodian for the
Custodian on behalf of the Series.
6. The Custodian shall transmit promptly to the Fund all
notices, reports or other written information received pertaining to
the Fund's Foreign Securities, including without limitation, notices
of corporate action, proxies and proxy solicitation materials.
7. Notwithstanding any provision of this Agreement to the
contrary, settlement and payment for securities received for the
account of any Series and delivery of securities maintained for the
account of such Series may be effected 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 the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
8. Notwithstanding any other provision in this Agreement to the
contrary, with respect to any losses or damages arising out of or
relating to any actions or omissions of any Foreign Sub-Custodian the
sole responsibility and liability of the Custodian shall be to take
appropriate action at the Fund's expense to recover such loss or
damage from the Foreign Sub-Custodian. It is expressly understood and
agreed that the Custodian's sole responsibility and liability shall
be limited to amounts so recovered from the Foreign Sub- Custodian.
ARTICLE XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the
Fund shall promptly deliver to the Custodian a Certificate or Oral
Instructions specifying with respect to
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such FX Transaction: (a) the Series to which such FX Transaction is
specifically allocated; (b) the type and amount of Currency to be
purchased by the Fund; (c) the type and amount of Currency to be sold
by the Fund; (d) the date on which the Currency to be purchased is to
be delivered; (e) the date on which the Currency to be sold is to be
delivered; and (f) the name of the person from whom or through whom
such currencies are to be purchased and sold. Unless otherwise
instructed by a Certificate or Oral Instructions, the Custodian shall
deliver, or shall instruct a Foreign Sub- Custodian to deliver, the
Currency to be sold on the date on which such delivery is to be made,
as set forth in the Certificate, and shall receive, or instruct a
Foreign Sub- Custodian to receive, the Currency to be purchased on
the date as set forth in the Certificate.
2. Where the Currency to be sold is to be delivered on the same
day as the Currency to be purchased, as specified in the Certificate
or Oral Instructions, the Custodian or a Foreign Sub-Custodian may
arrange for such deliveries and receipts to be made in accordance
with the customs prevailing from time to time among brokers or
dealers in Currencies, and such receipt and delivery may not be
completed simultaneously. The Fund assumes all responsibility and
liability for all credit risks involved in connection with such
receipts and deliveries, which responsibility and liability shall
continue until the Currency to be received by the Fund has been
received in full.
3. Any FX Transaction effected by the Custodian in connection
with this Agreement may be entered with the Custodian, any office,
branch or subsidiary of The Bank of New York Company, Inc., or any
Foreign Sub-Custodian acting as principal or otherwise through
customary banking channels. The Fund may issue a standing Certificate
with respect to FX Transaction but the Custodian may establish rules
or limitations concerning any foreign exchange facility made
available to the Fund. The Fund shall bear all risks of investing in
Securities or holding Currency. Without limiting the foregoing, the
Fund shall bear the risks that rules or procedures imposed by a
Foreign Sub-Custodian or foreign depositories, exchange controls,
asset freezes or other laws, rules, regulations or orders shall
prohibit or impose burdens or costs on the transfer to, by or for the
account of the Fund of Securities or any cash held outside the Fund's
jurisdiction or denominated in Currency other than its home
jurisdiction or the conversion of cash from one Currency into another
currency. The Custodian shall not be obligated to substitute another
Currency for a Currency (including a Currency that is a component of
a Composite Currency Unit) whose transferability, convertibility or
availability has been affected by such law, regulation, rule or
procedure. Neither the Custodian nor any Foreign Sub-Custodian shall
be liable to
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the Fund for any loss resulting from any of the foregoing events.
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article
XVI, neither the Custodian nor its nominee shall be liable for any
loss or damage, including counsel fees, resulting from its action or
omission to act or otherwise, either hereunder or under any Margin
Account Agreement, except for any such loss or damage arising out of
its own negligence or willful misconduct. In no event shall the
Custodian be liable to the Fund or any third party for special,
indirect or consequential damages or lost profits or loss of
business, arising under or in connection with this Agreement, even if
previously informed of the possibility of such damages and regardless
of the form of action. The Custodian may, with respect to questions
of law arising hereunder or under any Margin Account Agreement, apply
for and obtain the advice and opinion of counsel to the Fund, or of
its own counsel, at the expense of the Fund, and shall be fully
protected with respect to anything done or omitted by it in good
faith in conformity with such advice or opinion. The Custodian shall
be liable to the Fund for any loss or damage resulting from the use
of the Book-Entry System or any Depository arising by reason of any
negligence or willful misconduct on the part of the Custodian or any
of its employees or agents.
2. Without limiting the generality of the foregoing, the
Custodian shall be under no obligation to inquire into, and shall not
be liable for:
(a) The validity of the issue of any Securities purchased,
sold, or written by or for the Fund, the legality of the purchase,
sale or writing thereof, or the propriety of the amount paid or
received therefor;
(b) The legality of the sale or redemption of any Shares,
or the propriety of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any
dividend by the Fund;
(d) The legality of any borrowing by the Fund using
Securities as collateral;
(e) The legality of any loan of portfolio Securities, nor
shall the Custodian be under any duty or obligation to see to it that
any cash collateral delivered to it by a broker, dealer, or financial
institution or held by it at any
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time as a result of such loan of portfolio Securities of the Fund is
adequate collateral for the Fund against any loss it might sustain as
a result of such loan. The Custodian specifically, but not by way of
limitation, shall not be under any duty or obligation periodically to
check or notify the Fund that the amount of such cash collateral held
by it for the Fund is sufficient collateral for the Fund, but such
duty or obligation shall be the sole responsibility of the Fund. In
addition, the Custodian shall be under no duty or obligation to see
that any broker, dealer or financial institution to which portfolio
Securities of the Fund are lent pursuant to Article X of this
Agreement makes payment to it of any dividends or interest which are
payable to or for the account of the Fund during the period of such
loan or at the termination of such loan, provided, however, that the
Custodian shall promptly notify the Fund in the event that such
dividends or interest are not paid and received when due; or
(f) The sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or
Collateral Account in connection with transactions by the Fund. In
addition, the Custodian shall be under no duty or obligation to see
that any broker, dealer, futures commission merchant or Clearing
Member makes payment to the Fund of any variation margin payment or
similar payment which the Fund may be entitled to receive from such
broker, dealer, futures commission merchant or Clearing Member, to
see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount
the Fund is entitled to receive, or to notify the Fund of the
Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be
the Custodian of, any money, whether or not represented by any check,
draft, or other instrument for the payment of money, received by it
on behalf of the Fund until the Custodian actually receives and
collects such money directly or by the final crediting of the account
representing the Fund's interest at the Book-Entry System or the
Depository.
4. The Custodian shall have no responsibility and shall not be
liable for ascertaining or acting upon any calls, conversions,
exchange offers, tenders, interest rate changes or similar matters
relating to Securities held in the Depository, unless the Custodian
shall have actually received timely notice from the Depository. In no
event shall the Custodian have any responsibility or liability for
the failure of the Depository to collect, or for the late collection
or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be
redeemed, retired, called or otherwise become payable. However, upon
receipt of a Certificate from the Fund of an overdue amount on
Securities held in the Depository the
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Custodian shall make a claim against the Depository on behalf of the
Fund, except that the Custodian shall not be under any obligation to
appear in, prosecute or defend any action, suit or proceeding in
respect to any Securities held by the Depository which in its opinion
may involve it in expense or liability, unless indemnity satisfactory
to it against all expense and liability be furnished as often as may
be required.
5. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount due to the Fund from
the Transfer Agent of the Fund nor to take any action to effect
payment or distribution by the Transfer Agent of the Fund of any
amount paid by the Custodian to the Transfer Agent of the Fund in
accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount if the Securities upon
which such amount is payable are in default, or if payment is refused
after due demand or presentation, unless and until (i) it shall be
directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction of reimbursement of its costs and
expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XVI appoint one or more banking
institutions as Depository or Depositories, as Sub-Custodian or
Sub-Custodians, or as Co-Custodian or Co-Custodians including, but
not limited to, banking institutions located in foreign countries, of
Securities and money at any time owned by the Fund, upon such terms
and conditions as may be approved in a Certificate or contained in an
agreement executed by the Custodian, the Fund and the appointed
institution.
8. The Custodian shall not be under any duty or obligation (a)
to ascertain whether any Securities at any time delivered to, or held
by it or by any Foreign Sub-Custodian, for the account of the Fund
and specifically allocated to a Series are such as properly may be
held by the Fund or such Series under the provisions of its then
current prospectus, or (b) to ascertain whether any transactions by
the Fund, whether or not involving the Custodian, are such
transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund
agrees to pay to the Custodian all out-of-pocket expenses and such
compensation as may be agreed upon from time to time between the
Custodian and the Fund. The Custodian may charge such compensation
and any expenses with respect to a Series incurred by the Custodian
in the performance of its duties pursuant to such agreement against
any money specifically allocated to such Series. Unless and until the
Fund instructs
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the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the
Custodian shall also be entitled to charge against any money held by
it for the account of a Series such Series' pro rata share (based on
such Series, net asset value at the time of the charge to the
aggregate net asset value of all Series at that time) of the amount
of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the provisions
of this Agreement. The expenses for which the Custodian shall be
entitled to reimbursement hereunder shall include, but are not
limited to, the expenses of sub-custodians and foreign branches of
the Custodian incurred in settling outside of New York City
transactions involving the purchase and sale of Securities of the
Fund.
10. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received by the
Custodian and reasonably believed by the Custodian to be a
Certificate. The Custodian shall be entitled to rely upon any Oral
Instructions actually received by the Custodian hereinabove provided
for. The Fund agrees to forward to the Custodian a Certificate or
facsimile thereof confirming such Oral Instructions in such manner so
that such Certificate or facsimile thereof is received by the
Custodian, whether by hand delivery, telecopier or other similar
device, or otherwise, by the close of business of the same day that
such Oral Instructions are given to the Custodian. The Fund agrees
that the fact that such confirming instructions are not received, or
that contrary instructions are received, by the Custodian shall in no
way affect the validity of the transactions or enforceability of the
transactions hereby authorized by the Fund. The Fund agrees that the
Custodian shall incur no liability to the Fund in acting upon Oral
Instructions given to the Custodian hereunder concerning such
transactions provided such instructions reasonably appear to have
been received from an Authorized Person.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably
believed by the Custodian to be given in accordance with the terms
and conditions of any Margin Account Agreement. Without limiting the
generality of the foregoing, the Custodian shall be under no duty to
inquire into, and shall not be liable for, the accuracy of any
statements or representations contained in any such instrument or
other notice including, without limitation, any specification of any
amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in
the possession of the Custodian shall be the property of the Fund.
Such books and records shall be prepared and maintained as required
by the Investment Company Act of 1940,
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as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives,
shall have access to such books and records during the Custodian's
normal business hours. Upon the reasonable request of the Fund,
copies of any such books and records shall be provided by the
Custodian to the Fund or the Fund's authorized representative, and
the Fund shall reimburse the Custodian its expenses of providing such
copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro-film, whichever the Custodian
elects, any records included in any such delivery which are
maintained by the Custodian on a computer disc, or are similarly
maintained, and the Fund shall reimburse the Custodian for its
expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report
obtained by the Custodian on the system of internal accounting
control of the Book-Entry System, the Depository or O.C.C., and with
such reports on its own systems of internal accounting control as the
Fund may reasonably request from time to time.
14. The Fund agrees to indemnify the Custodian against and save
the Custodian harmless from all liability, claims, losses and demands
whatsoever, including attorney's fees, howsoever arising or incurred
because of or in connection with this Agreement, except for any such
liability, claim, loss and demand arising out of the Custodian's own
negligence or willful misconduct.
15. Subject to the foregoing provisions of this Agreement,
including, without limitation, those contained in Article XVI and
XVII the Custodian may deliver and receive Securities, and receipts
with respect to such Securities, and arrange for payments to be made
and received by the Custodian in accordance with the customs
prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities
against payment, delivery of such Securities and receipt of payment
therefor may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in
connection with the Custodian's delivery of Securities pursuant to
instructions of the Fund, which responsibility and liability shall
continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities
whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement, and no covenant or
obligation shall be implied in this Agreement against the Custodian.
ARTICLE XIX.
-38-
<PAGE>
TERMINATION
1. Either of the parties hereto may terminate this Agreement by
giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after
the date of giving of such notice. In the event such notice is given
by the Fund, it shall be accompanied by a copy of a resolution of the
Board of Directors of the Fund, certified by the Secretary or any
Assistant Secretary, electing to terminate this Agreement and
designating a successor custodian or custodians, each of which shall
be a bank or trust company having not less than $2,000,000 aggregate
capital, surplus and undivided profits. In the event such notice is
given by the Custodian, the Fund shall, on or before the termination
date, deliver to the Custodian a copy of a resolution of the Board of
Directors of the Fund, certified by the Secretary or any Assistant
Secretary, designating a successor custodian or custodians. In the
absence of such designation by the Fund, the Custodian may designate
a successor custodian which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus and undivided
profits. Upon the date set forth in such notice this Agreement shall
terminate, and the Custodian shall upon receipt of a notice of
acceptance by the successor custodian on that date deliver directly
to the successor custodian all Securities and money then owned by the
Fund and held by it as Custodian, after deducting all fees, expenses
and other amounts for the payment or reimbursement of which it shall
then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall
upon the date specified in the notice of termination of this
Agreement and upon the delivery by the Custodian of all Securities
(other than Securities held in the Book-Entry System which cannot be
delivered to the Fund) and money then owned by the Fund be deemed to
be its own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement, other
than the duty with respect to Securities held in the Book Entry
System which cannot be delivered to the Fund to hold such Securities
hereunder in accordance with this Agreement.
ARTICLE XX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two
of the present Authorized Persons of the Fund under its seal, setting
forth the names and the signatures of the present Authorized Persons
of the Fund. The Fund agrees to furnish to the Custodian a new
Certificate in similar form in the event that any such present
Authorized Person ceases to be
-39-
<PAGE>
an Authorized Person of the Fund, or in the event that other or
additional Authorized Persons are elected or appointed. Until such
new Certificate shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement or Oral
Instructions upon the signatures of the Authorized Persons as set
forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Custodian, shall be
sufficiently given if addressed to the Custodian and mailed or
delivered to it at its offices at 90 Washington Street, New York, New
York 10286, or at such other place as the Custodian may from time to
time designate in writing.
3. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Fund shall be
sufficiently given if addressed to the Fund and mailed or delivered
to it at its office at the address for the Fund first above written,
or at such other place as the Fund may from time to time designate in
writing.
4. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties with the same
formality as this Agreement and approved by a resolution of the Board
of Directors of the Fund.
5. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns;
provided, however, that this Agreement shall not be assignable by the
Fund without the written consent of the Custodian, or by the
Custodian without the written consent of the Fund, authorized or
approved by a resolution of the Fund's Board of Directors.
6. This Agreement shall be construed in accordance with the laws
of the State of New York without giving effect to conflict of laws
principles thereof. Each party hereby consents to the jurisdiction of
a state or federal court situated in New York City, New York in
connection with any dispute arising hereunder and hereby waives its
right to trial by jury.
7. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
-40-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers, thereunto duly
authorized and their respective seals to be hereunto affixed, as of
the day and year first above written.
DEBT STRATEGIES FUND II,
INC.
[SEAL] By:_______________________
Attest:
-----------------------
THE BANK OF NEW YORK
[SEAL] By:_______________________
Name:
Title:
Attest:
-----------------------
<PAGE>
APPENDIX A
I, , and I,
, of DEBT
STRATEGIES FUND II, INC., a Maryland corporation (the "Fund"), do
hereby certify that:
The following persons have been duly authorized in conformity
with the Fund's Articles of Incorporation and By-Laws to execute any
Certificate, instruction, notice or other instrument on behalf of the
Fund and the signatures set forth opposite their respective names are
their true and correct signatures:
Name Position Signature
-------------------- ------------------- -----------------
<PAGE>
APPENDIX B
SERIES
APPENDIX C
I, Jorge Ramos, a Vice President with THE BANK OF NEW YORK do
hereby designate the following publications:
The Bond Buyer Depository Trust Company Notices Financial Daily Card
Service JJ Kenney Municipal Bond Service London Financial Times New
York Times Standard & Poor's Called Bond Record Wall Street Journal
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, , hereby certifies
that he or she is the duly elected and acting
of DEBT STRATEGIES FUND II, INC., a Maryland
corporation (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on , 1998, at which a quorum was at all times
present and that such resolution has not been modified or rescinded
and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to a Custody Agreement between The Bank of New York and the Fund
dated as of , 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to deposit in the
Book- Entry System, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of the
Series to which the same are specifically allocated, and to
utilize the Book-Entry System to the extent possible in
connection with its performance thereunder, including, without
limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and
returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of DEBT STRATEGIES FUND II, INC., as of the day of
, 1998.
[SEAL]
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies
that he or she is the duly elected and acting
of DEBT STRATEGIES FUND II, INC., a Maryland
corporation (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on , 1998, at which a quorum was at all times
present and that such resolution has not been modified or rescinded
and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to a Custody Agreement between The Bank of New York and the Fund
dated as of , 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as
it receives a Certificate, as defined in the Custody Agreement,
to the contrary to deposit in the Depository, as defined in the
Custody Agreement, all securities eligible for deposit therein,
regardless of the Series to which the same are specifically
allocated, and to utilize the Depository to the extent possible
in connection with its performance thereunder, including,
without limitation, in connection with settlements of purchases
and sales of securities, loans of securities, and deliveries and
returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of DEBT STRATEGIES FUND II, INC., as of the day of
, 1998.
[SEAL]
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby certifies
that he or she is the duly elected and acting
of DEBT STRATEGIES FUND II, INC., a
Maryland corporation (the "Fund"), and further certifies that the
following resolution was adopted by the Board of Directors of the
Fund at a meeting duly held on , 1998, at which a quorum was at all
times present and that such resolution has not been modified or
rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to a Custody Agreement between The Bank of New York and the Fund
dated as of , 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as
it receives a Certificate, as defined in the Custody Agreement,
to the contrary to deposit in the Participants Trust Company as
Depository, as defined in the Custody Agreement, all securities
eligible for deposit therein, regardless of the Series to which
the same are specifically allocated, and to utilize the
Participants Trust Company to the extent possible in connection
with its performance thereunder, including, without limitation,
in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of DEBT STRATEGIES FUND II, INC., as of the day of
, 1998.
[SEAL]
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, , hereby
certifies that he or she is the duly elected and acting
of DEBT STRATEGIES FUND II, INC., a Maryland
corporation (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on , 1998, at which a quorum was at all times
present and that such resolution has not been modified or rescinded
and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to a Custody Agreement between The Bank of New York and the Fund
dated as of , 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as
it receives a Certificate, as defined in the Custody Agreement,
to the contrary, to accept, utilize and act with respect to
Clearing Member confirmations for Options and transaction in
Options, regardless of the Series to which the same are
specifically allocated, as such terms are defined in the Custody
Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of DEBT STRATEGIES FUND II, INC., as of the day of
, 1998.
[SEAL]
<PAGE>
EXHIBIT D
The undersigned, , hereby
certifies that he or she is the duly elected and acting
of DEBT STRATEGIES FUND II, INC., a
Maryland corporation (the "Fund"), further certifies that the
following resolutions were adopted by the Board of Directors of the
Fund at a meeting duly held on , 1998, at which a quorum was at all
times present and that such resolutions have not been modified or
rescinded and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to the Custody Agreement between The Bank of New York and the
Fund dated as of , 1998 (the "Custody Agreement") is authorized
and instructed on a continuous and ongoing basis to act in
accordance with, and to rely on Instructions (as defined in the
Custody Agreement).
RESOLVED, that the Fund shall establish access codes and
grant use of such access codes only to Authorized Persons of the
Fund as defined in the Custody Agreement, shall establish
internal safekeeping procedures to safeguard and protect the
confidentiality and availability of user and access codes,
passwords and authentication keys, and shall use Instructions
only in a manner that does not contravene the Investment Company
Act of 1940, as amended, or the rules and regulations
thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of DEBT STRATEGIES FUND II, INC., as of the day of
, 1998.
[SEAL]
<PAGE>
EXHIBIT (K)
THE
BANK OF
NEW
YORK
================================================================================
STOCK TRANSFER AGENCY AGREEMENT
between
Debt Strategies Fund II, Inc.
- --------------------------------------------------------------------------------
and
THE BANK OF NEW YORK
Dated as of January 30, 1998
ACCOUNT NUMBER (S)_________________________________________
================================================================================
<PAGE>
STOCK TRANSFER AGENCY AGREEMENT
AGREEMENT, made as of February 20, 1998, by and between Debt Strategies
Fund II, Inc., a corporation organized and existing under the laws of the State
of Maryland (hereinafter referred to as the "Customer"), and THE BANK OF NEW
YORK, a New York trust company (hereinafter referred to as the "Bank").
W I T N E S S E T H:
That for and in consideration of the mutual promises hereinafter set forth,
the parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
-----------
Whenever used in this Agreement, the following words and phrases shall have
the following meanings:
1. "Business Day" shall be deemed to be each day on which the Bank is
open for business.
2. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Bank by the Customer which is signed by any Officer, as hereinafter defined,
and actually received by the Bank.
3. "Officer" shall be deemed to be the Customer's Chief Executive
Officer, President, any Vice President, the Secretary, the Treasurer, the
Controller, any Assistant Treasurer, and any Assistant Secretary duly authorized
by the Board of Directors of the Customer to execute any Certificate,
instruction, notice or other instrument on behalf of the Customer and named in a
Certificate, as such Certificate may be amended from time to time.
4. "Shares" shall mean all or any part of each class of the shares of
capital stock of the Customer which from time to time are authorized and/or
issued by the Customer and identified in a Certificate of the Secretary of the
Customer under corporate seal, as such Certificate may be amended from time to
time, with respect to which the Bank is to act hereunder.
ARTICLE II
APPOINTMENT OF BANK
-------------------
1. The Customer hereby constitutes and appoints the Bank as its agent
to perform the services described herein and as more particularly described in
Schedule I attached hereto (the "Services"), and the Bank hereby accepts
appointment as such agent and agrees to perform the Services in accordance with
the terms hereinafter set forth.
2. In connection with such appointment, the Customer shall deliver
the following documents to the Bank:
(a) A certified copy of the Certificate of Incorporation or other
document evidencing the Customer's form of organization (the
"Charter") and all amendments thereto;
(b) A certified copy of the By-Laws of the Customer;
<PAGE>
-2-
(c) A certified copy of a resolution of the Board of Directors of the
Customer appointing the Bank to perform the Services and
authorizing the execution and delivery of this Agreement;
(d) A Certificate signed by the Secretary of the Customer specifying:
the number of authorized Shares, the number of such authorized
Shares issued and currently outstanding, and the names and
specimen signatures of all persons duly authorized by the Board
of Directors of the Customer to execute any Certificate on behalf
of the Customer, as such Certificate may be amended from time to
time;
(e) A Specimen Share certificate for each class of Shares in the form
approved by the Board of Directors of the Customer, together with
a Certificate signed by the Secretary of the Customer as to such
approval and covenanting to supply a new such Certificate and
specimen whenever such form shall change;
(f) A copy of the Customer's Registration Statement, as amended to
date, and the most recently filed Post-Effective Amendment
thereto, filed by the Customer with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, together
with any applications filed in connection therewith; and
(g) An opinion of counsel for the Customer, in a form satisfactory to
the Bank, with respect to the validity of the authorized and
outstanding Shares, the obtaining of all necessary governmental
consents, whether such Shares are fully paid and non-assessable
and the status of such Shares under the Securities Act of 1933,
as amended, and any other applicable law or regulation (i.e., if
-----
subject to registration, that they have been registered and that
the Registration Statement has become effective or, if exempt,
the specific grounds therefor);
(h) A list of the name, address, social security or taxpayer
identification number of each Shareholder, number of Shares
owned, certificate numbers, and whether any "stops" have been
placed; and
(i) An opinion of counsel for the Customer, in a form satisfactory to
the Bank, with respect to the due authorization by the Customer
and the validity and effectiveness of the use of facsimile
signatures by the Bank in connection with the countersigning and
registering of Share certificates of the Customer.
3. The Customer shall furnish the Bank with a sufficient supply of
blank Share certificates and from time to time will renew such supply upon
request of the Bank. Such blank Share certificates shall be properly signed, by
facsimile or otherwise, by Officers of the Customer authorized by law or by the
By-Laws to sign Share certificates, and, if required, shall bear the corporate
seal or a facsimile thereof.
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
------------------------------------
1. The Customer shall deliver to the Bank the following documents on
or before the effective date of any increase, decrease or other change in the
total number of Shares authorized to be issued:
(a) A certified copy of the amendment to the Charter giving effect to
such increase, decrease or change;
<PAGE>
-3-
(b) An opinion of counsel for the Customer, in a form satisfactory to
the Bank, with respect to the validity of the Shares, the
obtaining of all necessary governmental consents, whether such
Shares are fully paid and non-assessable and the status of such
Shares under the Securities Act of 1933, as amended, and any
other applicable federal law or regulations (i.e., if subject to
----
registration, that they have been registered and that the
Registration Statement has become effective or, if exempt, the
specific grounds therefor); and
(c) In the case of an increase, if the appointment of the Bank was
theretofore expressly limited, a certified copy of a resolution
of the Board of Directors of the Customer increasing the
authority of the Bank.
2. Prior to the issuance of any additional Shares pursuant to stock
dividends, stock splits or otherwise, and prior to any reduction in the number
of Shares outstanding, the Customer shall deliver the following documents to the
Bank:
(a) A certified copy of the resolutions adopted by the Board of
Directors and/or the shareholders of the Customer authorizing
such issuance of additional Shares of the Customer or such
reduction, as the case may be;
(b) A certified copy of the order or consent of each governmental or
regulatory authority required by law as a prerequisite to the
issuance or reduction of such Shares, as the case may be, and an
opinion of counsel for the Customer that no other order or
consent is required; and
(c) An opinion of counsel for the Customer, in a form satisfactory to
the Bank, with respect to the validity of the Shares, the
obtaining of all necessary governmental consents, whether such
Shares are fully paid and non-assessable and the status of such
Shares under the Securities Act of 1933, as amended, and any
other applicable law or regulation (i.e., if subject to
-----
registration, that they have been registered and that the
Registration Statement has become effective, or, if exempt, the
specific grounds therefor).
ARTICLE IV
RECAPITALIZATION OR CAPITAL ADJUSTMENT
--------------------------------------
1. In the case of any negative stock split, recapitalization or
other capital adjustment requiring a change in the form of Share certificates,
the Bank will issue Share certificates in the new form in exchange for, or upon
transfer of, outstanding Share certificates in the old form, upon receiving:
(a) A Certificate authorizing the issuance of Share certificates in
the new form;
(b) A certified copy of any amendment to the Charter with respect to
the change;
(c) Specimen Share certificates for each class of Shares in the new
form approved by the Board of Directors of the Customer, with a
Certificate signed by the Secretary of the Customer as to such
approval;
<PAGE>
-4-
(d) A certified copy of the order or consent of each governmental or
regulatory authority required by law as a prerequisite to the
issuance of the Shares in the new form, and an opinion of counsel
for the Customer that the order or consent of no other
governmental or regulatory authority is required; and
(e) An opinion of counsel for the Customer, in a form satisfactory to
the Bank, with respect to the validity of the Shares in the new
form, the obtaining of all necessary governmental consents,
whether such Shares are fully paid and non-assessable and the
status of such Shares under the Securities Act of 1933, as
amended, and any other applicable law or regulation (i.e., if
-----
subject to registration, that the Shares have been registered and
that the Registration Statement has become effective or, if
exempt, the specific grounds therefore).
2. The Customer shall furnish the Bank with a sufficient supply of
blank Share certificates in the new form, and from time to time will replenish
such supply upon the request of the Bank. Such blank Share certificates shall
be properly signed, by facsimile or otherwise, by Officers of the Customer
authorized by law or by the By-Laws to sign Share certificates and, if required,
shall bear the corporate seal or a facsimile thereof.
ARTICLE V
ISSUANCE AND TRANSFER OF SHARES
-------------------------------
1. The Bank will issue Share certificates upon receipt of a
Certificate from an Officer, but shall not be required to issue Share
certificates after it has received from an appropriate federal or state
authority written notification that the sale of Shares has been suspended or
discontinued, and the Bank shall be entitled to rely upon such written
notification. The Bank shall not be responsible for the payment of any original
issue or other taxes required to be paid by the Customer in connection with the
issuance of any Shares.
2. Shares will be transferred upon presentation to the Bank of Share
certificates in form deemed by the Bank properly endorsed for transfer,
accompanied by such documents as the Bank deems necessary to evidence the
authority of the person making such transfer, and bearing satisfactory evidence
of the payment of applicable stock transfer taxes. In the case of small estates
where no administration is contemplated, the Bank may, when furnished with an
appropriate surety bond, and without further approval of the Customer, transfer
Shares registered in the name of the decedents where the current market value of
the Shares being transferred does not exceed such amount as may from time to
time be prescribed by the various states. The Bank reserves the right to refuse
to transfer Shares until it is satisfied that the endorsements on Share
certificates are valid and genuine, and for that purpose it may require, unless
otherwise instructed by an Officer of the Customer, a guaranty of signature by
an "eligible guarantor institution" meeting the requirements of the Bank, which
requirements include membership or participation in STAMP or such other
"signature guarantee program" as may be determined by the Bank in addition to,
or in substitution for, STAMP, all in accordance with the Securities Exchange
Act of 1934, as amended. The Bank also reserves the right to refuse to transfer
Shares until it is satisfied that the requested transfer is legally authorized,
and it shall incur no liability for the refusal in good faith to make transfers
which the Bank, in its judgment, deems improper or unauthorized, or until it is
satisfied that there is no basis to any claims adverse to such transfer. The
Bank may, in effecting transfers of Shares, rely upon those provisions of the
Uniform Act for the Simplification of Fiduciary Security Transfers or the
Uniform Commercial Code, as the same may be amended from time to time,
applicable to the transfer of securities, and the Customer shall indemnify the
Bank for any act done or omitted by it in good faith in reliance upon such laws.
<PAGE>
-5-
3. All certificates representing Shares that are subject to
restrictions on transfer (e.g., securities acquired pursuant to an investment
-----
representation, securities held by controlling person, securities subject to
stockholders' agreement, etc.), shall be stamped with a legend describing the
extent and conditions of the restrictions or referring to the source of such
restrictions. The Bank assumes no responsibility with respect to the transfer
of restricted securities where counsel for the Customer advises that such
transfer may be properly effected.
4. Notwithstanding the foregoing or any other provision contained in
this Agreement to the contrary, the Bank shall be fully protected by the
Customer in not requiring any instruments, documents, assurances, endorsements
or guarantees, including, without limitation, any signature guarantees, in
connection with a transfer of Shares whenever the Bank reasonably believes that
requiring the same would be inconsistent with the transfer procedures as
described in the Prospectus.
ARTICLE VI
DIVIDENDS AND DISTRIBUTIONS
---------------------------
1. The Customer shall furnish to the Bank a copy of a resolution of
its Board of Directors, certified by the Secretary or any Assistant Secretary,
either (i) setting forth the date of the declaration of a dividend or
distribution, the date of accrual or payment, as the case may be, the record
date as of which shareholders entitled to payment, or accrual, as the case may
be shall be determined, the amount per Share of such dividend or distribution,
the payment date on which all previously accrued and unpaid dividends are to be
paid, and the total amount, if any, payable to the Bank on such payment date, or
(ii) authorizing the declaration of dividends and distributions on a periodic
basis and authorizing the Bank to rely on a Certificate setting forth the
information described in subsection (i) of this paragraph.
2. Prior to the payment date specified in such Certificate or
resolution, as the case may be, the Customer shall, in the case of a cash
dividend or distribution, pay to the Bank an amount of cash, sufficient for the
Bank to make the payment, specified in such Certificate or resolution, to the
shareholders of record as of such payment date. The Bank will, upon receipt of
any such cash, (i) in the case of shareholders who are participants in a
dividend reinvestment and/or cash purchase plan of the Customer, reinvest such
cash dividends or distributions in accordance with the terms of such plan, and
(ii) in the case of shareholders who are not participants in any such plan, make
payment of such cash dividends or distributions to the shareholders of record as
of the record date by mailing a check, payable to the registered shareholder, to
the address of record or dividend mailing address. The Bank shall not be liable
for any improper payment made in accordance with a Certificate or resolution
described in the preceding paragraph. If the Bank shall not receive sufficient
cash prior to the payment date to make payments of any cash dividend or
distribution pursuant to subsections (i) and (ii) above to all shareholders of
the Customer as of the record date, the Bank shall, upon notifying the Customer,
withhold payment to all shareholders of the Customer as of the record date until
sufficient cash is provided to the Bank.
3. It is understood that the Bank shall in no way be responsible for
the determination of the rate or form of dividends or distributions due to the
shareholders.
4. It is understood that the Bank shall file such appropriate
information returns concerning the payment of dividends and distributions with
the proper federal, state and local authorities as are required by law to be
filed by the Customer but shall in no way be responsible for the collection or
withholding of taxes due on such dividends or distributions due to shareholders,
except and only to the extent required of it by applicable law.
<PAGE>
-6-
ARTICLE VII
CONCERNING THE CUSTOMER
-----------------------
1. The Customer shall promptly deliver to the Bank written notice of
any change in the Officers authorized to sign Share certificates, Certificates,
notifications or requests, together with a specimen signature of each new
Officer. In the event any Officer who shall have signed manually or whose
facsimile signature shall have been affixed to blank Share certificates shall
die, resign or be removed prior to issuance of such Share certificates, the Bank
may issue such Share certificates as the Share certificates of the Customer
notwithstanding such death, resignation or removal, and the Customer shall
promptly deliver to the Bank such approvals, adoptions or ratifications as may
be required by law.
2. Each copy of the Charter of the Customer and copies of all
amendments thereto shall be certified by the Secretary of State (or other
appropriate official) of the state of incorporation, and if such Charter and/or
amendments are required by law also to be filed with a county or other officer
or official body, a certificate of such filing shall be filed with a certified
copy submitted to the Bank. Each copy of the By-Laws and copies of all
amendments thereto, and copies of resolutions of the Board of Directors of the
Customer, shall be certified by the Secretary or an Assistant Secretary of the
Customer under the corporate seal.
3. Customer hereby represents and warrants:
(a) It is a corporation duly organized and validly existing under the
laws of Maryland.
(b) This Agreement has been duly authorized, executed and delivered
on its behalf and constitutes the legal, valid and binding
obligation of Customer. The execution, delivery and performance
of this Agreement by Customer do not and will not violate any
applicable law or regulation and do not require the consent of
any governmental or other regulatory body except for such
consents and approvals as have been obtained and are in full
force and effect.
4. It shall be the sole responsibility of the Customer to deliver to
the Bank the Customer's currently effective Prospectus and, for
purposes of this Agreement, the Bank shall not be deemed to have
notice of any information contained in such Prospectus until it
is actually received by the Bank.
ARTICLE VIII
CONCERNING THE BANK
-------------------
1. The Bank shall not be liable and shall be fully protected in
acting upon any oral instruction, writing or document reasonably believed by it
to be genuine and to have been given, signed or made by the proper person or
persons and shall not be held to have any notice of any change of authority of
any person until receipt of written notice thereof from an Officer of the
Customer. It shall also be protected in processing Share certificates which it
reasonably believes to bear the proper manual or facsimile signatures of the
duly authorized Officer or Officers of the Customer and the proper
countersignature of the Bank.
2. The Bank may establish such additional procedures, rules and
regulations governing the transfer or registration of Share certificates as it
may deem advisable and consistent with such rules and regulations generally
adopted by bank transfer agents.
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3. The Bank may keep such records as it deems advisable but not
inconsistent with resolutions adopted by the Board of Directors of the Customer.
The Bank may deliver to the Customer from time to time at its discretion, for
safekeeping or disposition by the Customer in accordance with law, such records,
papers, Share certificates which have been cancelled in transfer or exchange and
other documents accumulated in the execution of its duties hereunder as the Bank
may deem expedient, other than those which the Bank is itself required to
maintain pursuant to applicable laws and regulations, and the Customer shall
assume all responsibility for any failure thereafter to produce any record,
paper, cancelled Share certificate or other document so returned, if and when
required. The records maintained by the Bank pursuant to this paragraph which
have not been previously delivered to the Customer pursuant to the foregoing
provisions of this paragraph shall be considered to be the property of the
Customer, shall be made available upon request for inspection by the Officers,
employees and auditors of the Customer, and shall be delivered to the Customer
upon request and in any event upon the date of termination of this Agreement, as
specified in Article IX of this Agreement, in the form and manner kept by the
Bank on such date of termination or such earlier date as may be requested by the
Customer.
4. The Bank may employ agents or attorneys-in-fact at the expense of
the Customer, and shall not be liable for any loss or expense arising out of, or
in connection with, the actions or omissions to act of its agents or attorneys-
in-fact, so long as the Bank acts in good faith and without negligence or
willful misconduct in connection with the selection of such agents or attorneys-
in-fact.
5. The Bank shall only be liable for any loss or damage arising out
of its own negligence or willful misconduct; provided, however, that the Bank
shall not be liable for any indirect, special, punitive or consequential
damages.
6. The Customer shall indemnify and hold harmless the Bank from and
against any and all claims (whether with or without basis in fact or law),
costs, demands, expenses and liabilities, including reasonable attorney's fees,
which the Bank may sustain or incur or which may be asserted against the Bank
except for any liability which the Bank has assumed pursuant to the immediately
preceding section. The Bank shall be deemed not to have acted with negligence
and not to have engaged in willful misconduct by reason of or as a result of any
action taken or omitted to be taken by the Bank without its own negligence or
willful misconduct in reliance upon (i) any provision of this Agreement, (ii)
any instrument, order or Share certificate reasonably believed by it to be
genuine and to be signed, countersigned or executed by any duly authorized
Officer of the Customer, (iii) any Certificate or other instructions of an
Officer, (iv) any opinion of legal counsel for the Customer or the Bank, or (v)
any law, act, regulation or any interpretation of the same even though such law,
act, or regulation may thereafter have been altered, changed, amended or
repealed. Nothing contained herein shall limit or in any way impair the right
of the Bank to indemnification under any other provision of this Agreement.
7. Specifically, but not by way of limitation, the Customer shall
indemnify and hold harmless the Bank from and against any and all claims
(whether with or without basis in fact or law), costs, demands, expenses and
liabilities, including reasonable attorney's fees, of any and every nature which
the Bank may sustain or incur or which may be asserted against the Bank in
connection with the genuineness of a Share certificate, the Bank's due
authorization by the Customer to issue Shares and the form and amount of
authorized Shares.
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8. At any time the Bank may apply to an Officer of the Customer for
written instructions with respect to any matter arising in connection with the
Bank's duties and obligations under this Agreement, and the Bank shall not be
liable for any action taken or omitted to be taken by the Bank in good faith in
accordance with such instructions. Such application by the Bank for
instructions from an Officer of the Customer may, at the option of the Bank,
set forth in writing any action proposed to be taken or omitted to be taken by
the Bank with respect to its duties or obligations under this Agreement and the
date on and/or after which such action shall be taken, and the Bank shall not
be liable for any action taken or omitted to be taken in accordance with a
proposal included in any such application on or after the date specified
therein unless, prior to taking or omitting to take any such action, the Bank
has received written instructions in response to such application specifying
the action to be taken or omitted. The Bank may consult counsel to the Customer
or its own counsel, at the expense of the Customer, and shall be fully
protected with respect to anything done or omitted by it in good faith in
accordance with the advice or opinion of such counsel.
9. When mail is used for delivery of non-negotiable Share
certificates, the value of which does not exceed the limits of the Bank's
Blanket Bond, the Bank shall send such non-negotiable Share certificates by
first class mail, and such deliveries will be covered while in transit by the
Bank's Blanket Bond. Non-negotiable Share certificates, the value of which
exceed the limits of the Bank's Blanket Bond, will be sent by insured registered
mail. Negotiable Share certificates will be sent by insured registered mail. The
Bank shall advise the Customer of any Share certificates returned as
undeliverable after being mailed as herein provided for.
10. The Bank may issue new Share certificates in place of Share
certificates represented to have been lost, stolen or destroyed upon receiving
instructions in writing from an Officer and indemnity satisfactory to the Bank.
Such instructions from the Customer shall be in such form as approved by the
Board of Directors of the Customer in accordance with applicable law or the By-
Laws of the Customer governing such matters. If the Bank receives written
notification from the owner of the lost, stolen or destroyed Share certificate
within a reasonable time after he has notice of it, the Bank shall promptly
notify the Customer and shall act pursuant to written instructions signed by an
Officer. If the Customer receives such written notification from the owner of
the lost, stolen or destroyed Share certificate within a reasonable time after
he has notice of it, the Customer shall promptly notify the Bank and the Bank
shall act pursuant to written instructions signed by an Officer. The Bank
shall not be liable for any act done or omitted by it pursuant to the written
instructions described herein. The Bank may issue new Share certificates in
exchange for, and upon surrender of, mutilated Share certificates.
11. The Bank will issue and mail subscription warrants for Shares,
Shares representing stock dividends, exchanges or splits, or act as conversion
agent upon receiving written instructions from an Officer and such other
documents as the Bank may deem necessary.
12. The Bank will supply shareholder lists to the Customer from time
to time upon receiving a request therefor from an Officer of the Customer.
13. In case of any requests or demands for the inspection of the
shareholder records of the Customer, the Bank will notify the Customer and
endeavor to secure instructions from an Officer as to such inspection. The Bank
reserves the right, however, to exhibit the shareholder record to any person
whenever it is advised by its counsel that there is a reasonable likelihood that
the Bank will be held liable for the failure to exhibit the shareholder records
to such person.
14. At the request of an Officer, the Bank will address and mail such
appropriate notices to shareholders as the Customer may direct.
15. Notwithstanding any provisions of this Agreement to the contrary,
the Bank shall be under no duty or obligation to inquire into, and shall not be
liable for:
(a) The legality of the issue, sale or transfer of any Shares, the
sufficiency of the amount to
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be received in connection therewith, or the authority of the
Customer to request such issuance, sale or transfer;
(b) The legality of the purchase of any Shares, the sufficiency of
the amount to be paid in connection therewith, or the authority
of the Customer to request such purchase;
(c) The legality of the declaration of any dividend by the Customer,
or the legality of the issue of any Shares in payment of any
stock dividend; or
(d) The legality of any recapitalization or readjustment of the
Shares.
16. The Bank shall be entitled to receive and the Customer hereby
agrees to pay to the Bank for its performance hereunder (i) out-of-pocket
expenses (including legal expenses and attorney's fees) incurred in connection
with this Agreement and its performance hereunder, and (ii) the compensation for
services as set forth in Schedule I.
17. The Bank shall not be responsible for any money, whether or not
represented by any check, draft or other instrument for the payment of money,
received by it on behalf of the Customer, until the Bank actually receives and
collects such funds.
18. The Bank shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied against the Bank in
connection with this Agreement.
ARTICLE IX
TERMINATION
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Either of the parties hereto may terminate this Agreement by giving to
the other party a notice in writing specifying the date of such termination,
which shall be not less than 60 days after the date of receipt of such notice.
In the event such notice is given by the Customer, it shall be accompanied by a
copy of a resolution of the Board of Directors of the Customer, certified by the
Secretary, electing to terminate this Agreement and designating a successor
transfer agent or transfer agents. In the event such notice is given by the
Bank, the Customer shall, on or before the termination date, deliver to the Bank
a copy of a resolution of its Board of Directors certified by the Secretary
designating a successor transfer agent or transfer agents. In the absence of
such designation by the Customer, the Bank may designate a successor transfer
agent. If the Customer fails to designate a successor Transfer agent and if the
Bank is unable to find a successor transfer agent, the Customer shall, upon the
date specified in the notice of termination of this Agreement and delivery of
the records maintained hereunder, be deemed to be its own transfer agent and the
Bank shall thereafter be relieved of all duties and responsibilities hereunder.
Upon termination hereof, the Customer shall pay to the Bank such compensation as
may be due to the Bank for any disbursements and expenses made or incurred by
the Bank and payable or reimbursable hereunder.
ARTICLE X
MISCELLANEOUS
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1. The Customer agrees that prior to effecting any change in the
Prospectus which would increase or alter the duties and obligations of the Bank
hereunder, it shall advise the Bank of such proposed change at least 30 days
prior to the intended date of the same, and shall proceed with such change only
if it shall have received the written consent of the Bank thereto.
2. The indemnities contained herein shall be continuing obligations
of the Customer, its
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successors and assigns, notwithstanding the termination of this Agreement.
3. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Customer shall be sufficiently given if
addressed to the Customer and mailed or delivered to it at 800 Scudders Mill
Road, Plainsboro, N.J. 08536, or at such other place as the Customer may from
time to time designate in writing.
4. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Bank shall be sufficiently given if
addressed to the Bank and mailed or delivered to it at its office at 101 Barclay
Street (12W), New York, New York 10286 or at such other place as the Bank may
from time to time designate in writing.
5. This Agreement may not be amended or modified in any manner
except by a written agreement duly authorized and executed by both parties. Any
duly authorized Officer may amend any Certificate naming Officers authorized to
execute and deliver Certificates, instructions, notices or other instruments,
and the Secretary or any Assistant Secretary may amend any Certificate listing
the shares of capital stock of the Customer for which the Bank performs Services
hereunder.
6. This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by either party without the prior
written consent of the other party, and provided, further, that any
reorganization, merger, consolidation, or sale of assets, by the Bank shall not
be deemed to constitute an assignment of this Agreement.
7. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
8. This Agreement may be executed in any number of counterparts each
of which shall be deemed to be an original; but such counterparts, together,
shall constitute only one instrument.
9. The provisions of this Agreement are intended to benefit only the
Bank and the Customer, and no rights shall be granted to any other person by
virtue of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective corporate officers, thereunto duly authorized
and their respective corporate seals to be hereunto affixed, as of the day and
year first above written.
Attest: -----------------------------------
By:
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Name:
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Title:
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Attest: THE BANK OF NEW YORK
By:
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Name:
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Title:
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