<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1998
SECURITIES ACT FILE NO.
INVESTMENT COMPANY ACT FILE NO.
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] PRE-EFFECTIVE AMENDMENT NO.
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[_] AMENDMENT NO.
--------------
DEBT STRATEGIES FUND III, 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 III, 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. FUND ASSET FRANK P. BRUNO, ESQ. BROWN & WOOD LLP
MANAGEMENT, L.P. P.O. BOX 9011 ONE WORLD TRADE CENTER NEW YORK, NEW
PRINCETON, NEW JERSEY 08543-9011 YORK 10048-0557
--------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
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
TITLE OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES BEING BEING OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE FEE(2)
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)................ 10,100,000 shares $10.00 $101,000,000 $29,795
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
--------------
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
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
DEBT STRATEGIES FUND III, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
--------------------- ---------------------
<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 JUNE 17, 1998
PROSPECTUS
10,100,000 SHARES
DEBT STRATEGIES FUND III, INC.
COMMON STOCK
-----------
Debt Strategies Fund III, 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)
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $10.00 None $10.00
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Total(4).................................. $101,000,000 None $101,000,000
</TABLE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(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 July ,
1998.
-----------
MERRILL LYNCH & CO.
-----------
The date of this Prospectus is July , 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 up 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. The Fund plans to apply to list its 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 III, Inc. (the "Fund") is a newly
organized, diversified, closed-end management investment
company. See "The Fund."
THE The Fund is offering 10,100,000 shares of Common Stock at an
OFFERING 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. The Fund plans to apply to
list its 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 Fund Asset Management, L.P. is the Fund's investment adviser
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 Asset Management
Group of ML & Co. (which includes the Investment Adviser), acts
as the investment adviser for over 100 other registered
management investment companies and offers portfolio management
services to individuals and institutions. As of April 1998, the
Asset Management Group had a total of approximately $490
billion in investment company and other portfolio assets under
management. This amount includes assets managed for 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 4.02% (assuming
leverage of 33 1/3% 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 $122 $206 $422
</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 2.99% and Total Annual Expenses would be 4.02%. 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 III, 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 May 26, 1998, 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 up 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 estimated annual
interest rate of 5.93% 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
1.98%.
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................. (18)% (10)% (3)% 5% 12%
</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
IBCA, 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
24
<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 (66)--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; Consultant, Urban Institute, Washington, D.C. since
1995.
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 from 1986 to 1997.
Kevin A. Ryan (65)--Director (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director 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.
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 Realty Trust, Inc.
(real estate holding company) and Alexander's Inc. (real estate company).
30
<PAGE>
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 (38)--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 (49)--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 (44)--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 $ plus $ 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 $ .
The Chairman of the Audit Committee receives an additional annual fee of $ .
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<PAGE>
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 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)......... $ $
Cynthia A. Montgomery(1)....
Charles C. Reilly(1)........
Kevin A. Ryan(1)............
Richard W. West(1)..........
</TABLE>
- - --------
(1) The Directors serve on the boards of other FAM/MLAM Advised Funds as
follows: Mr. Forbes (33 registered investment companies consisting of 46
portfolios); Ms. Montgomery (33 registered investment companies consisting
of 46 portfolios); Mr. Reilly (51 registered investment companies
consisting of 64 portfolios); Mr. Ryan (33 registered investment companies
consisting of 46 portfolios); and Mr. West (52 registered investment
companies consisting of 74 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 Asset Management Group of ML
& Co. (which includes the Investment Adviser) acts as the investment adviser
for over 100 other registered management investment companies and offers
portfolio management services to individuals and institutions. As of April
1998, the Asset Management Group had a total of approximately $490 billion in
investment company and other portfolio assets under management. This amount
includes assets managed for 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 , 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 , 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
, 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 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 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
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<PAGE>
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 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 .
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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
.
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 , 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. The Fund plans to apply to list its 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.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of the Fund is .
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.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act and in accordance
therewith is required to file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Any such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Regional Office, at Seven World Trade
Center, Suite 1300, New York, New York 10048; Pacific Regional Office, at 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest
Regional Office, at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains
45
<PAGE>
a Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the Fund,
that file electronically with the Commission. Reports, proxy statements and
other information concerning the Fund can also be inspected at the offices of
the .
Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This Prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the
Commission upon the payment of certain fees prescribed by the Commission.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be
adversely affected if the computer systems used by the Investment Adviser or
other Fund service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser has established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the Investment Adviser does not
anticipate that the transition to the 21st century will have any material
impact on its ability to continue to service the Fund at current levels. In
addition, the Investment Adviser has sought assurances from the Fund's other
service providers that they are taking all necessary steps to ensure that
their computer systems will accurately reflect the Year 2000, and the
Investment Adviser will continue to monitor the situation. At this time,
however, no assurance can be given that the Fund's other service providers
have anticipated every step necessary to avoid any adverse effect on the Fund
attributable to the Year 2000 Problem.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,Debt Strategies Fund III, Inc.:
We have audited the accompanying statement of assets, liabilities and capital
of Debt Strategies Fund III, Inc. as of . 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 III, Inc. as of in conformity with generally accepted
accounting principles.
Princeton, New Jersey
47
<PAGE>
DEBT STRATEGIES FUND III, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<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 May 26,
1998, 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
. 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.
48
<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
Additional Information..................................................... 45
Independent Auditors' Report............................................... 47
Statement of Assets, Liabilities and Capital............................... 48
Appendix................................................................... A-1
</TABLE>
---------------
UNTIL OCTOBER , 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 III, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
JULY , 1998
CODE 19031-0698
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<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
(2) Exhibits:
<TABLE>
<C> <S>
(a) --Articles of Incorporation
(b) --By-Laws
(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 (a)
(d)(2) --Form of specimen certificate for shares of Common Stock of the
Registrant
(e) --Form of Dividend Reinvestment Plan
(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 *
(k) --Registrar, Transfer Agency and Service Agreement between the
Registrant and *
(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) 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 provided 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 Corporate High Yield
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 Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund, MuniHoldings New York Fund, 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 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
Advisors 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.
C-3
<PAGE>
("Princeton Services") and Princeton Administrators, L.P. also is P.O. Box
9011, Princeton, New Jersey 08543-9011. 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.;
Managing Director and Co-Head of the
Investment Banking Division of Merrill
Lynch (in 1997); Senior Vice President
and Director of the Global Securities
and Economics Division of Merrill Lynch
(from 1995 to 1997).
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 16th day of June,
1998.
Debt Strategies Fund III, Inc.
(Registrant)
/s/ Patrick D. Sweeney
By
------------------------------------
(PATRICK D. SWEENEY, PRESIDENT)
Each person whose signature appears below hereby authorizes Patrick D.
Sweeney, George D. Pelose or Alice A. Pellegrino, 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/ Patrick D. Sweeney President (Principal June 16, 1998
- - ------------------------------------ Executive Officer)
(PATRICK D. SWEENEY) and Director
/s/ George D. Pelose Treasurer and June 16, 1998
- - ------------------------------------ Director (Principal
(GEORGE D. PELOSE) Financial and
Accounting Officer)
/s/ Alice A. Pellegrino Director June 16, 1998
- - ------------------------------------
(ALICE A. PELLEGRINO)
C-6
<PAGE>
EXHIBIT (a)
ARTICLES OF INCORPORATION
OF
DEBT STRATEGIES FUND III, INC.
THE UNDERSIGNED, ELIZABETH KEELEY, whose post-office address is c/o Brown &
Wood LLP, One World Trade Center, 56th Floor, New York, New York 10048, being at
least eighteen (18) years of age, does hereby act as incorporator, under and by
virtue of the General Laws of the State of Maryland authorizing the formation of
corporations and with the intention of forming a corporation.
ARTICLE I.
NAME
----
The name of the corporation is DEBT STRATEGIES FUND III, INC. (the
"Corporation").
ARTICLE II.
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed is to act as a
closed-end, management investment company under the federal Investment Company
Act of 1940, as amended, and in effect from time to time (the "Investment
Company Act"), and to exercise and enjoy all of the powers, rights and
privileges
<PAGE>
granted to, or conferred upon, corporations by the General Laws of
the State of Maryland now or hereafter in force.
ARTICLE III.
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post-office address of the resident agent is The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202.
ARTICLE IV.
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation shall
have authority to issue is 200,000,000 shares, all initially classified as one
class called Common Stock, of the par value of Ten Cents ($0.10) per share, and
of the aggregate par value of Twenty Million Dollars ($20,000,000).
(2) The Board of Directors may classify and reclassify any unissued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the
2
<PAGE>
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 provided, however, that the total amount of shares of
all classes or series shall not exceed the total number of shares of capital
stock authorized in the Charter.
(3) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series.
(4) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the
3
<PAGE>
Corporation, irrespective of the class or series thereof, and all shares of all
classes and series shall vote together as a single class; provided, however,
that as to any matter with respect to which a separate vote of any class or
series is required by the Investment Company Act, or any rules, regulations or
orders issued thereunder, or by the Maryland General Corporation Law, such
requirement as to a separate vote by that class or series shall apply in lieu of
a general vote of all classes and series as described above.
(5) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act, and any rules, regulations and orders issued thereunder)
to take such action upon the concurrence of a majority of the votes entitled to
be cast by holders of capital stock of the Corporation (or a majority of the
votes entitled to be cast by holders of a class or series as a separate class or
series) unless a greater proportion is specified in the Charter.
4
<PAGE>
(6) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation.
(7) Any fractional shares shall carry proportionately all of the rights of
a whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(8) The presence in person or by proxy of the holders of shares entitled to
cast one-third of the votes entitled to be cast shall constitute a quorum at any
meeting of stockholders, except with respect to any matter which requires
approval by a separate vote of one or more classes or series of stock, in which
case the presence in person or by proxy of the holders of shares entitled to
cast one-third of the votes entitled to be cast by each class or series entitled
to vote as a separate class shall constitute a quorum.
5
<PAGE>
(9) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of the Charter and the By-Laws of the
Corporation. As used in the Charter of the Corporation, the terms "Charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
ARTICLE V.
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------------------------
(1) The initial number of directors of the Corporation shall be three (3),
which number may be increased or decreased pursuant to the By-Laws of the
Corporation but shall never be less than the minimum number permitted by the
General Laws of the State of Maryland. The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualify are:
Patrick D. Sweeney
George Pelose
Alice A. Pellegrino
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock of any class
or series, whether now or
6
<PAGE>
hereafter authorized, for such consideration as the Board of Directors may deem
advisable, without any action by the stockholders, subject to such limitations
as may be set forth in these Articles of Incorporation or in the By-Laws of the
Corporation or in the General Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
and advanced expenses by the Corporation to the full extent permitted by the
General Laws of the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the full extent permitted by law
subject to the requirements of the Investment Company Act. The foregoing rights
of indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. No amendment of these Articles
7
<PAGE>
of Incorporation or repeal of any provision hereof shall limit or eliminate the
benefits provided to directors and officers under this provision in connection
with any act or omission that occurred prior to such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State of
Maryland or decisional law, as amended or interpreted, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation or
repeal of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act.
(7) A director elected by the holders of capital stock may be removed (with
or without cause), but only by action taken by
8
<PAGE>
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the shares
of capital stock then entitled to vote in an election to fill that directorship.
(8) The enumeration and definition of the particular powers of the Board of
Directors included in the Charter shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereinafter in force.
ARTICLE VI.
DENIAL OF PREEMPTIVE RIGHTS
---------------------------
No stockholder of the Corporation shall by reason of his holding shares of
capital stock have any preemptive or preferential right to purchase or subscribe
to any shares of capital stock of the Corporation, now or hereafter to be
authorized, or any notes, debentures, bonds or other securities convertible into
shares of capital stock, now or hereafter to be authorized, whether or not the
issuance of any such shares, or notes, debentures, bonds or other securities
would adversely affect the dividend or voting rights of such stockholder; except
that the Board of Directors, in its discretion, may issue shares
9
<PAGE>
of any class of the Corporation, or any notes, debentures, bonds, other
securities convertible into shares of any class, either in whole or in part, to
the existing stockholders or holders of any class, series or type of stock or
other securities at the time outstanding to the exclusion of any or all of the
holders of any or all of the classes, series or types of stock or other
securities at the time outstanding.
ARTICLE VII.
DETERMINATION BINDING
---------------------
Any determination made in good faith and consistent with applicable law, so
far as accounting matters are involved, in accordance with accepted accounting
practice by or pursuant to the direction of the Board of Directors, as to the
amount of assets, obligations or liabilities of the Corporation, as to the
amount of net income of the Corporation from dividends and interest for any
period or amounts at any time legally available for the payment of dividends, as
to the amount of any reserves or charges set up and the propriety thereof, as to
the time of or purpose for creating reserves or as to the use, alteration or
cancellation of any reserves or charges (whether or not any obligation or
liability for which such reserves or as to the use, alteration or cancellation
of any reserves or charges shall have been created, shall have been paid or
discharged or shall
10
<PAGE>
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities "short,"
or an underwriting or the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations shall be
binding as aforesaid. No provision in this Charter shall be effective to (a)
require a waiver of compliance with any provision of the Securities Act of 1933,
as amended, or the Investment Company Act, or of any valid rule, regulation or
order of the Securities and Exchange Commission thereunder or (b) protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
11
<PAGE>
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
ARTICLE VIII.
PRIVATE PROPERTY OF STOCKHOLDERS
--------------------------------
The private property of stockholders shall not be subject to the payment of
corporate debts to any extent whatsoever.
ARTICLE IX.
CONVERSION TO OPEN-END COMPANY
------------------------------
Notwithstanding any other provisions of these Articles of Incorporation or
the By-Laws of the Corporation, a favorable vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize an amendment to these Articles of Incorporation of
the Corporation that makes the Common Stock a "redeemable security" (as that
term is defined in section 2(a) (32) the Investment Company Act) unless such
action has previously been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of directors fixed in accordance
with the By-Laws of the Corporation, in which case the affirmative vote of the
holders
12
<PAGE>
of a majority of the outstanding shares of capital stock of the Corporation
entitled to vote thereon shall be required.
ARTICLE X.
MERGER, SALE OF ASSETS, LIQUIDATION
-----------------------------------
Notwithstanding any other provisions of these Articles of Incorporation or
the By-Laws of the Corporation, a favorable vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize (i) a merger or consolidation or statutory share
exchange of the Corporation with any other corporation, (ii) a sale of all or
substantially all of the assets of the Corporation (other than in the regular
course of its investment activities), or (iii) a liquidation or dissolution of
the Corporation, unless such action has previously been approved, adopted or
authorized by the affirmative vote of at least two-thirds of the total number of
directors fixed in accordance with the By-Laws of the Corporation, in which case
the affirmative vote of the holders of a majority of the outstanding shares of
capital stock of the Corporation entitled to vote thereon shall be required.
13
<PAGE>
ARTICLE XI.
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE XII.
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in its Charter, in any manner now or hereafter prescribed by
statute, including any amendment which alters the contract rights, as expressly
set forth in the Charter, of any outstanding stock and substantially adversely
affects the stockholders' rights, and all rights conferred upon stockholders
herein are granted subject to this reservation. Notwithstanding any other
provisions of these Articles of Incorporation or the By-Laws of the Corporation
(and notwithstanding the fact that a lesser percentage may be specified by law,
these Articles of Incorporation or the By-Laws of the Corporation), the
amendment or repeal of Section (5) of Article IV, Section (1), Section (4),
Section (5), Section (6) and Section (7) of Article V, Article VIII, Article IX,
Article X, Article XI or this Article XII, of these Articles of Incorporation
shall require the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66 2/3%) of the
14
<PAGE>
outstanding shares of capital stock of the Corporation entitled to be voted on
the matter.
IN WITNESS WHEREOF, the undersigned incorporator of DEBT STRATEGIES FUND
III, INC. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be her act.
Dated this 26th day of May, 1998
/s/ Elizabeth Keeley
15
<PAGE>
EXHIBIT (b)
BY-LAWS
OF
DEBT STRATEGIES FUND III, INC.
ARTICLE I.
Offices
Section 1.01. Principal Office. The principal office of the Corporation shall
----------------
be in the City of Baltimore and State of Maryland.
Section 1.02. Principal Executive Office. The principal executive office of
--------------------------
the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 1.03. Other Offices. The Corporation may have such other offices in
-------------
such places as the Board of Directors from time to time may determine.
ARTICLE II.
Meetings of Stockholders
Section 2.01. Annual Meeting. Except as otherwise required by the rules of any
--------------
stock exchange on which the Corporation's shares of stock may be listed, the
Corporation shall not be required to hold an annual meeting of its stockholders
in any year in which the election of directors is not required to be acted upon
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). In the event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors under the Investment Company Act,
such meeting shall be held no later than 120 days after the occurrence of the
event requiring the meeting. Any stockholders' meeting held in accordance with
this Section shall
<PAGE>
for all purposes constitute the annual meeting of stockholders for the year in
which the meeting is held.
In the event an annual meeting is required by the rules of a stock exchange
on which the Corporation's shares of stock are listed, the annual meeting of the
stockholders of the Corporation for the election of directors and for the
transaction of such other business as may properly be brought before the meeting
shall be held on such day and month of each year as shall be designated annually
by the Board of Directors.
Section 2.02. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the written request of
the holders of at least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with Section 2-
502(b) or (c) of the Maryland General Corporation Law.
Section 2.03. Place of Meetings. The annual meeting and any special meeting of
-----------------
the stockholders shall be held at such place within the United States as the
Board of Directors from time to time may determine.
Section 2.04. Notice of Meetings; Waiver of Notice. Notice of the place, date
------------------------------------
and time of the holding of each annual and special meeting of the stockholders
and the purpose or purposes of each special meeting shall be given personally or
by mail, not less than ten nor more than 90 days before the date of such
meeting, to each stockholder entitled to vote at such meeting and to each other
stockholder entitled to notice of the meeting. Notice by mail shall be deemed
to be duly given when
2
<PAGE>
deposited in the United States mail addressed to the stockholder at his or her
address as it appears on the records of the Corporation, with postage thereon
prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who, either
before or after the meeting, shall submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or unless the adjournment is for
more than 120 days after the original record date, notice of such adjourned
meeting need not be given if the time and place to which the meeting shall be
adjourned were announced at the meeting at which the adjournment is taken.
Section 2.05. Quorum. The presence in person or by proxy of the holders of
------
shares of stock entitled to cast one-third of the votes entitled to be cast
shall constitute a quorum at any meeting of stockholders, except with respect to
any matter which requires approval by a separate vote of one or more classes or
series of stock, in which case the presence in person or by proxy of the holders
of shares entitled to cast one-third of the votes entitled to be cast by each
class or series entitled to vote as a separate class or series shall constitute
a quorum. In the absence of a quorum no business may be transacted, except that
the holders of a majority of the shares of stock present in person or by proxy
and entitled to vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by these By-Laws,
until the holders of the requisite amount of shares of stock shall be so
3
<PAGE>
present. At any such adjourned meeting at which a quorum may be present any
business may be transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by proxy, of
holders of the number of shares of stock of the Corporation in excess of a
majority thereof which may be required by the laws of the State of Maryland, the
Investment Company Act, or other applicable statute, the Charter, or these By-
Laws, for action upon any given matter shall not prevent action at such meeting
upon any other matter or matters which properly may come before the meeting, if
there shall be present thereat, in person or by proxy, holders of the number of
shares of stock of the Corporation required for action in respect of such other
matter or matters.
Section 2.06. Organization. At each meeting of the stockholders, the Chairman
------------
of the Board (if one has been designated by the Board), or in his or her absence
or inability to act, the President, or in the absence or inability to act of the
Chairman of the Board and the President, a Vice President, shall act as chairman
of the meeting. The Secretary, or in his or her absence or inability to act,
any person appointed by the chairman of the meeting, shall act as secretary of
the meeting and keep the minutes thereof.
Section 2.07. Order of Business. The order of business at all meetings of the
-----------------
stockholders shall be as determined by the chairman of the meeting.
Section 2.08. Voting. Except as otherwise provided by statute or the Charter,
------
each holder of record of shares of stock of the Corporation having voting power
shall be entitled at each meeting of the stockholders to one vote for every
share of such
4
<PAGE>
stock standing in his or her name on the record of stockholders of the
Corporation as of the record date determined pursuant to Section 9 of this
Article or, if such record date shall not have been so fixed, then at the later
of (i) the close of business on the day on which notice of the meeting is mailed
or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or her by a proxy signed by
such stockholder or his or her attorney-in-fact. No proxy shall be valid after
the expiration of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Charter or these By-Laws, any corporate
action to be taken by vote of the stockholders (other than the election of
directors, which shall be by a plurality of votes cast) shall be authorized by a
majority of the total votes cast at a meeting of stockholders by the holders of
shares present in person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his or her proxy, if there be such
proxy, and shall state the number of shares voted.
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Section 2.09. Fixing of Record Date. The Board of Directors may set a record
---------------------
date for the purpose of determining stockholders entitled to vote at any meeting
of the stockholders. The record date, which may not be prior to the close of
business on the day the record date is fixed, shall be not more than 90 nor less
than ten days before the date of the meeting of the stockholders. All persons
who were holders of record of shares at such time, and not others, shall be
entitled to vote at such meeting and any adjournment thereof.
Section 2.10. Inspectors. The Board, in advance of any meeting of
----------
stockholders, may appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his or her duties, shall
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his or her
ability. The inspectors shall determine the number of shares outstanding and
the voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, and the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a
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certificate of any fact found by them. No director or candidate for the office
of director shall act as inspector of an election of directors. Inspectors need
not be stockholders.
Section 2.11. Consent of Stockholders in Lieu of Meeting. Except as otherwise
------------------------------------------
provided by statute or the Charter, any action required to be taken at any
annual or special meeting of stockholders, or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if the following are filed
with the records of stockholders' meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder entitled to vote
on the matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III.
Board of Directors
Section 3.01. General Powers. Except as otherwise provided in the Charter, the
--------------
business and affairs of the Corporation shall be managed under the direction of
the Board of Directors. All powers of the Corporation may be exercised by or
under authority of the Board of Directors except as conferred on or reserved to
the stockholders by law or by the Charter or these By-Laws.
Section 3.02. Number of Directors. The number of directors shall be fixed from
-------------------
time to time by resolution of the Board of Directors adopted by a majority of
the entire Board of Directors then in office; provided, however, that in no
event shall the number of directors be less than the minimum permitted
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by the General Law of the State of Maryland nor more than 15. Any vacancy
created by an increase in the number of directors may be filled in accordance
with Section 6 of this Article III. No reduction in the number of directors
shall have the effect of removing any director from office prior to the
expiration of his or her term unless such director specifically is removed
pursuant to Section 5 of this Article III at the time of such decrease.
Directors need not be stockholders. As long as any preferred stock of the
Corporation is outstanding, the number of directors shall be not less than five.
Section 3.03. Election and Term of Directors. Directors shall be elected
------------------------------
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article II of these By-Laws,
directors shall be elected at the next meeting held. The term of office of each
director shall be from the time of his election and qualification until the
election of directors next succeeding his election and until his successor shall
have been elected and shall have qualified, or until his death, or until he
shall have resigned or until December 31 of the year in which he shall have
reached seventy-two years of age, or until he shall have been removed as
hereinafter provided in these By-Laws, or as otherwise provided by statute or by
the Charter.
Section 3.04. Resignation. A director of the Corporation may resign at any
-----------
time by giving written notice of his or her resignation to the Board or the
Chairman of the Board or the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein,
8
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immediately upon its receipt; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 3.05. Removal of Directors. Any director of the Corporation may be
--------------------
removed (with or without cause) by the stockholders by a vote of sixty-six and
two-thirds percent
(662/3%) of the outstanding shares of capital stock then entitled to vote in the
election of such director.
Section 3.06. Vacancies. Subject to the provisions of the Investment Company
---------
Act, any vacancies in the Board of Directors, whether arising from death,
resignation, removal, an increase in the number of directors or any other cause,
shall be filled by a vote of a majority of the Board of Directors then in
office, regardless of whether they constitute a quorum.
Section 3.07. Place of Meetings. Meetings of the Board may be held at such
-----------------
place as the Board from time to time may determine or as shall be specified in
the notice of such meeting.
Section 3.08. Regular Meeting. Regular meetings of the Board may be held
---------------
without notice at such time and place as may be determined by the Board of
Directors.
Section 3.09. Special Meetings. Special meetings of the Board may be called by
----------------
two or more directors of the Corporation or by the Chairman of the Board or the
President.
Section 3.10. Telephone Meetings. Members of the Board of Directors or of any
------------------
committee thereof may participate in a meeting by means of a conference
telephone or similar
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communications equipment if all persons participating in the meeting can hear
each other at the same time. Subject to the provisions of the Investment Company
Act, participation in a meeting by these means constitutes presence in person at
the meeting.
Section 3.11. Notice of Special Meetings. Notice of each special meeting of
--------------------------
the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least 24 hours before the time at
which such meeting is to be held, or by first-class mail, postage prepaid,
addressed to him or her at his or her residence or usual place of business, at
least three days before the day on which such meeting is to be held.
Section 3.12. Waiver of Notice of Meetings. Notice of any special meeting need
----------------------------
not be given to any director who, either before or after the meeting, shall sign
a written waiver of notice which is filed with the records of the meeting or who
shall attend such meeting. Except as otherwise specifically required by these
By-Laws, a notice or waiver of notice of any meeting need not state the purposes
of such meeting.
Section 3.13. Quorum and Voting. One-third, but not less than two (unless
-----------------
there is only one director) of the members of the entire Board shall be present
in person at any meeting of the Board in order to constitute a quorum for the
transaction of business at such meeting, and except as otherwise expressly
required by statute, the Charter, these By-Laws, the Investment Company Act, or
other applicable statute, the act of a majority of the directors present at any
meeting at which a quorum is
10
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present shall be the act of the Board. In the absence of a quorum at any meeting
of the Board, a majority of the directors present thereat may adjourn such
meeting to another time and place until a quorum shall be present thereat.
Notice of the time and place of any such adjourned meeting shall be given to the
directors who were not present at the time of the adjournment and, unless such
time and place were announced at the meeting at which the adjournment was taken,
to the other directors. At any adjourned meeting at which a quorum is present,
any business may be transacted which might have been transacted at the meeting
as originally called.
Section 3.14. Organization. The Board, by resolution adopted by a majority of
------------
the entire Board, may designate a Chairman of the Board, who shall preside at
each meeting of the Board. In the absence or inability of the Chairman of the
Board to preside at a meeting, the President or, in his or her absence or
inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his or her absence or inability to act, any person appointed
by the Chairman) shall act as secretary of the meeting and keep the minutes
thereof.
Section 3.15. Written Consent of Directors in Lieu of a Meeting. Subject to
----------------------------------------- -------
the provisions of the Investment Company Act, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board or the committee, as
the case may be, consent thereto in writing, and the writings or writing are
filed with the minutes of the proceedings of the Board or the committee.
11
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Section 3.16. Compensation. Directors may receive compensation for services to
------------
the Corporation in their capacities as directors or otherwise in such manner and
in such amounts as may be fixed from time to time by the Board.
Section 3.17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation at all times
are consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
Prospectus of the Corporation included in the registration statement of the
Corporation relating to the initial public offering of its capital stock, as
filed with the Securities and Exchange Commission (or as such investment
policies and restrictions may be modified by the Board of Directors, or, if
required, by a majority vote of the stockholders of the Corporation in
accordance with the Investment Company Act) and as required by the Investment
Company Act. The Board, however, may delegate the duty of management of the
assets and the administration of its day to day operations to an individual or
corporate management company and/or investment adviser pursuant to a written
contract or contracts which have obtained the requisite approvals, including the
requisite approvals of renewals thereof, of the Board of Directors and/or the
stockholders of the Corporation in accordance with the provisions of the
Investment Company Act.
ARTICLE IV.
Committees
Section 4.01. Executive Committee. The Board, by resolution adopted by a
-------------------
majority of the entire board, may
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designate an Executive Committee consisting of two or more of the directors of
the Corporation, which committee shall have and may exercise all of the powers
and authority of the Board with respect to all matters other than:
(i) the submission to stockholders of any action requiring authorization
of stockholders pursuant to statute or the Charter;
(ii) the filling of vacancies on the Board of Directors;
(iii) the fixing of compensation of the directors for serving on the Board
or on any committee of the Board, including the Executive Committee;
(iv) the approval or termination of any contract with an investment adviser
or principal underwriter, as such terms are defined in the Investment Company
Act, or the taking of any other action required to be taken by the Board of
Directors by the Investment Company Act;
(v) the amendment or repeal of these By-Laws or the adoption of new By-
Laws;
(vi) the amendment or repeal of any resolution of the Board which by its
terms may be amended or repealed only by the Board;
(vii) the declaration of dividends and, except to the extent permitted by
law, the issuance of capital stock of the Corporation; and
(viii) the approval of any merger or share exchange which does not require
stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject
to revision or alteration by
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the Board; provided, however, that third parties shall not be prejudiced by such
revision or alteration.
Section 4.02. Other Committees of the Board. The Board of Directors from time
-----------------------------
to time, by resolution adopted by a majority of the whole Board, may designate
one or more other committees of the Board, each such committee to consist of two
or more directors and to have such powers and duties as the Board of Directors,
by resolution, may prescribe.
Section 4.03. General. One-third, but not less than two, of the members of any
-------
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and the
act of a majority present shall be the act of such committee. The Board may
designate a chairman of any committee and such chairman or any two members of
any committee may fix the time and place of its meetings unless the Board shall
otherwise provide. In the absence or disqualification of any member of any
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or she or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall be
deemed to prevent the Board from appointing one or more committees consisting in
whole or in part of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any authority or
power of the Board in the management
14
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of the business or affairs of the Corporation except as may be prescribed by the
Board.
ARTICLE V.
Officers, Agents and Employees
Section 5.01. Number of Qualifications. The officers of the Corporation shall
------------------------
be a President, who shall be a director of the Corporation, a Secretary and a
Treasurer, each of whom shall be elected by the Board of Directors. The Board
of Directors may elect or appoint one or more Vice Presidents and also may
appoint such other officers, agents and employees as it may deem necessary or
proper. Any two or more offices may be held by the same person, except the
offices of President and Vice President, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity. Such officers
shall be elected by the Board of Directors each year at its first meeting held
after the annual meeting of stockholders, each to hold office until the next
meeting of the stockholders and until his or her successor shall have been duly
elected and shall have qualified, or until his or her death, or until he or she
shall have resigned, or have been removed, as hereinafter provided in these By-
Laws. The Board from time to time may elect such officers (including one or
more Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents, as may be necessary or desirable for the
business of the Corporation. The President also shall have the power to appoint
such assistant officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) as may be
necessary or appropriate to facilitate the management of the Corporation's
affairs. Such officers and agents shall have such
15
<PAGE>
duties and shall hold their offices for such terms as may be prescribed by the
Board or by the appointing authority.
Section 5.02. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of resignation to the Board, the Chairman of the
Board, the President or the Secretary. Any such resignation shall take effect
at the time specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt; and, unless
otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Section 5.03. Removal of Officer, Agent or Employee. Any officer, agent or
-------------------------------------
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract rights, if
any, but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 5.04. Vacancies. A vacancy in any office, whether arising from death,
---------
resignation, removal or any other cause, may be filled for the unexpired portion
of the term of the office which shall be vacant, in the manner prescribed in
these By-Laws for the regular election or appointment to such office.
Section 5.05. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her control.
16
<PAGE>
Section 5.06. Bonds or Other Security. If required by the Board, any officer,
-----------------------
agent or employee of the Corporation shall give a bond or other security for the
faithful performance of his or her duties, in such amount and with such surety
or sureties as the Board may require.
Section 5.07. President. The President shall be the chief executive officer of
---------
the Corporation. In the absence of the Chairman of the Board (or if there be
none), the President shall preside at all meetings of the stockholders and of
the Board of Directors. He or she shall have, subject to the control of the
Board of Directors, general charge of the business and affairs of the
Corporation. He or she may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he or she may
delegate these powers.
Section 5.08. Vice President. Each Vice President shall have such powers and
--------------
perform such duties as the Board of Directors or the President from time to time
may prescribe.
Section 5.09. Treasurer. The Treasurer shall:
---------
(i) have charge and custody of, and be responsible for, all of the funds
and securities of the Corporation, except those which the Corporation has
placed in the custody of a bank or trust company or member of a national
securities exchange (as that term is defined in the Securities Exchange Act
of 1934, as amended) pursuant to a written agreement designating such bank
or trust company or member of a national securities exchange as custodian
of the property of the Corporation;
(ii) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
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(iii) cause all moneys and other valuables to be deposited to the credit
of the Corporation;
(iv) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(v) disburse the funds of the Corporation and supervise the investment
of its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(vi) in general, perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him
or her by the Board or the President.
Section 5.10. Secretary. The Secretary shall:
---------
(i) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;
(ii) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(iii) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;
(iv) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly
kept and filed; and
(v) in general, perform all of the duties incident to the office of
Secretary and such other duties as from time
18
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to time may be assigned to him or her by the Board or the President.
Section 5.11. Delegation of Duties. In case of the absence of any officer of
--------------------
the Corporation, or for any other reason that the Board may deem sufficient, the
Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI.
Indemnification
Section 6.01. General Indemnification. Each officer and director of the
-----------------------
Corporation shall be indemnified by the Corporation to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Corporation or
any stockholder thereof to which such person otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. Absent a court
determination that an officer or director seeking indemnification was not liable
on the merits or guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office,
the decision by the Corporation to indemnify such person must be based upon the
reasonable determination of independent legal counsel or the vote of a majority
of a quorum of the directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to the proceeding
("non-party independent directors"), after review of the facts, that such
officer or director is not guilty of willful misfeasance,
19
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bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and to
the full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Corporation a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met and a written undertaking to repay any such advance, if it ultimately should
be determined that the standard of conduct has not been met, and provided
further that at least one of the following additional conditions is met:
(i) the person seeking indemnification shall provide a security in form
and amount acceptable to the Corporation for his or her undertaking;
(ii) the Corporation is insured against losses arising by reason of the
advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based on a
review of facts readily available to the Corporation at the time the
advance is proposed to be made, that there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled to
indemnification.
20
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The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland, from liability arising from his or her activities as an
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any officer or director of the Corporation that
protects or purports to protect such person from liability to the Corporation or
to its stockholders to which such officer or director otherwise would be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
Section 6.02. Other Rights. The indemnification provided by this Article VI
------------
shall not be deemed exclusive of any other right, in respect of indemnification
or otherwise, to which those seeking such indemnification may be entitled under
any insurance or other agreement, vote of stockholders or disinterested
directors or otherwise, both as to action by a director or officer of the
Corporation in his or her official capacity and as to action by such person in
another capacity while holding such office or position, and shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such person.
21
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ARTICLE VII.
Capital Stock
Section 7.01. Stock Certificates. Each holder of stock of the Corporation
------------------
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation owned by him or her, provided, however, that
certificates for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by or in the name of
the Corporation by the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with
the seal of the Corporation. Any or all of the signatures or the seal on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate shall be issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or registrar were still
in office at the date of issue.
Section 7.02. Books of Account and Record of Stockholders. There shall be kept
-------------------------------------------
at the principal executive office of the Corporation correct and complete books
and records of account of all the business and transactions of the Corporation.
Section 7.03. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or
22
<PAGE>
certificates, if issued, for such shares properly endorsed or accompanied by a
duly executed stock transfer power and the payment of all taxes thereon. Except
as otherwise provided by law, the Corporation shall be entitled to recognize the
exclusive right of a person in whose name any share or shares stand on the
record of stockholders as the owner of such share or shares for all purposes,
including, without limitation, the rights to receive dividends or other
distributions, and to vote as such owner, and the Corporation shall not be bound
to recognize any equitable or legal claim to or interest in any such share or
shares on the part of any other person.
Section 7.04. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 7.05. Lost, Destroyed or Mutilated Certificates. The holder of any
-----------------------------------------
certificates representing shares of stock of the Corporation immediately shall
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board, in its discretion, may require such owner or his or her legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in
23
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such form and with such surety or sureties, as the Board in its absolute
discretion shall determine, to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss or destruction of any such
certificate, or issuance of a new certificate. Anything herein to the contrary
notwithstanding, the Board, in its absolute discretion, may refuse to issue any
such new certificate, except pursuant to legal proceedings under the laws of the
State of Maryland.
Section 7.06. Fixing of a Record Date for Dividends and Distributions. The
----------------------------------------- -------------
Board may fix, in advance, a date not more than 90 days preceding the date fixed
for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7.07. Information to Stockholders and Others. Any stockholder of the
--------------------------------------
Corporation or his or her agent may inspect and copy during usual business hours
the Corporation's By-Laws, minutes of the proceedings of its stockholders,
annual statements of its affairs, and voting trust agreements on file at its
principal office.
24
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ARTICLE VIII.
Seal
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors, the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX.
Fiscal Year
The Board of Directors shall have the power from time to time to fix the
fiscal year of the corporation by a duly adopted resolution.
ARTICLE X.
Depositories and Custodians
Section 10.01. Depositories. The funds of the Corporation shall be deposited
------------
with such banks or other depositories as the Board of Directors of the
Corporation from time to time may determine.
Section 10.02. Custodians. All securities and other investments shall be
----------
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation from time to time may determine. Every arrangement
entered into with any bank or other company for the safekeeping of the
securities and investments of the Corporation shall contain provisions complying
with the Investment Company Act, and the general rules and regulations
thereunder.
25
<PAGE>
ARTICLE XI.
Execution of Instruments
Section 11.01. Checks, Notes, Drafts, etc. Checks, notes, drafts, acceptances,
--------------------------
bills of exchange and other orders or obligations for the payment of money shall
be signed by such officer or officers or person or persons as the Board of
Directors by resolution from time to time shall designate.
Section 11.02. Sale or Transfer of Securities. Stock certificates, bonds or
------------------------------
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer or pursuant
to any procedure approved by the Board of Directors, subject to applicable law.
ARTICLE XII.
Independent Public Accountants
The firm of independent public accountants which shall sign or certify the
financial statements of the Corporation which are filed with the Securities and
Exchange Commission shall be selected annually by the Board of Directors and
ratified by the stockholders in accordance with the provisions of the Investment
Company Act.
26
<PAGE>
ARTICLE XIII.
Annual Statement
The books of account of the Corporation shall be examined by an independent
firm of public accountants at the close of each annual period of the Corporation
and at such other times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of record of the Corporation on such date with respect to each
report as may be determined by the Board, at his or her address as the same
appears on the books of the Corporation. Such annual statement also shall be
available at the annual meeting of stockholders and shall be placed on file at
the Corporation's principal office in the State of Maryland, and if no annual
meeting is held pursuant to Article II, Section 1, such annual statement of
affairs shall be placed on file as the Corporation's principal office within 120
days after the end of the Corporation's fiscal year. Each such report shall
show the assets and liabilities of the Corporation as of the close of the period
covered by the report and the securities in which the funds of the Corporation
then were invested. Such report also shall show the Corporation's income and
expenses for the period from the end of the Corporation's preceding fiscal year
to the close of the period covered by the report and any other information
required by the Investment Company Act, and shall set forth such other matters
as the Board or such firm of independent public accountants shall determine.
ARTICLE XIV.
Amendments
These By-Laws or any of them may be amended, altered or repealed by the
affirmative vote of a majority of the Board of
27
<PAGE>
Directors. The stockholders shall have no power to make, amend, alter or repeal
By-Laws.
28
<PAGE>
EXHIBIT (D)(2)
COMMON STOCK COMMON STOCK
PAR VALUE $.10 PAR VALUE $.10
CUSIP
See Reverse For Certain
Definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
DEBT STRATEGIES FUND III, INC.
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF Debt Strategies
Fund III, Inc. transferable on the books of the Corporation by the holder in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate and the shares represented hereby are issued
and shall be subject to all of the provisions of the Articles of Incorporation
and of the By-Laws of the Corporation, and of all the amendments from time to
time made thereto. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
President Secretary
Countersigned and Registered:
THE BANK OF NEW YORK
Transfer Agent and Registrar
Authorized Signature
<PAGE>
DEBT STRATEGIES FUND III, INC.
The Corporation has the authority to issue stock of more than one class. A
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class of stock
which the Corporation is authorized to issue and the differences in the relative
rights and preferences between the shares of each class to the extent that they
have been set, and the authority of the Board of Directors to set the relative
rights and preferences of subsequent classes and series, will be furnished by
the Corporation to any stockholder, without charge, upon request to the
Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--
_______Custodian_______
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to
Minors Act _________
(State)
JT TEN --as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
______________________________
_________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
_________________________________________________________________________
_________________________________________________________________________
__________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably
constitute and appoint___________________________________________________
_________________________________________________________________________
<PAGE>
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated:__________________
Signature:___________________________________
NOTICE: The signature to this assignment must correspond with the
name as written upon the face of the certificate, in every
particular, without alteration or enlargement, or any change
whatever.
Signature Guaranteed:____________________________________
-------------------------------------------------------
Signatures must be guaranteed by an "eligible guarantor
institution" as such term is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934.
-------------------------------------------------------
<PAGE>
DEBT STRATEGIES FUND III, INC.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, __________, will act as Agent for me, and
--------------------
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present shares of common stock, par value $.10 per share
("Common Stock"), of DEBT STRATEGIES FUND III, INC. (the "Fund") are registered,
and will automatically put into effect for me the dividend reinvestment option
of the Plan as of the first record date for a dividend or capital gains
distribution (collectively referred to herein as a "dividend"), payable at the
election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan
---------------------------------
constitutes an election by me to receive dividends in shares of Common Stock
whenever the Fund declares a dividend. In such event, the dividend amount shall
automatically be made payable to me entirely in shares of Common Stock which
shall be acquired by the Agent for my account, depending upon the circumstances
described in paragraph 3, either (i) through receipt of additional shares of
unissued but authorized shares of Common Stock from the Fund ("newly-issued
shares") as described in paragraph 6 or (ii) by purchase of outstanding shares
of Common Stock on the open market ("open-market purchases") as described in
paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open-Market Purchases.
---------------------------------------------------------------------
If on the payment date for the dividend (the "valuation date"), the net asset
value per share of the Common Stock, as defined in paragraph 8, is equal to or
less than the market price per share of the Common Stock, as defined in
paragraph 8, plus estimated brokerage commissions (such condition being referred
to herein as "market premium"), the Agent shall invest the dividend amount in
newly-issued shares on my behalf as described in paragraph 6. If on the
valuation date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Agent shall
invest the dividend amount in shares acquired on my behalf in open-market
purchases as described in paragraph 7.
4. Purchase Period for Open-Market Purchases. In the event of a market
-----------------------------------------
discount on the valuation date, the Agent shall have until the last business day
before the next ex-dividend date with respect to the shares of Common Stock or
in no event more than 30 days after the valuation date (the "last purchase
date") to invest the dividend amount in shares acquired in open-market purchases
except where temporary curtailment or suspension of purchases is necessary to
comply with applicable provisions of federal securities laws.
5. Failure to Complete Open-Market Purchases During Purchase Period. If
----------------------------------------------------------------
the Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period because the market discount has shifted to a market
premium or otherwise, the Agent will invest the uninvested portion of the
dividend amount in newly-issued shares at the close of business on the last
purchase date as described in paragraph 4; except that the Agent may not acquire
newly-issued shares after the valuation date under the foregoing circumstances
unless it has received a legal opinion that registration of such shares is not
required under the Securities Act of 1933, as amended, or unless the shares to
be issued are registered under such Act.
<PAGE>
6. Acquisition of Newly-Issued Shares. In the event that all or part of
----------------------------------
the dividend amount is to be invested in newly-issued shares, you shall
automatically receive such newly-issued shares of Common Stock, including
fractions, for my account, and the number of additional newly-issued shares of
Common Stock to be credited to my account shall be determined by dividing the
dollar amount of the dividend on my shares to be invested in newly-issued shares
by the net asset value per share of Common Stock on the date the shares are
issued (the valuation date in the case of an initial market premium or the last
purchase date in case the Agent is unable to complete open-market purchases
during the purchase period); provided, that the maximum discount from the then
current market price per share on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the dividend
--------------------------------------
amount is to be invested in shares of Common Stock acquired in open-market
purchases, you shall apply the amount of such dividend on my shares (less my pro
rata share of brokerage commissions incurred with respect to your open-market
purchases) to the purchase on the open-market of shares of the Common Stock for
my account. Open-market purchases may be made on any securities exchange where
the Common Stock is traded, in the over-the-counter market or in negotiated
transactions and may be on such terms as to price, delivery and otherwise as you
shall determine. My funds held by you uninvested will not bear interest, and it
is understood that, in any event, you shall have no liability in connection with
any inability to purchase shares within 30 days after the initial date of such
purchase as herein provided, or with the timing of any purchases affected. You
shall have no responsibility as to the value of the Common Stock acquired for my
account. For the purposes of cash investments you may commingle my funds with
those of other shareholders of the Fund for whom you similarly act as Agent, and
the average price (including brokerage commissions) of all shares purchased by
you as Agent in the open market shall be the price per share allocable to me in
connection with open-market purchases.
8. Meaning of Market Price and Net Asset Value. For all purposes of the
-------------------------------------------
Plan: (a) the market price of the Common Stock on a particular date shall be the
last sales price on the New York Stock Exchange (the "Exchange") on that date,
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such stock on the Exchange on such date and
(b) net asset value per share of the Common Stock on a particular date shall be
as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold my
----------------------------------------------------
shares of Common Stock acquired pursuant to the Plan, together with the shares
of other shareholders of the Fund acquired pursuant to the Plan, in
noncertificated form in your name or that of your nominee. You will forward to
me any proxy solicitation material and will vote any shares so held for me only
in accordance with the proxy returned by me to the Fund. Upon my written
request, you will deliver to me, without charge, a certificate or certificates
for the full shares held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my
-------------
account as soon as practicable but not later than 60 days after the date
thereof.
2
<PAGE>
11. Fractional Interests. Although I may from time to time have an
--------------------
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
12. Stock Dividends or Share Purchase Rights. Any stock dividends or
----------------------------------------
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains
-----------
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan by
----------------------
notifying you in writing. Such termination will be effective immediately if my
notice is received by you not less than ten days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first trading day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be terminated
by you or the Fund upon notice in writing mailed to me at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any termination you will cause a certificate or certificates for the full
shares held for me under the Plan and cash adjustment for any fraction to be
delivered to me without charge. If I elect by notice to you in writing in
advance of such termination to have you sell part or all of my shares and remit
the proceeds to me, you are authorized to deduct brokerage commissions for this
transaction from the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or
-----------------
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date, thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
my account, all dividends and distributions payable on Common Stock of the Fund
held in my name or under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
16. Extent of Responsibility of Agent. You shall at all times act in good
---------------------------------
faith and agree to use your best efforts within reasonable limits to insure the
accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall
3
<PAGE>
not be liable for loss or damage due to errors unless such error is caused by
your negligence, bad faith, or willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the
-------------
laws of the State of New York without regard to its conflicts of laws
provisions.
4
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the_____________________, by and between DEBT
STRATEGIES FUND III, 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:
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
<PAGE>
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 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
2
<PAGE>
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 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.
3
<PAGE>
ARTICLE II.
Allocation of Charges and Expenses
----------------------------------
(a) The Investment Adviser. The Investment Adviser shall provide the staff and
----------------------
personnel necessary to perform its obligations under this Agreement, shall
assume and pay or cause to be paid all expenses incurred in connection with the
maintenance of such staff and personnel, and, at its own expense, shall provide
the office space, facilities, equipment and necessary personnel which it is
obligated to provide under Article I hereof, and shall pay all compensation of
officers 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.
4
<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 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
5
<PAGE>
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 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.
6
<PAGE>
ARTICLE IV.
Limitation of Liability of the Investment Adviser
-------------------------------------------------
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V.
Activities of the Investment Adviser
------------------------------------
The services of the Investment Adviser to the Fund are not to be deemed to
be exclusive; the Investment Adviser and any person controlled by or under
common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") are free to render services to others. It is
understood that 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.
7
<PAGE>
ARTICLE VI.
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until July 31, 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 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
8
<PAGE>
respective meanings specified in the Investment Company Act and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act.
ARTICLE IX.
Governing Law
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York and the applicable provisions of the Investment
Company Act. To the extent that the applicable laws of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
DEBT STRATEGIES FUND III, INC.
By: ______________________________
Authorized Signatory
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
10
<PAGE>
EXHIBIT (h)(1)
_______________Shares
DEBT STRATEGIES FUND III, 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 III, 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., Inc., 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 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.
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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-
________) 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-____________) 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:
(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
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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.
(vi) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, diversified, management investment
company, and
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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
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any notice 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 to general equitable principles; and neither the execution
and
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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
association 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 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
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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.
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
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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 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.
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(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.
(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.
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(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.
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.
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(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 Maryla.
(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
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.
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(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 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.
12
<PAGE>
(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:
(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
13
<PAGE>
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
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,
14
<PAGE>
(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 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.
15
<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 prospectus or the Prospectus (or any amendment or supplement
16
<PAGE>
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 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
17
<PAGE>
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 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.
18
<PAGE>
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.
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
19
<PAGE>
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 Lynch & Co. Inc., 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
20
<PAGE>
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.
21
<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 III, 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
22
<PAGE>
Exhibit A
________________ Shares
Debt Strategies Fund III, 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 III, 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 III, 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 Conduct Rules 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
2740 of the Conduct Rules 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 2730 and 2750 of such Conduct Rules and to
comply with Section 2420 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
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<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.
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<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)
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