<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 1999.
SECURITIES ACT FILE NO. 333-72137
INVESTMENT COMPANY ACT FILE NO. 811-09229
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 2 [X]
(CHECK APPROPRIATE BOX OR BOXES)
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MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
TERRY K. GLENN
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPIES TO:
<TABLE>
<S> <C>
FRANK P. BRUNO, ESQ. PATRICK D. SWEENEY, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
</TABLE>
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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. [X]
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. [ ]
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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
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING BEING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
Common Stock ($.10 par value)...... 50,000,000 shs. $ 10.00 $500,000,000 $139,000
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$27,800 was previously paid. $111,200 was transmitted in connection with
this filing.
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<PAGE> 2
PROSPECTUS
MARCH 22, 1999
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
COMMON STOCK
------------------------
Merrill Lynch Senior Floating Rate Fund II, Inc. (the "Fund") is a newly
organized, continuously offered, non-diversified, closed-end fund. The Fund
seeks as high a level of current income and such preservation of capital as is
consistent with investment in senior collateralized corporate loans (primarily
in the form of participation interests) made by banks and other financial
institutions. There can be no assurance that the investment objective of the
Fund will be realized. Currently, there is no secondary market for the Fund's
common stock. To provide liquidity, the Fund generally intends to make quarterly
tender offers for its shares. In a tender offer, the Fund repurchases
outstanding shares at the Fund's net asset value on the last day of the offer.
If a tender offer is not made, shareholders may not be able to sell their
shares.
Shares of common stock of the Fund will be offered at $10.00 per share
without a front-end sales charge during a subscription offering period expected
to end on March 23, 1999, unless extended. On the third business day after the
conclusion of this subscription offering period, the subscriptions will be
payable, the common stock will be issued and the Fund will commence operations.
After the completion of the subscription offering period, the Fund expects to
engage in a continuous offering of its common stock at a price equal to the next
determined net asset value per share without a front-end sales charge.
------------------------
This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference. The Securities and Exchange Commission has not approved or
disapproved these securities or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) FUND(3)
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<S> <C> <C> <C>
Per Share..................... $10.00 None $10.00
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Total(3)...................... $500,000,000 None $500,000,000
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</TABLE>
(1) The common stock is offered on a best efforts basis at a price equal to net
asset value, which is initially $10.00 a share.
(2) The Distributor pays all offering expenses (other than registration fees)
and sales commissions to selected dealers (primarily Merrill Lynch, Pierce,
Fenner & Smith Incorporated) from its own assets. Therefore, all of the
proceeds of this offering will be available to the Fund for investment in
portfolio securities. See "Purchase of Shares."
(3) These amounts (a) do not take into account offering expenses (approximately
$350,000), which will be amortized over a one-year period and charged as
expenses against income of the Fund, and (b) assume all shares currently
registered are sold in the continuous offering.
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MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
<PAGE> 3
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this Prospectus.
THE FUND Merrill Lynch Senior Floating Rate Fund II,
Inc. is a newly organized, continuously
offered, non-diversified, closed-end fund.
THE OFFERING Merrill Lynch Funds Distributor, a division of
Princeton Funds Distributor, Inc., and other
securities dealers which have entered into
selected dealer agreements with the
Distributor, including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, will solicit
subscriptions for common stock of the Fund
during a period expected to end on March 23,
1999, unless extended. On the third business
day after the conclusion of this subscription
period, the subscriptions will be payable, the
common stock will be issued and the Fund will
commence operations. The public offering price
of the common stock during the subscription
offering will be $10.00 per share without a
front-end sales charge.
After the completion of the initial
subscription offering, the Fund expects to
engage in a continuous offering of its common
stock at a price equal to the next determined
net asset value per share without a front-end
sales charge. During the subscription and
continuous offering periods shares will be sold
subject to certain minimum purchase
requirements:
<TABLE>
<CAPTION>
THE THE
MINIMUM MINIMUM
INITIAL SUBSEQUENT
FOR INVESTMENTS PURCHASE PURCHASE
IN THE FUND MADE AMOUNT IS AMOUNT IS
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<S> <C> <C>
Directly through the Fund's
Distributor or Transfer Agent.... $1,000 $50
Via a Merrill Lynch-maintained
401(k) or 403(b) plan............ None None
Via another retirement plan........ $ 250 $ 1
</TABLE>
INVESTMENT OBJECTIVE AND
POLICIES The Fund seeks to provide shareholders with as
high a level of current income and such
preservation of capital as is consistent with
investment in senior collateralized corporate
loans made to U.S. or non-U.S. borrowers. An
investment in the Fund entails certain risks.
Corporate Loans. The Fund invests primarily in
corporate loans that are direct obligations of
a borrower undertaken to finance
2
<PAGE> 4
the growth of the borrower's business or a
capital restructuring. A significant portion of
such corporate loans are highly leveraged loans
such as leveraged buy-out loans, leveraged
recapitalization loans and other types of
acquisition loans. The Fund also may invest in
privately placed notes with credit and pricing
terms that are, in the opinion of the
Investment Adviser, consistent with investment
in senior collateralized corporate loans.
Floating or Variable Rate Corporate
Loans. Under normal market conditions, the
Fund will invest at least 65% of its assets in
corporate loans that have floating or variable
interest rates. Floating rate corporate loan
interest rates adjust periodically at a margin
above a generally-recognized base lending rate
such as the prime rate of a designated U.S.
bank, the Certificate of Deposit rate or the
London InterBank Offered Rate.
Credit Quality. The Fund will invest in a
corporate loan only if, in the Investment
Adviser's judgment, the borrower can meet debt
service on such loan. The Investment Adviser
performs its own credit analysis of each
borrower. Since the minimum debt rating of a
borrower may not have a meaningful relationship
to the quality of such borrower's senior
collateralized debt, the Fund does not impose
any minimum standard regarding the rating of
other debt instruments of the borrower. The
Fund may invest without limitation in corporate
loans rated below investment grade (i.e., below
BBB or Baa) or which are unrated but of similar
credit quality.
Unsecured Loans and Short-Term
Investments. Generally the Fund invests at
least 80% of its assets in senior
collateralized corporate loans. The remainder
of the Fund's assets may be invested in
unsecured senior loans. The Fund also may
invest in cash or in secured or unsecured
short-term debt obligations. Short-term debt
obligations in which the Fund invests are rated
investment grade (i.e., within the four highest
rating categories assigned by a nationally
recognized rating service) or, if not rated,
are determined to be of comparable quality by
the Investment Adviser. Obligations rated in
the fourth highest rating category may include
obligations considered to have certain
speculative characteristics.
Portfolio Maturity. The Fund has no
restrictions on portfolio maturity, but it is
anticipated that a majority of the corporate
loans in which it invests will have stated
maturities ranging from three to ten years. As
a result of prepayments, however, the
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<PAGE> 5
average life of the corporate loans is expected
to be in the two to three year range.
Foreign and Domestic Borrowers. The Fund may
invest in corporate loans made to U.S. or
non-U.S. borrowers, provided that the loans are
U.S. dollar-denominated or otherwise provide
for payment to the Fund in U.S. dollars.
Hedging Techniques. The Fund may engage in
certain interest rate hedging transactions,
such as "swaps", "caps" or "floors," to reduce
the Fund's exposure to interest rate movements.
The Fund also may invest in corporate loans
that pay interest and principal in a currency
other than U.S. dollars if the loan arrangement
also includes a foreign currency swap that
entitles the Fund to receive payments in U.S.
dollars, or if the Fund hedges the foreign
currency exposure itself utilizing forward
contracts or other methods.
BORROWINGS BY THE FUND The Fund may borrow money in amounts up to
33 1/3% of the value of its total assets.
Typically the Fund borrows to satisfy tender
offers, but it also is authorized to borrow to
finance additional investments. The Fund will
borrow to finance additional investments only
when the Investment Adviser believes that the
potential return on such additional investments
will exceed the costs incurred in connection
with the borrowing. The Fund does not currently
anticipate borrowing to finance additional
investments.
INVESTMENT ADVISER AND
ADMINISTRATOR Merrill Lynch Asset Management, L.P., the
Investment Adviser, provides investment
advisory and administrative services to the
Fund. For advisory services, the Fund pays the
Investment Adviser a fee at the annual rate of
0.95% of the Fund's average daily net assets.
For its administrative services, the Fund pays
the Investment Adviser a fee at the annual rate
of 0.40% of the Fund's average daily net
assets. While the combined advisory and
administrative fees are higher than that paid
by most funds, they are comparable to those
paid by other continuously offered closed-end
funds investing primarily in corporate loans.
DISTRIBUTIONS The Fund intends to declare dividends daily,
pay dividends monthly and distribute all of its
net investment income. Net capital gains, if
any, will be distributed at least annually.
TENDER OFFERS Currently, there is no secondary market for the
Fund's common stock, and it is not expected
that a secondary market will develop. To
provide liquidity, the Board of Directors
intends to
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<PAGE> 6
consider, on a quarterly basis, whether the
Fund should make a tender offer for its shares.
In a tender offer, the Fund repurchases
outstanding shares at the Fund's net asset
value on the last day of the offer. If a tender
offer is not made, shareholders may not be able
to sell their shares.
EARLY WITHDRAWAL CHARGE Tendered shares of common stock held for less
than one year at the date of tender are subject
to an early withdrawal charge in most cases. It
is based on the lesser of cost or net asset
value of the tendered shares. There is no
charge when shares are tendered after more than
one year.
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<PAGE> 7
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity of Shares. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.
Currently, there is no secondary market for the Fund's common stock, and a
secondary market is not expected to develop. To provide liquidity to
shareholders, the Board of Directors of the Fund intends to consider the making
of quarterly tender offers to repurchase the Fund's shares at net asset value.
However, the Fund's shares are less liquid than shares of funds traded on a
stock exchange, and shareholders who tender Fund shares held for less than one
year will pay an early withdrawal charge. The Board of Directors is not
obligated to authorize any tender offer, and there may be quarters in which no
tender offer is made. If the Board of Directors does not authorize a tender
offer, shareholders may be unable to sell their shares. Merrill Lynch and other
selected dealers are prohibited from making a market in the Fund's common stock
while the Fund either is offering its shares or is making a tender offer to
repurchase its shares.
Closed-end funds that do trade in a secondary market are subject to the
risk that the net asset value of the shares may be higher than the market price,
commonly referred to as "trading at a discount." As long as there is no
secondary market for the Fund's shares, the Fund is not subject to this risk.
Non-payment. The debt instruments in which the Fund invests are subject to
the risk of non-payment of interest and principal. When a borrower fails to make
scheduled interest or principal payments on a debt instrument, the value of the
instrument, and hence the value of the Fund's shares, may go down. While
collateral may provide some protection against devaluation due to a default on a
collateralized loan, losses may not be completely covered by the liquidation or
sale of collateral.
The Fund may invest without limitation in corporate loans rated below
investment grade (i.e., below BBB or Baa) or which are unrated but of similar
credit quality. These investments have a higher risk of non-payment than
investment grade investments.
Corporate loans made in connection with highly leveraged transactions are
subject to greater risks than other corporate loans. For example, the risks of
default or bankruptcy of the borrower or the risks that other creditors of the
borrower may seek to nullify or subordinate the Fund's claims on the collateral
securing the loan are greater in highly leveraged transactions.
Intermediary. The Fund may invest in corporate loans either by
participating as a co-lender at the time the loan is originated or by buying an
interest in the loan from an institution acting as agent, co-lender or
participant. The financial status of the institutions interposed between the
Fund and a borrower may affect the ability of the Fund to receive principal and
interest payments. For this reason, the Fund will invest in corporate loans only
if, at the time of investment, the outstanding debt obligations of these
intermediary institutions are rated investment grade or are of comparable
quality in the judgment of the Investment Adviser.
The success of the Fund depends, to a great degree, on the skill with which
an agent bank administers the terms of the corporate loan agreements, monitors
borrower compliance with covenants, collects principal, interest and fee
payments from borrowers and, where necessary, enforces creditor remedies against
borrowers. Agent banks typically have broad discretion in enforcing corporate
loan agreements.
6
<PAGE> 8
Net Asset Value; Interest Rate Sensitivity. Generally, when interest rates
go up, the value of debt securities goes down. Therefore, the net asset value of
a fund that invests primarily in fixed-income debt securities changes as
interest rates fluctuate. Because the Fund invests primarily in floating or
variable rate debt obligations, the Investment Adviser expects that it will be
insulated to a significant degree from net asset value fluctuations caused by
movements in interest rates. However, because floating and variable rate debt
obligations only reset periodically, the Fund's net asset value may fluctuate
from time to time when there is an imperfect correlation between the interest
rates on the variable rate loans in the Fund's portfolio and prevailing interest
rates. Changes in the creditworthiness of borrowers or of co-lenders or
participants interposed between the Fund and the borrowers also may affect the
Fund's net asset value. Furthermore, volatility in the capital markets may
affect the Fund's net asset value given that the Fund uses market prices to
value many of its corporate loan investments.
Borrowings by the Fund. If the Fund chooses to borrow money, rather than
liquidate investments, to satisfy a tender offer, it is subject to the risk that
investment return on Fund shares will be reduced to the extent the cost of the
borrowings exceeds income on the retained investments.
Hedging. Hedging transactions subject the Fund to the risk that, if the
Investment Adviser incorrectly forecasts market values, interest rates or other
applicable factors, the Fund's performance could suffer. In addition, if the
counterparty to an interest rate hedging transaction defaults, the Fund's risk
of loss consists of the net amount of interest payments that the Fund
contractually is entitled to receive. The Fund is not required to enter into
interest rate hedging transactions and may not do so. If the counterparty to a
foreign currency swap defaults, the Fund will seek a replacement swap, which may
result in additional costs to the Fund, and will be subject to fluctuations in
the applicable exchange rate until a replacement swap is obtained.
Concentration. The Fund's investments may be concentrated in obligations
issued by 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, including, among other things, changes in government
regulation, interest rate levels and general economic conditions.
Foreign Investment. Loans to non-U.S. borrowers may involve risks not
typically involved in domestic investment, including fluctuation in foreign
interest rates, future foreign political and economic developments and the
possible imposition of exchange controls or other governmental laws or
restrictions.
Non-diversification. The Fund is classified as a non-diversified
investment company, meaning that the Fund may invest a greater percentage of its
assets in the obligations of a single issuer than a diversified investment
company. Even as a non-diversified fund, the Fund is still subject to the
diversification requirements of the U.S. tax laws. However, since the Fund may
invest a higher percentage of its assets in obligations of a single issuer than
a diversified fund, it is more susceptible than a diversified fund to any
economic, political or regulatory occurrence that affects an individual issuer.
Liquidity of Investments. Certain corporate loans in which the Fund
invests may be deemed to be illiquid. Illiquid investments may impair the Fund's
ability to realize the full value of those investments in the event the Fund
must dispose of them quickly. The Fund's Board of Directors will consider the
liquidity of the Fund's portfolio in determining whether a tender offer should
be made.
7
<PAGE> 9
FEE TABLE
<TABLE>
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering price).... None
Dividend Reinvestment and Cash Purchase Plan Fees......... None
Early Withdrawal Charge (as a percentage of the lesser of
the original purchase price or net asset value at the
time of repurchase)(a)................................. 1.0% during the first year,
0.0% thereafter
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS)
Investment Advisory Fees(b)............................... 0.95%
Interest Payments on Borrowed Funds(c).................... 0.00
Other Expenses(d)......................................... 0.72
----
Total Annual Expenses............................. 1.67%
----
----
</TABLE>
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(a) See "Early Withdrawal Charge" -- page 27.
(b) See "Investment Advisory and Administrative Arrangements" -- page 30.
(c) Typically the Fund will borrow only when sufficient cash is otherwise
unavailable to satisfy tender offers.
(d) Includes administrative fees, which are payable to the Investment Adviser by
the Fund, at the annual rate of 0.40% of average daily net assets. See
"Investment Advisory and Administrative Arrangements" -- page 30.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment assuming (1) total annual expenses of 1.67%,
(2) a 5% annual return throughout the periods and (3)
tender at the end of the period........................ $27* $53 $91 $198
An investor would pay the following expenses on a $1,000
investment assuming no tender at the end of the
period................................................. $17 $53 $91 $198
</TABLE>
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* Reflects the early withdrawal charge.
The 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 current fiscal year. The Example set forth above
assumes reinvestment of all dividends 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 PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") may charge its customers a processing fee
(presently $5.35) for confirming purchases and repurchases. Purchases and
repurchases made directly through the Transfer Agent are not subject to the
processing fee.
8
<PAGE> 10
THE FUND
Merrill Lynch Senior Floating Rate Fund II, Inc. is a newly organized,
continuously offered, non-diversified, closed-end management investment company.
The Fund was incorporated under the laws of the State of Maryland on February 9,
1999 and has registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund's principal office is located at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536 and its telephone number is (609) 282-2800.
USE OF PROCEEDS
Assuming all shares of common stock currently registered are sold in the
initial offering, it is estimated that the net proceeds from the sale of the
common stock offered hereby will be $449,650,000, after payment of offering
expenses by the Fund, and will be invested in accordance with the Fund's
investment objective and policies as soon as practicable after the closing of
the subscription offering of common stock, but in no event, under normal market
conditions, longer than three months from such closing date. Pending such
investment, it is anticipated that the proceeds will be invested in high grade,
short-term debt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current
income and such preservation of capital as is consistent with investment in
senior collateralized corporate loans ("Corporate Loans") primarily in the form
of Participation Interests, as defined below, in Corporate Loans made by banks
or other financial institutions. It is anticipated that the Corporate Loans will
pay interest 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 which adjust
periodically at a margin above the Certificate of Deposit ("CD") rate or the
London InterBank Offered Rate ("LIBOR"). This is a fundamental policy of the
Fund and may not be changed without a vote of a majority of the outstanding
shares of the Fund. There can be no assurance that the investment objective of
the Fund will be realized.
Under normal market conditions the Fund will invest at least 80% of its
total assets in interests in Corporate Loans that have floating or variable
interest rates. Under normal market conditions, at least 65% of the total assets
of the Fund will be invested in floating or variable rate loans made to
corporations. The Fund may invest up to 20% of its total assets in cash or in
short-term debt obligations including, but not limited to, U.S. Government and
Government agency securities (some of which may not be backed by the full faith
and credit of the United States), bank money instruments (such as certificates
of deposit and bankers' acceptances), corporate and commercial obligations (such
as commercial paper and medium-term notes) and repurchase agreements. Such
short-term debt obligations, which need not be secured, will all be investment
grade (rated Baa, P-3 or higher by Moody's Investors Service, Inc. ("Moody's")
or BBB, A-3 or higher by Standard & Poor's ("S&P") or, if unrated, determined to
be of comparable quality in the judgment of the Investment Adviser). Securities
rated Baa, BBB, P-3 or A-3 are considered to have adequate capacity for payment
of principal and interest, but are more susceptible to adverse economic
conditions and, in the case of securities rated BBB or Baa (or comparable
unrated securities), have speculative characteristics. Such securities or cash
will not exceed 20% of the Fund's total assets except during interim periods
pending investment of the net proceeds of public offerings of the Fund's
securities
9
<PAGE> 11
and during temporary defensive periods when, in the opinion of the Investment
Adviser, suitable Corporate Loans are not available for investment by the Fund
or prevailing market or economic conditions warrant. The Fund also may invest up
to 20% of its total assets in senior loans made on an unsecured basis
("Unsecured Corporate Loans"). Investments in Unsecured Corporate Loans will be
made on the same basis as investments in Corporate Loans as described herein,
except with respect to collateral requirements. To a limited extent, incidental
to and in connection with its lending activities, the Fund also may acquire
warrants and other debt and equity securities.
The Fund has no restrictions on portfolio maturity, but it is anticipated
that a majority of the Corporate Loans in which it will invest will have stated
maturities ranging from three to ten years. As a result of prepayments, however,
it is expected that the average life of the Corporate Loans will be in the two
to three year range. See "Description of Corporate Loans."
Investment in shares of common stock of the Fund offers several benefits.
The Fund offers investors the opportunity to receive a high level of current
income by investing in a professionally managed portfolio comprised primarily of
Corporate Loans, a type of investment typically not available to individual
investors. In managing such portfolio, Merrill Lynch Asset Management, L.P., the
investment adviser (the "Investment Adviser"), provides the Fund and its
shareholders with professional credit analysis and portfolio diversification.
The Fund also relieves the investor of the burdensome administrative details
involved in managing a portfolio of such investments, if available to individual
investors. The benefits are at least partially offset by the expenses involved
in operating an investment company. Such expenses primarily consist of the
investment advisory and administrative fees and operational costs.
The net asset value of the shares of common stock of an investment company
that invests primarily in fixed-income securities changes as the general levels
of interest rates fluctuate. When interest rates decline, the value of a
fixed-income portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed-income portfolio can be expected to decline. The
Investment Adviser expects the Fund's net asset value to be relatively stable
during normal market conditions, because the Fund's portfolio will consist
primarily of floating and variable rate Corporate Loans, of fixed-rate Corporate
Loans hedged by interest rate swap transactions and of short-term instruments.
For these reasons, the Investment Adviser expects the value of the Fund's
portfolio to fluctuate significantly less as a result of interest rate changes
than would a portfolio of fixed-rate obligations. However, because variable
interest rates only reset periodically, the Fund's net asset value may fluctuate
from time to time in the event of an imperfect correlation between either the
interest rates on variable rate loans in the Fund's portfolio or the variable
interest rates on notional amounts in the Fund's interest rate swap
transactions, and prevailing interest rates. Also, a default on a Corporate Loan
in which the Fund has invested or a sudden and extreme increase in prevailing
interest rates may cause a decline in the Fund's net asset value. Conversely, a
sudden and extreme decline in interest rates could result in an increase in the
Fund's net asset value. Furthermore, volatility in the capital markets may
affect the Fund's net asset value given that the Fund uses market prices to
value many of its corporate loan investments.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund as a "regulated
investment company" for purposes of the Federal tax laws. See "Taxes." To
qualify, among other requirements, the Fund will limit its investments so that,
at the close of each quarter of the taxable year,
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(i) not more than 25% of the market value of the Fund's total assets will be
invested in the securities (other than U.S. Government securities) of a single
issuer and (ii) with respect to 50% of the market value of its total assets, not
more than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer. A fund
that elects to be classified as "diversified" under the 1940 Act must satisfy
the foregoing 5% requirement with respect to 75% of its total assets. To the
extent that the Fund assumes large positions in the securities of a small number
of issuers, the Fund's net asset value may fluctuate to a greater extent than
that of a diversified company as a result of changes in the financial condition
or in the market's assessment of the issuers.
DESCRIPTION OF CORPORATE LOANS
The Corporate Loans in which the Fund invests primarily consist of direct
obligations of a 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 debtor in possession financings pursuant to
Chapter 11 of the U.S. Bankruptcy Code and obligations of a borrower issued in
connection with a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy
Code. A significant portion of such Corporate Loans 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 the 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. Corporate Loans generally are issued in the form of
senior syndicated loans, but the Fund also may invest from time to time in
privately placed notes with credit and pricing terms which are, in the opinion
of the Investment Adviser, consistent with investments in senior collateralized
loan obligations. The Fund may invest without limitation in highly leveraged
Corporate Loans that are rated below investment grade or are unrated. See "Risk
Factors and Special Considerations."
The Fund may invest in Corporate Loans that are made to non-U.S. borrowers,
provided that the loans are U.S. dollar-denominated or otherwise provide for
payment in U.S. dollars, and any such borrower meets the credit standards
established by the Investment Adviser for U.S. borrowers. The Fund similarly may
invest in Corporate Loans made to U.S. borrowers with significant non-dollar
denominated revenues, provided that the loans are U.S. dollar-denominated or
otherwise provide for payment to the Fund in U.S. dollars. In all cases where
the Corporate Loans are not denominated in U.S. dollars, the Corporate Loan
facility will provide for payments to the lenders, including the Fund, in U.S.
dollars pursuant to foreign currency swap arrangements. Loans to such non-U.S.
borrowers or U.S. borrowers may involve risks not typically involved in domestic
investment, including fluctuation in foreign exchange rates, future foreign
political and economic developments, and the possible imposition of exchange
controls or other foreign or U.S. governmental laws or restrictions applicable
to such loans. With respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect the Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment position. In addition, information with
respect to non-U.S. borrowers may differ from that available with respect to
U.S. borrowers, since foreign companies are not generally subject to uniform
accounting,
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auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. borrowers.
The Corporate Loans in which the Fund invests, in many instances, hold the
most senior position in the capitalization structure of the borrower, and, in
any case, in the judgment of the Investment Adviser, are in the category of
senior debt of the borrower. Each Corporate Loan is secured by collateral that
the Investment Adviser believes to have a market value, at the time of the
Fund's investment in the Corporate Loan, which equals or exceeds the principal
amount of the Corporate Loan. The value of such collateral generally is
determined by an independent appraisal or by obtaining the market value of such
collateral (e.g., cash or securities) if it is readily ascertainable. In the
event of a default, however, the ability of the lender to have access to the
collateral may be limited by bankruptcy and other insolvency laws. The value of
the collateral may decline below the amount of the Corporate Loan subsequent to
the Fund's investment in the loan. Under certain circumstances, the collateral
is released with the consent of the Agent Bank and Co-Lenders or pursuant to the
terms of the underlying credit agreement with the borrower. There is no
assurance that the liquidation of the collateral will satisfy the borrower's
obligation in the event of 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 the case of highly leveraged loans, a borrower generally is required to
pledge collateral that may include (i) working capital assets, such as accounts
receivable and inventory, (ii) tangible fixed assets, such as real property,
buildings and equipment, (iii) intangible assets, such as trademarks, copyrights
and patent rights and (iv) security interests in securities of subsidiaries or
affiliates. In the case of Corporate Loans to privately held companies, the
companies' owners may provide additional credit support in the form of
guarantees and/or pledges of other securities that they own. There may be
temporary periods in the course of financing a borrower's tender offer where the
collateral for the loan consists of common stock having a value not less than
200% of the value of the loan on the date the loan is made. Under such
circumstances, the borrower generally proceeds with a subsequent transaction
that will permit it to pledge assets of a company as collateral for the loan,
although there can be no assurance that the borrower will be able to effect such
transaction.
In the case of project finance loans, the borrower is generally a special
purpose entity that pledges undeveloped land and other non-income producing
assets as collateral and obtains construction completion guaranties from third
parties, such as the project sponsor. Project finance credit facilities
typically provide for payment of interest from escrowed funds during a scheduled
construction period, and for the pledge of current and fixed assets after the
project is constructed and becomes operational. During the construction period,
however, the lenders bear the risk that the project will not be constructed in a
timely manner, or will exhaust project funds prior to completion. In such an
event, the lenders may need to take legal action to enforce the completion
guaranties, or may need to lend more money to the project on less favorable
financing terms, or may need to liquidate the undeveloped project assets. There
can be no assurance in any of such cases that the lenders will recover all of
their invested capital.
The rate of interest payable on floating or variable rate Corporate Loans
is established as the sum of a base lending rate 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
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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 invests 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 interest rates that are fixed for the
term of the loan. Investment in Corporate Loans with longer interest rate reset
periods or fixed interest rates may increase fluctuations in the Fund's net
asset value as a result of changes in interest rates. However, the Fund attempts
to hedge all of its fixed rate Corporate Loans against fluctuations in interest
rates by entering into interest rate swap transactions. The Fund also attempts
to maintain a portfolio of Corporate Loans that have a dollar weighted average
period to the next interest rate adjustment of no more than 90 days.
The Fund may receive and/or pay certain fees in connection with its lending
activities. These fees are in addition to interest payments received and may
include facility fees, commitment fees, amendment fees, commissions and
prepayment fees. When the Fund buys a Corporate Loan it may receive a facility
fee, and when it sells a Corporate Loan may pay a facility fee. In certain
circumstances, the Fund may receive a prepayment fee on the prepayment of a
Corporate Loan by a borrower. In connection with the acquisition of Corporate
Loans, the Fund also may acquire warrants and other debt and equity securities
of the borrower or its affiliates. The acquisition of such debt and equity
securities will only be incidental to the Fund's purchase of an interest in a
Corporate Loan.
The Fund invests in a Corporate Loan only if, in the Investment Adviser's
judgment, the borrower can meet debt service on such loan. In addition, the
Investment Adviser will consider other 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, the ratio of cash flows to total debt 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.
The primary consideration in selecting such Corporate Loans for investment
by the Fund is the creditworthiness of the borrower. The Investment Adviser
performs its own independent credit analysis of the borrower in addition to
utilizing information prepared and supplied by the Agent Bank, Co-Lender or
Participant (each defined below) from whom the Fund purchases its Participation
Interest in a Corporate Loan. The Investment Adviser's analysis continues on an
ongoing basis for any Corporate Loans in which the Fund has invested. Although
the Investment Adviser uses due care in making such analysis, there can be no
assurance that such analysis will disclose factors that may impair the value of
the Corporate Loan.
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 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.
The Fund does not have a policy with regard to minimum ratings for
Corporate Loans in which it may invest. Investments in Corporate Loans are based
primarily on the Investment Adviser's independent credit analyses of a
particular borrower. Moreover, the Investment Adviser does not regard the
ratings of other publicly held securities of a borrower to be relevant to its
investment considerations. See "Appendix--Ratings of Securities."
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A borrower also must comply with various restrictive covenants contained in
any Corporate Loan agreement between the borrower and the lending syndicate.
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, the
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 a 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).
It is expected that a majority of the Corporate Loans will have stated
maturities ranging from three to ten years. However, such Corporate Loans
usually require, in addition to scheduled payments of interest and principal,
the prepayment of the Corporate Loan 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. Upon a
prepayment, the Fund may receive both a prepayment fee from the prepaying
borrower and a facility fee on the purchase of a new Corporate Loan with the
proceeds from the prepayment of the former. Such fees may mitigate any adverse
impact on the yield on the Fund's portfolio which may arise as a result of
prepayments and the reinvestment of such proceeds in Corporate Loans bearing
lower interest rates.
Loans to non-U.S. borrowers or to U.S. borrowers with significant non-U.S.
dollar-denominated revenues may provide for conversion of all or part of the
loan from a U.S. dollar-denominated obligation into a foreign currency
obligation at the option of the borrower. The Fund may invest in Corporate Loans
that were converted into non-U.S. dollar-denominated obligations only when the
Corporate Loan facility provides for payments to the lenders in U.S. dollars
pursuant to foreign currency swap arrangements. 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 U.S. dollars. The Fund will 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 or Baa or P-3 or
higher by Moody's, or determined to be of comparable quality in the judgment of
the Investment Adviser). The amounts of U.S. 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 U.S.
dollars. If there is a default by the counterparty, the Fund will have
contractual remedies pursuant to the swap arrangements; however, the U.S. 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,
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an amount of cash or liquid securities 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.
DESCRIPTION OF PARTICIPATION INTERESTS
A Corporate Loan in which the Fund may invest typically is 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 administers the Loan on behalf
of the syndicate (the "Agent Bank"). Co-Lenders may sell Corporate Loans to
third parties called "Participants." The Fund invests 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
acquiring participations in, assignments of or novations of a Corporate Loan
(collectively, "Participation Interests"). In a novation, the Fund accepts all
of the rights of the Intermediate Participants 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 a lender directly
against the borrower and assumes all of the obligations of the Intermediate
Participants, including any obligations to make future advances to the borrower.
As a result, therefore, the Fund has 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
is 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 is 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 Loans. The Fund
will not act as an Agent Bank, guarantor, sole negotiator or sole structuror
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 the borrower fails
to pay principal and interest when due, the Fund may be subject to delays,
expenses 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 a 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 a result of improper
conduct by the Agent Bank or Intermediate Participant. The Fund invests in
Corporate Loans only if, at the time of
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investment, the outstanding debt obligations of the Agent Bank and Intermediate
Participants are investment grade (i.e., rated BBB or A-3 or higher by S&P or
Baa or P-3 or higher by Moody's, or determined to be of comparable quality in
the judgment of the Investment Adviser).
Because the Fund regards 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 that such institutions may make and the
interest rates and fees that such institutions may charge. The profitability of
these institutions is largely dependent on the availability and cost of capital
funds, and has shown significant recent fluctuation as a result of volatile
interest rate levels. In addition, general economic conditions are important to
the operations of these institutions, with exposure to credit losses resulting
from possible financial difficulties of borrowers potentially having an adverse
effect. Insurance companies also are affected by economic and financial
conditions and are subject to extensive government regulation, including rate
regulation. The property and casualty industry is cyclical, being subject to
dramatic swings in profitability which can be affected by natural catastrophes
and other disasters. Individual companies may be exposed to material risks,
including reserve inadequacy, latent health exposure and inability to collect
from their reinsurance carriers. The financial services area is currently
undergoing relatively rapid change as existing distinctions between financial
service segments become less clear. In this regard, recent business combinations
have included insurance, finance and securities brokerage under single
ownership. Moreover, the Federal laws generally separating commercial and
investment banking are currently being studied by Congress.
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 lenders which are parties to the Corporate Loan
Agreement. The Fund generally relies on the Agent Bank or an Intermediate
Participant to collect its portion of the payments on the Corporate Loan.
Furthermore, the Fund generally relies on the Agent Bank to use 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 is obligated to use only the same care it would use in the
management of its own property. The borrower compensates the Agent Bank for
these services. 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 were 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.
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The Fund 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 high quality, short-term,
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 Objective and Policies."
ILLIQUID SECURITIES
Certain Corporate Loans are, at present, not readily marketable and may be
subject to restrictions on resale. Although the market for Corporate Loans has
developed significantly during recent years, certain of the Corporate Loans in
which the Fund invests do not have the liquidity of conventional debt securities
traded in the secondary market and may be considered illiquid. The Fund has no
limitation on the amount of its investments which are not readily marketable or
are subject to restrictions on resale. Such investments, which may be considered
illiquid, may affect the Fund's ability to realize the net asset value in the
event of a voluntary or involuntary liquidation of its assets. To the extent
that such investments are illiquid, the Fund may have difficulty disposing of
portfolio securities in order to purchase shares of its common stock pursuant to
tender offers, if any. The Board of Directors of the Fund will consider the
liquidity of the Fund's portfolio securities in determining whether a tender
offer should be made by the Fund. See "Net Asset Value" for information with
respect to valuation of illiquid Corporate Loans.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowing. The Fund is authorized to borrow money in amounts of up to
33 1/3% of the value of its total assets at the time of such borrowings.
Borrowings by the Fund (commonly known as "leveraging") create an opportunity
for greater total return but, at the same time, increase exposure to capital
risk. In addition, borrowed funds are subject to interest costs that may offset
or exceed the return earned on the borrowed funds. See "Borrowings by the Fund."
Repurchase Agreements. The Fund may enter into repurchase agreements with
respect to its permitted investments but currently intends to do so only with
member banks of the Federal Reserve System or with primary dealers in U.S.
Government securities. Under a repurchase agreement the Fund buys a security at
one price and simultaneously promises 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 1940 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.
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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 United States Government. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the 1940 Act. 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. In the event that the borrower
defaults on its obligation to return borrowed securities, because of insolvency
or otherwise, the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the borrowed securities.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund also may purchase and sell interests in Corporate Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Corporate Loans and other portfolio debt
securities at delivery may be more or less than their purchase price, and yields
generally available on such interests or securities when delivery occurs may be
higher than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase such interest or securities on such basis only with the
intention of actually acquiring these interests or securities, but the Fund may
sell such interests or securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
interests or securities for the Fund's portfolio consistent with the Fund's
investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.
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INTEREST RATE HEDGING TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates by entering into interest rate hedging
transactions. While the Fund's use of hedging strategies is intended to further
the Fund's investment objective, there can be no assurance that the Fund's
interest rate hedging transactions will be effective. Suitable hedging
instruments may not be available on a timely basis and on acceptable terms.
Furthermore, the Fund has no obligation to enter into interest rate hedging
transactions and may only be engaged in interest rate hedging transactions from
time to time and may not necessarily engage in hedging transactions when moves
in interest rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in interest rate hedging transactions. Gains from transactions in
interest rate hedges when distributed to shareholders are taxable as ordinary
income or, in certain circumstances, as long-term capital gains to shareholders.
See "Taxes."
The Fund expects to enter into interest rate hedging 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 also attempts to enter into
interest rate hedging transactions to hedge all of its fixed rate Corporate
Loans against fluctuations in interest rates. The Fund may enter into interest
rate hedges on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or its liabilities. Typically, the parties with
which the Fund enters into interest rate hedging transactions are broker-dealers
and other financial institutions.
The interest rate hedging transactions in which the Fund may engage include
interest rate swaps involving the exchange by the Fund with another party of
their respective commitments to pay or receive interest, such as an exchange of
fixed rate payments for floating rate payments. For example, if the Fund holds a
Corporate Loan 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 enables the Fund to offset a
decline in the value of the Corporate Loan due to rising interest rates, but
would also limit its ability to benefit from falling interest rates. Conversely,
if the Fund holds a Corporate Loan 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, but would preclude it from taking full advantage of rising
interest rates.
The Fund also may engage in interest rate hedging 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.
19
<PAGE> 21
Inasmuch as these interest rate hedging transactions are entered into for
good faith hedging purposes, the Investment Adviser believes that such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to its borrowing restrictions. The Fund usually enters
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 high grade liquid debt
securities 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 will not enter into any interest rate
hedging transaction unless the Investment Adviser considers the credit quality
of the unsecured senior debt or the claims-paying ability of the other party
thereto to be investment grade. 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 but such remedies may be subject to
bankruptcy and insolvency laws which could affect the Fund's rights as a
creditor. The swap market has grown substantially in recent years with a large
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. Interest rate caps and floors are more recent
innovations and they are less liquid than swaps. There can be no assurance,
however, that the Fund will be able to enter into interest rate swaps or to
purchase interest rate caps or floors at prices or on terms the Investment
Adviser believes are advantageous to the Fund. In addition, although the terms
of interest rate swaps, caps and floors may provide for termination, there can
be no assurance the Fund will be able to terminate an interest rate swap or to
sell or offset interest rate caps or floors that it has purchased.
The use of interest rate hedges is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. 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.
There is no limit on the amount of interest rate hedging transactions that
may be entered into by the Fund. These transactions do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate hedges is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the
Corporate Loan 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.
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 Participation Interests and its rights and
obligations to receive and pay interest pursuant to interest rate swaps.
20
<PAGE> 22
BORROWINGS BY THE FUND
The Fund may borrow money representing up to approximately 33 1/3%, or
issue shares of preferred stock representing up to approximately 50%, of the
Fund's total assets immediately after such borrowing or issuance. There can be
no assurance, however, that money will actually be borrowed or that preferred
stock representing such percentage of the Fund's capital will actually be
issued. Borrowings by the Fund or the issuance of the preferred stock will
result in leveraging of the common stock. 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. Borrowings from an affiliate of the Investment Adviser will
result in the payment of fees and interest on borrowed funds to the affiliate by
the Fund.
The Fund may borrow money to finance the purchase of shares of its common
stock pursuant to tender offers. The Fund also may incur borrowings and/or issue
preferred stock for the purpose of acquiring additional income-producing
investments when the Investment Adviser believes that the interest or dividend
payments and other costs with respect to such borrowings and/or preferred stock
issuance will be exceeded by the anticipated return on such investments. The
amount of any such borrowing or issuance will depend on market or economic
conditions existing at that time. Although the Fund is authorized to borrow
money and/or issue preferred stock to finance the purchase of investments, it
does not currently anticipate doing so.
Capital raised through leverage will be subject to interest costs or
dividend payments which may or may not exceed the interest 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. Certain types of borrowings may result in the
Fund being subject to covenants in credit agreements, including those relating
to asset coverage and portfolio composition requirements and those restricting
the Fund's payment of dividends and distributions on the common stock in certain
instances. 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 income per share of common stock, but at the same time such borrowing or
issuance 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.
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount it will borrow, 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.
21
<PAGE> 23
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 1940 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. Borrow money or issue senior securities, except as permitted by
Section 18 of the 1940 Act.
2. Make investments for the purpose of exercising control or
management.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter's or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than 10% of the Fund's total assets would be invested
in such securities.
4. Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
5. Underwriter securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 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 objective, policies
and limitations and (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 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
Objective and Policies -- Description of Participation Interests").
8. 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.
9. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options.
22
<PAGE> 24
An additional investment restriction adopted by the Fund, which may be
changed by the Board of Directors, provides that the Fund may not 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 hedging techniques involving interest rate transactions, foreign currency
swap transactions relating to non-U.S. dollar-denominated loans and permitted
borrowings by the Fund.
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, Pierce, Fenner & Smith
Incorporated ("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 1940 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."
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, 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.
PURCHASE OF SHARES
SUBSCRIPTION OFFERING
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. (the "Distributor"), an affiliate of the Investment Adviser, acts as the
distributor of shares of common stock of the Fund.
The Distributor, and other securities dealers which have entered into
selected dealer agreements with the Distributor, including Merrill Lynch, will
solicit subscriptions for shares of the Fund during a period expected to end on
March 23, 1999. The subscription period may be extended for up to an additional
30 days upon agreement between the Fund and the Distributor. On the third
business day after the conclusion of the subscription period, the subscriptions
will be payable, the shares will be issued and the Fund will commence
operations. The subscription offering may be terminated by the Fund or the
Distributor at any time, in which event no shares will be issued (and,
therefore, the Fund will not commence operations, no amounts will be payable by
subscribers, any payments by subscribers will be refunded in full without
interest) or a limited number of shares will be issued.
The public offering price of the shares during the subscription offering is
$10.00 without a front-end sales charge. The minimum initial purchase for shares
of common stock during the subscription offering is $1,000.
The proceeds per share to the Fund from the sale of all shares sold during
the subscription period will be $10.00. As set forth below, the Distributor may
make payments to Merrill Lynch or other selected dealers from its own assets.
23
<PAGE> 25
Due to the administrative complexities associated with the subscription
offering, administrative errors may result in the Distributor or an affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of the
shares of common stock) or shares of common stock which it may wish to resell.
Such shares of common stock will not be subject to any investment restriction
and may be resold pursuant to this Prospectus.
CONTINUOUS OFFERING
After completion of the subscription offering, the Fund expects to engage
in a continuous offering of its shares of common stock through the Distributor
and other securities dealers that have entered into selected dealer agreements
with the Distributor, including Merrill Lynch. During the continuous offering of
the Fund's common stock, shares of the Fund may be purchased from the
Distributor or selected dealers, including Merrill Lynch, or by mailing a
purchase order directly to the Fund's Transfer Agent. Minimum initial and
subsequent purchase requirements during the continuous offering are:
<TABLE>
<CAPTION>
THE THE
MINIMUM MINIMUM
INITIAL SUBSEQUENT
PURCHASE PURCHASE
FOR INVESTMENTS IN THE FUND MADE AMOUNT IS AMOUNT IS
-------------------------------- ----------- -----------
<S> <C> <C>
Directly through the Fund's Distributor or Transfer
Agent................................................... $1,000 $50
Via 401(k) or 403(b) plans maintained through Merrill
Lynch................................................... None None
Via other individual retirement accounts or other
retirement plans that are not maintained through Merrill
Lynch................................................... $ 250 $ 1
</TABLE>
To permit the Fund to invest the net proceeds from the sale of its shares
of common stock in an orderly manner, the Fund may delay the commencement of the
continuous offering of its shares of common stock or, from time to time, suspend
the sale of its shares of common stock, except for sales to existing holders of
common stock and dividend reinvestments.
The Fund will offer its shares during the continuous offering at a public
offering price equal to the next determined net asset value per share without a
front-end sales charge. The applicable offering price for purchase orders is
based on the net asset value of the Fund next determined after receipt of the
purchase order by the Distributor. As to purchase orders received by securities
dealers prior to the close of business on the New York Stock Exchange
(generally, the NYSE closes at 4:00 p.m., Eastern time), which includes orders
received after the close of business on the previous day, the applicable
offering price is based on the net asset value determined as of 15 minutes after
the close of business on the NYSE on that day, provided the Distributor in turn
receives the order from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the NYSE on that day, such orders are deemed received on the next business day.
Any order may be rejected by the Distributor or the Fund. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares at any time
in response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Neither the Distributor nor
the dealers are permitted to withhold placing orders to benefit themselves by a
price change. The Distributor is required to advise the Fund promptly of all
purchase orders and cause payments for shares of common stock to be delivered
promptly to the Fund. Merrill Lynch charges
24
<PAGE> 26
its customers a processing fee (presently $5.35) to confirm a purchase of shares
by such customers. Purchases made directly through the Fund's Transfer Agent are
not subject to the processing fee.
Due to the administrative complexities associated with a continuous
offering, administrative errors may result in the Distributor or an affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of the
shares of common stock) of shares of common stock that it may wish to resell.
Such shares of common stock will not be subject to any investment restriction
and may be resold pursuant to this Prospectus.
The Distributor compensates Merrill Lynch or other selected dealers at a
rate of 1.0% of amounts purchased. In addition, the Distributor compensates
Merrill Lynch or such dealers quarterly at an annual rate equal to 0.75% of the
value of Fund shares that remain outstanding after one year from the date of
their original purchase sold by Merrill Lynch or such dealers. The foregoing
payments made by the Distributor will be made from its own assets or an
affiliate's and will not be an expense borne by the Fund. Total compensation
paid to Merrill Lynch, selected dealers and the Distributor, including the
compensation paid at the time of purchase, the quarterly payments mentioned
above and the early withdrawal charge, if any, will not exceed the applicable
limit (presently, 8%), as determined from time to time by the National
Association of Securities Dealers, Inc.
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholder's name may be opened at the
Transfer Agent. Shareholders should be aware that it will not be possible to
transfer their shares from Merrill Lynch to another brokerage firm or financial
institution. Shareholders interested in transferring their brokerage accounts
from Merrill Lynch and who do not wish to have an account maintained for such
shares at the Fund's transfer agent must tender the shares for repurchase by the
Fund as described under "Tender Offers" so that the cash proceeds can be
transferred to the account at the new firm.
TENDER OFFERS
In recognition of the possibility that a secondary market for the Fund's
shares will not exist, the Fund intends to take certain actions that provide
liquidity to shareholders. The Fund intends from time to time to make offers to
purchase its shares of common stock from all beneficial holders at a price per
share equal to the net asset value per share determined at the close of business
on the day an offer terminates. Commencing with the second quarter of Fund
operations, the Board of Directors presently intends to make tender offers on a
quarterly basis. There can be no assurance, however, that the Board of Directors
will decide to undertake the making of any tender offer. Subject to the Fund's
investment restriction with respect to borrowings, the Fund may borrow money to
finance the repurchase of shares pursuant to any tender offers. See "Borrowings
by the Fund" and "Investment Restrictions."
The Fund expects that ordinarily there will be no secondary market for the
Fund's common stock and that periodic tenders will be the only source of
liquidity for Fund shareholders. Nevertheless, if a secondary market develops
for the common stock of the Fund, the market price of the shares may vary from
net asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the Fund,
especially as it affects the yield on and net asset value of the common stock of
the Fund. A tender offer for shares of common stock of the Fund at net asset
value is expected to reduce any spread between net asset value and market price
that may
25
<PAGE> 27
otherwise develop. However, there can be no assurance that such action would
result in the Fund's common stock trading at a price which equals or
approximates net asset value.
Although the Board of Directors believes that the tender offers generally
are beneficial to shareholders, the acquisition of shares of common stock by the
Fund will decrease the total assets of the Fund. Tender offers are therefore
likely to increase the Fund's expense ratio (assuming such acquisition is not
offset by the issuance of additional shares of common stock). Furthermore, to
the extent the Fund borrows to finance the making of tender offers, interest on
such borrowings reduce the Fund's net investment income.
It is the Board's announced policy, which may be changed by the Board, not
to purchase shares pursuant to a tender offer if (1) such purchases would impair
the Fund's status as a regulated investment company under the Federal tax laws
(which would cause the Fund's income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Fund);
(2) the Fund would not be able to liquidate portfolio securities in a manner
which is orderly and consistent with the Fund's investment objective and
policies in order to purchase common stock tendered pursuant to the tender
offer; or (3) there is, in the Board's judgment, any (a) legal action or
proceeding instituted or threatened challenging the tender offer or otherwise
materially adversely affecting the Fund, (b) declaration of a banking moratorium
by Federal or state authorities or any suspension of payment by banks in the
United States or New York State, which is material to the Fund, (c) limitation
imposed by Federal or state authorities on the extension of credit by lending
institutions, (d) commencement of war, armed hostilities or other international
or national calamity directly or indirectly involving the United States which is
material to the Fund, or (e) other event or condition which would have a
material adverse effect on the Fund or its shareholders if shares of common
stock tendered pursuant to the tender offer were purchased. Thus, there can be
no assurance that the Board will proceed with any tender offer. The Board of
Directors may modify these conditions in light of circumstances existing at the
time. If the Board of Directors determines to purchase the Fund's shares of
common stock pursuant to a tender offer, such purchases could reduce
significantly the asset coverage of any borrowing or outstanding senior
securities. The Fund may not purchase shares of common stock to the extent such
purchases would result in the asset coverage with respect to such borrowing or
senior securities being reduced below the asset coverage requirement set forth
in the 1940 Act. Accordingly, in order to purchase all shares of common stock
tendered, the Fund may have to repay all or part of any then outstanding
borrowing or redeem all or part of any then outstanding senior securities to
maintain the required asset coverage. See "Borrowings by the Fund." In addition,
the amount of shares of common stock for which the Fund makes any particular
tender offer may be limited for the reasons set forth above or in respect of
other concerns related to liquidity of the Fund's portfolio.
In the event that circumstances arise under which the Fund does not conduct
the tender offers regularly, the Board of Directors will consider alternative
means of providing liquidity for holders of common stock. Such action would
include evaluating any secondary market that then exists and determining whether
such market provides liquidity for shareholders. If the Board of Directors
determines that such market, if any, fails to provide liquidity for the holders
of common stock, the Board plans to consider alternatives to providing such
liquidity. Among the alternatives that the Board of Directors may consider is
the listing of the Fund's common shares on a major domestic stock exchange or on
the Nasdaq National Market. The Board of Directors also may consider causing the
Fund to repurchase its shares
26
<PAGE> 28
from time to time in open-market or private transactions when it can do so on
terms that represent a favorable investment opportunity. In any event, the Board
of Directors cause the Fund to take whatever action it deems necessary or
appropriate to provide liquidity for the shareholders in light of the facts and
circumstances existing at such time.
Consummating a tender offer may require the Fund to liquidate portfolio
securities, and realize gains or losses, at a time when the Investment Adviser
would otherwise consider it disadvantageous to do so.
Each tender offer is made and shareholders are notified in accordance with
the requirements of the Securities Exchange Act of 1934 and the 1940 Act, either
by publication or mailing or both. The offering documents contain information
prescribed by such laws and the rules and regulations promulgated thereunder.
The repurchase of tendered shares by the Fund is a taxable event. See "Taxes."
The Fund pays all costs and expenses associated with the making of any tender
offer. An early withdrawal charge is imposed on most shares accepted for tender
that have been held for less than one year. See "Early Withdrawal Charge." In
addition, Merrill Lynch charges its customers a processing fee (presently $5.35)
to confirm a repurchase of shares from such customers pursuant to a tender
offer. Tenders made directly through the Fund's Transfer Agent are not subject
to the processing fee.
Shareholders have an investment option consisting of the right to reinvest
the net proceeds from a sale of shares (the "Original Shares") in a tender offer
by the Fund in Class C shares of certain Merrill Lynch-sponsored open-end funds
("Eligible Class C Shares") at their net asset value, without the imposition of
any contingent deferred sales charge upon any subsequent redemption of Eligible
Class C Shares, if the conditions set forth below are satisfied. First, net
proceeds from the sale of the Original Shares in the tender offer must be
immediately reinvested in Eligible Class C Shares. Second, the investment option
is available only with respect to the proceeds of shares as to which no early
withdrawal charge is applicable. Eligible Class C shares are subject to an
ongoing account maintenance fee and an ongoing distribution fee. Before taking
advantage of this investment option, shareholders should obtain a currently
effective prospectus of the fund in which they intend to invest and should
consult their Merrill Lynch Financial Consultant.
EARLY WITHDRAWAL CHARGE
An early withdrawal charge to recover distribution expenses incurred by the
Distributor is charged against the shareholder's investment account and paid to
the Distributor in connection with most shares of common stock held for less
than one year which are repurchased pursuant to a tender offer. The early
withdrawal charge is imposed on those shares accepted for tender based on an
amount equal to the lesser of the then current net asset value or the cost of
the shares. Accordingly, the early withdrawal charge is not imposed on increases
in the net asset value above the initial purchase price. In addition, the early
withdrawal charge is not imposed on shares acquired by reinvesting ordinary
income dividends or capital gain dividends. In determining whether an early
withdrawal charge is payable, it is assumed that the acceptance of an offer to
repurchase pursuant to a tender offer would be made from the earliest purchase
of shares of common stock. The early withdrawal charge imposed, if any, varies
depending on the length of
27
<PAGE> 29
time the common stock has been owned since purchase (separate purchases shall
not be aggregated for these purposes), as set forth in the following table:
<TABLE>
<CAPTION>
EARLY
YEAR OF REPURCHASE WITHDRAWAL
AFTER PURCHASE CHARGE
------------------ ----------
<S> <C>
First....................................................... 1.0%
Second and following........................................ 0.0%
</TABLE>
In determining whether an early withdrawal charge is applicable to a tender
of shares of common stock, the calculation is determined in the manner that
results in the lowest possible amount being charged. Therefore, it is assumed
that the shareholder first tenders shares held for over one year and shares
acquired by reinvesting dividends. The Fund waives the early withdrawal charge
on shares tendered following the death of all beneficial owners of such shares,
provided the shares are tendered within one year of death (a death certificate
and other applicable documents may be required). At the time of tender, the
record or succeeding beneficial owner must notify the Transfer Agent either
directly or indirectly through the Distributor that the early withdrawal charge
should be waived. Upon confirmation of the owner's entitlement, the waiver will
be granted; otherwise, the waiver will be lost.
EXAMPLE:
Assume an investor purchased 1,000 shares of common stock (at a cost of
$10,000) and six months after purchase, the net asset value per share is $10.05
and, during the six months period, the investor has acquired 30 additional
shares of common stock upon dividend reinvestment. If the investor first tenders
500 shares at this time (proceeds of $5,025), 30 shares will not be subject to
the early withdrawal charge because they were acquired by dividend reinvestment.
With respect to the remaining 470 shares, the early withdrawal charge is applied
only to the original cost of $10 per share (and not to the increase in net asset
value of $0.05 per share). Therefore, $4,700 of the $5,025 repurchase proceeds
will be charged at a rate of 1.0%.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio manager
of the Fund, including their ages and their principal occupations for at least
the last five years, is set forth below. Unless otherwise noted, the address of
the portfolio manager and each Director and executive officer is P.O. Box 9011,
Princeton, New Jersey 08536-9011.
TERRY K. GLENN (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and its affiliate, Fund Asset Management,
L.P. ("FAM") (which terms as used herein include their corporate predecessors),
since 1983; President of Princeton Funds Distributor, Inc. ("PFD") since 1986
and Director thereof since 1991; Executive Vice President and Director of
Princeton Services since 1993; President of Princeton Administrators, L.P. since
1988.
RONALD W. FORBES (58) -- 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.
28
<PAGE> 30
CYNTHIA A. MONTGOMERY (46) -- 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 (67) -- 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 Arnold 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.
KEVIN A. RYAN (66) -- 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., Vornado Realty Trust, Inc.,
Vornado Operating Company and Alexander's Inc.
ARTHUR ZEIKEL (66) -- Director(1)(2) -- Chairman of the Investment Adviser
and FAM from 1997 to 1999; President of the Investment Adviser and FAM from 1977
to 1997; Chairman of Princeton Services, Inc. ("Princeton Services") from 1997
to 1999 and Director from 1997 to 1999; President of Princeton Services from
1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.")
from 1990 to 1999.
JOSEPH T. MONAGLE, JR. (50) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and FAM since 1990; Department Head of the
Global Fixed Income Division of the Investment Adviser and FAM since 1997;
Senior Vice President of Princeton Services since 1993.
R. DOUGLAS HENDERSON (41) -- Senior Vice President and Portfolio
Manager(1)(2) -- First Vice President of the Investment Adviser since 1997; Vice
President of the Investment Adviser from 1989 to 1997.
DONALD C. BURKE (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser since 1999; First Vice
President of the Investment Adviser from 1997 to 1999 and Vice President of the
Investment Adviser from 1990 to 1997; Director of Taxation of the Investment
Adviser since 1990.
PATRICK D. SWEENEY (44) -- Secretary(1)(2) -- First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser from
1990 to 1997.
- ---------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee, officer or member of the
advisory board of certain other investment companies for which the
Investment Adviser or FAM acts as investment adviser.
29
<PAGE> 31
COMPENSATION OF DIRECTORS
Pursuant to its investment advisory agreement with the Fund (the
"Investment Advisory Agreement"), the Investment Adviser pays all compensation
of officers and employees of the Fund as well as the fees of all Directors of
the Fund who are affiliated persons of ML & Co. or its subsidiaries. The Fund
pays each Director not affiliated with the Investment Adviser (each a
"non-affiliated Director") a fee of $3,000 per year plus $300 per meeting
attended and pays all Directors' actual out-of-pocket expenses relating to
attendance at meetings. The Fund also pays members of the Board's Audit and
Nominating Committee (the "Committee"), which consists of all of the
non-affiliated Directors, an annual fee of $900. The Chairman of the Committee
receives an additional annual fee of $1,000.
The following table sets forth the 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 the aggregate compensation paid to non-affiliated Directors from
all registered investment companies advised by the Investment Adviser and its
affiliate FAM ("MLAM/FAM Advised Funds") for the calendar year ended December
31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF DIRECTOR FROM FUND OF FUND EXPENSE DIRECTORS(1)
- ---------------- ------------ ------------------------ ----------------
<S> <C> <C> <C>
Ronald W. Forbes....................... $5,100 None $192,567
Cynthia A. Montgomery.................. $5,100 None $192,567
Charles C. Reilly...................... $6,100 None $362,858
Kevin A. Ryan.......................... $5,100 None $192,567
Richard R. West........................ $5,100 None $326,125
</TABLE>
- ---------------
(1) The Directors serve on the Boards of other MLAM/FAM Advised Funds as
follows: Mr. Forbes (38 registered investment companies consisting of 51
portfolios); Ms. Montgomery (38 registered investment companies consisting
of 51 portfolios); Mr. Reilly (57 registered investment companies consisting
of 70 portfolios); Mr. Ryan (38 registered investment companies consisting
of 51 portfolios); and Mr. West (58 registered investment companies
consisting of 79 portfolios).
INVESTMENT ADVISORY
AND ADMINISTRATIVE ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides the
Fund with investment advisory and administrative services. The Merrill Lynch
Asset Management Group (which includes the Investment Adviser) acts as the
investment adviser to more than 100 registered investment companies and offers
investment advisory services to individuals and institutional accounts. As of
February 1999, the Merrill Lynch Asset Management Group had a total of
approximately $507 billion in investment company and other portfolio assets
under management. This amount includes assets managed for certain affiliates of
the Investment Adviser. The Investment Adviser is a limited partnership, the
partners of which are ML & Co. and Princeton Services, Inc. The principal
business address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
30
<PAGE> 32
The Investment Advisory Agreement provides that, subject to the direction
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, make the
necessary investment decisions, and place orders for transactions accordingly.
The Investment Adviser also will be responsible for the performance of certain
management services for the Fund. R. Douglas Henderson is the portfolio manager
of 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 pays a monthly fee at an annual rate of 0.95% of
the Fund's average daily net assets (i.e., the average daily value of the total
assets of the Fund, including proceeds from the issuance of any shares of
preferred stock, minus the sum of accrued liabilities of the Fund and
accumulated dividends on shares of outstanding preferred stock, if any). For
purposes of this calculation, average daily net assets is determined at the end
of each month on the basis of the average net assets of the Fund for each day
during the month.
Under the terms of an administration agreement with the Fund (the
"Administration Agreement"), the Investment Adviser also performs or arranges
for the performance of the administrative services (i.e., services other than
investment advice and related portfolio activities) necessary for the operation
of the Fund, including paying all compensation of and furnishing office space
for officers and employees performing investment and economic research, trading
and investment management for 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.
For administrative services, the Fund pays the Investment Adviser a monthly
fee at an annual rate of 0.40% of the Fund's average daily net assets determined
in the same manner as the fee payable by the Fund under the Investment Advisory
Agreement. The combined advisory and administrative fees are greater than those
paid by most funds, but are comparable to those paid by other continuously
offered, closed-end funds investing primarily in Corporate Loans.
The Investment Adviser has entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an indirect,
wholly-owned subsidiary of ML & Co. and an affiliate of the Investment Adviser,
pursuant to which the Investment Adviser pays MLAM U.K. a fee for providing
investment advisory services to the Investment Adviser with respect to the Fund
in an amount to be determined from time to time by the Investment Adviser and
MLAM U.K. but in no event in excess of the amount that the Investment Adviser
actually receives for providing services to the Fund pursuant to the Investment
Advisory Agreement. MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London
EC2Y 9HA, England.
The Fund pays all other expenses incurred in its operations, including,
among other things, legal and auditing expenses, taxes, costs of printing
proxies, stock certificates and shareholder reports, charges of the Custodian
and Transfer Agent, expenses of registering the shares under Federal and state
securities laws, fees and expenses with respect to the issuance of preferred
shares or any borrowing, Securities and Exchange Commission fees, fees and
expenses of non-affiliated Directors, accounting and pricing costs, insurance,
interest, brokerage costs, litigation and other extraordinary or non-recurring
expenses, mailing
31
<PAGE> 33
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.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the 1940 Act
because of their ownership of its voting securities and their power to exercise
a controlling influence over its management or policies. Similarly, the
following entities may be considered "controlling persons" of MLAM U.K.: Merrill
Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch
International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc.,
a subsidiary of ML & Co.
Unless earlier terminated as described below, the Investment Advisory and
Administration Agreements 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 1940
Act) of any such party. Such contracts are 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.
Securities held by the Fund, including Corporate Loans, may also be held
by, or be appropriate investments for, other funds or investment advisory
clients for which the Investment Adviser or its affiliates act as an adviser.
Because of different objectives or other factors, a particular security may be
bought for an advisory client when other clients are selling the same security.
If purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for 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. Transactions effected by the
Investment Adviser (or its affiliate) on behalf of more than one of its clients
during the same period may increase the demand for securities being purchased or
the supply of securities being sold, causing an adverse effect on price.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which 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 government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
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 in
securities. In addition, no employee may purchase or sell any security which 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
32
<PAGE> 34
provide for trading "blackout periods" which 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 and the
firm's risk in positioning a block of securities. While the Investment Adviser
generally seeks reasonably competitive fee or commission rates, the Fund does
not necessarily pay the lowest commission or spread available.
The Fund purchases 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 Objective and Policies -- Description of Participation Interests."
While such financial institutions generally are not required to repurchase
Participation Interests in 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.
The Fund has no obligation to deal with any bank, broker or dealer in
execution of transactions in portfolio securities. Subject to providing the best
price and execution, securities firms that provide investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for transactions
by the Fund. Research information provided to the Investment Adviser by
securities firms is supplemental. It does not replace or reduce the level of
services performed by the Investment Adviser and the expenses of the Investment
Adviser will not be reduced.
The Fund invests in securities traded primarily in the over-the-counter
markets, and the Fund intends to deal directly with dealers who make markets in
the securities involved, except in those circumstances where better prices and
execution are available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch, 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
does not deal with Merrill Lynch and its affiliates in connection with such
transactions. See "Investment Restrictions." An affiliated person of the Fund
may serve as its broker in over-the-counter transactions conducted on an agency
basis.
PORTFOLIO TURNOVER
The Fund may dispose of securities without regard to the length of 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, presently it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, should 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
33
<PAGE> 35
by the monthly average 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.) A high portfolio turnover rate bears certain tax consequences and
results in greater transaction costs, which are borne directly by the Fund.
DIVIDENDS
The Fund intends to distribute all its net investment income. Dividends
from such net investment income are declared daily and paid monthly to holders
of common stock. It is expected that the Fund will commence paying dividends to
holders of common stock within approximately 90 days of the date of this
Prospectus. Monthly distributions to holders of common stock consist of
substantially all net investment income remaining after the payment of interest
on any borrowing or dividends or interest on any senior securities from and
after any borrowing or issuance of senior securities. For Federal tax purposes,
the Fund is required to distribute substantially all of its net investment
income for each calendar year. All net realized capital gains, if any, are
distributed at least annually to holders of common stock. Shares of common stock
accrue dividends as long as they are issued and outstanding. Shares of common
stock are issued and outstanding from the settlement date of a purchase order to
the settlement date of a tender offer.
Under the 1940 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. Also, certain
types of borrowings may result in the Fund being subject to covenants in credit
agreements, including those relating to asset coverage and portfolio composition
requirements and those restricting the Fund's payment of dividends and
distributions.
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, (1) all accumulated preferred stock dividends have
been paid and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such 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).
This limitation, and the limitations contained in the preceding paragraph, 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 "Borrowings by the Fund" and
"Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends to holders of common stock may be automatically
reinvested in shares of common stock of the Fund. Dividends are taxable to
shareholders whether they are reinvested in shares of the Fund or received in
cash (provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10 or less, a shareholder will not receive such
payment in cash and such payment will be automatically invested in additional
shares).
34
<PAGE> 36
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, in any taxable year in
which it distributes at least 90% of its net income (see below), the Fund 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 its net investment income and net capital gains.
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") will be taxable to
shareholders as ordinary income. Distributions, if any, from the excess of net
long-term capital gains over net short-term capital losses derived from the sale
of securities or from certain transactions in interest rate swaps ("capital gain
dividends") are taxable as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Certain categories of capital gains
are 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 amount of any capital gain dividends as well as any
amounts of capital gain dividends in the different categories of capital gain
referred to above. Any loss upon the sale or exchange of Fund shares held for
six months or less is 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 first reduce the adjusted tax basis of a
holder's common stock and, after such adjusted tax basis is reduced to zero,
constitute capital gains to such holder (assuming such common stock is held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. 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 is treated for tax purposes as being paid and received on
December 31 of the year in which the dividend was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two or
more classes 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 gains,
discussed 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
the 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 as discussed above, will be allocated among the holders of common
stock and any series of preferred stock in proportion to the total dividends
paid to each class during the taxable year, or otherwise as required by
applicable law.
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
35
<PAGE> 37
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.
If at any time when borrowings or shares of preferred stock are outstanding
the Fund does not meet the asset coverage requirements of the 1940 Act or
applicable credit agreements, the Fund will be required to suspend distributions
to holders of common stock until the asset coverage is restored. See
"Dividends." Limits on the Fund's payment of dividends may prevent the Fund from
distributing at least 90% of its net income and may therefore jeopardize the
Fund's qualification for taxation as a RIC and/or may subject the Fund to the 4%
Federal excise tax described above. If the Fund were to fail to qualify as a
RIC, some or all of the distributions would be fully taxable for Federal income
tax purposes. Upon any failure to meet the asset coverage requirement of the
1940 Act or applicable credit agreements, the Fund may, in its sole discretion,
repay borrowings or 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 a question as
to whether distributions on such preferred stock are "preferential" under the
Code and therefore not eligible for the dividends paid deduction. The Fund
intends to rely on the advice of its counsel and may seek a private letter
ruling from the IRS on questions raised by issuance of these types of preferred
stock. Moreover, the Fund intends to issue preferred stock that counsel advises
or the IRS has ruled will not result in the payment of preferential dividends.
If the Fund ultimately relies solely on a legal opinion on issuance of such
preferred stock, there is no assurance that the IRS would agree that dividends
on the preferred stock are not preferential. If the IRS successfully disallowed
the dividends paid deduction for dividends on the preferred stock, the Fund
could lose the benefit of the special treatment afforded RICs under the Code.
The Federal income tax rules governing the taxation of interest rate swaps
are not entirely clear and may require the Fund to treat payments received under
such arrangements as ordinary income and to amortize payments under certain
circumstances. Additionally, because the treatment of swaps under the RIC
qualification rules is also not clear, the Fund will limit its activity in this
regard in order to maintain its qualification as a RIC.
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 tax.
36
<PAGE> 38
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 and
other taxes imposed by the country in which the issuer is located. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
OFFERS TO PURCHASE SHARES
Under current law, a shareholder who, pursuant to any tender offer, tenders
all of its shares and who, after such tender offer, is not considered to own any
shares under attribution rules contained in the Code will realize a taxable gain
or loss depending upon such shareholder's basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares are held as capital
assets. Different tax consequences may apply to tendering and nontendering
shareholders in connection with a tender offer, and these consequences will be
disclosed in the related offering documents. For example, if a shareholder
tenders less than all shares owned by or attributed to such shareholder, and if
the distribution to such shareholder does not otherwise qualify as a sale or
exchange, the proceeds received will be treated as a taxable dividend, a return
of capital or capital gain depending on the Fund's earnings and profits and the
shareholder's basis in the tendered shares. Also, there is a remote risk that
non-tendering shareholders may be considered to have received a deemed
distribution which may be a taxable dividend in whole or in part. Shareholders
may wish to consult their tax advisers prior to tendering. If holders of common
stock whose shares are acquired by the Fund in the open market sell less than
all shares owned by or attributed to them, a risk exists that these shareholders
will be subject to taxable dividend treatment and a remote risk exists that the
remaining shareholders may be considered to have received a deemed distribution.
-------------------------
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.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Shareholders are urged to consult their tax advisors 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.
37
<PAGE> 39
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by request to his Merrill Lynch financial consultant or by
written notification to Merrill Lynch if the shareholder's account is maintained
with Merrill Lynch or by written notification or by telephone (1-800-MER-FUND)
to the Transfer Agent if the shareholder's account is maintained with the
Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date (provided that, in the event
that a payment on an account maintained at the Transfer Agent would amount to
$10 or less, a shareholder will not receive such payment in cash and such
payment will be automatically reinvested in additional shares). Cash payments
can also be directly deposited to the shareholder's bank account. No early
withdrawal charge will be imposed upon redemption of shares issued as a result
of the automatic reinvestment of dividends. 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 distribution or redemption checks.
The automatic reinvestment of dividends does not relieve participants of
any Federal income tax that may be payable (or required to be withheld) on such
dividends. See "Taxes."
NET ASSET VALUE
The net asset value per share of common stock is determined Monday through
Friday as of 15 minutes after the close of business on the NYSE (generally, the
NYSE closes at 4:00 p.m., Eastern time), on each business day during which the
NYSE is open. The NYSE is not open on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. 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 and dividends accumulated but
not yet received) minus all liabilities (including accrued expenses) and the
aggregate liquidation value of the 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.
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 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, and the Investment
Adviser believes that such quote is a reliable indicator of value, 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 no reliable quotes
are available, 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
38
<PAGE> 40
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.
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, such other
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 1,000,000,000 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 by setting or changing in any one or more
respects the designation and number of shares of any such class or series, and
the nature, rates, amounts and times at which and the conditions under which
dividends shall be payable on, and the voting, conversion, redemption and
liquidation rights of, such class or series and any other preferences, rights,
restrictions and qualifications applicable thereto.
Shares of common stock, when issued and outstanding, are 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.
The Fund does not currently anticipate issuing preferred stock. However, in
the event the Fund issues preferred stock and so long as any shares of the
Fund's preferred stock are outstanding, holders of common stock are not 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 the 1940 Act) with respect to preferred stock would be
at least 200% after giving effect to such distributions.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders of record.
39
<PAGE> 41
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.
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 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. A Director elected by all holders of
capital stock or by the holders of preferred stock may be removed from office
only for cause by vote of the holders of at least 66 2/3% of the shares of
capital stock or preferred stock, as the case may be, of the Fund 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 of capital stock, then
entitled to be voted, voting as a single class, 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, 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.
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 1940 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.
PERFORMANCE DATA
From time to time the Fund may include its yield and/or total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders.
The yield of the Fund refers to the income generated by an investment in
the Fund over a stated period. Yield is calculated by annualizing the most
recent monthly distribution and dividing the product by the average maximum
offering price.
40
<PAGE> 42
The Fund also may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the redeemable value of such investment at
the end of the period.
The calculation of yield and total return does not reflect the imposition
of any early withdrawal charges.
Yield and total return figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
yield is expected to fluctuate, and its total return varies depending on market
conditions, the Corporate Loans and other securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of net realized and
unrealized capital gains or losses during the period.
On occasion, the Fund may compare its yield to (1) the Prime Rate, quoted
daily in The Wall Street Journal as the base rate on corporate loans at large
U.S. money center commercial banks, (2) the CD rate, quoted daily in The Wall
Street Journal as the average of top rates paid by major New York banks on
primary new issues of negotiable CDs, usually on amounts of $1 million and more,
(3) one or more averages compiled by Donoghue's Money Fund Report, a widely
recognized independent publication that monitors the performance of money market
mutual funds, (4) the average yield reported by the Bank Rate Monitor National
Index(TM) for money market deposit accounts offered by the 100 leading banks and
thrift institutions in the ten largest standard metropolitan statistical areas,
(5) yield data published by Lipper Analytical Services, Inc., or (6) the yield
on an investment in 90-day Treasury bills on a rolling basis, assuming quarterly
compounding. In addition, the Fund may compare the Prime Rate, the CD rate, the
Donoghue's averages and the other yield data described above to each other. As
with yield quotations, yield comparisons should not be considered indicative of
the Fund's yield or relative performance for any future period.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
The Bank of New York, 90 Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT; SHAREHOLDER REPORTS
The Transfer Agent for the shares of the Fund is Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, a subsidiary
of ML & Co.
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and tender of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of up to $14.00 per shareholder account, and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by it under the Agreement. Additionally, a $.20 monthly closed
account charge is assessed on all accounts that close during the calendar year.
Application of this fee commences
41
<PAGE> 43
the month following the month the account is closed and terminates at the end of
the calendar year. For purposes of the Transfer Agency Agreement, the term
"account" includes a shareholder account maintained directly by the Transfer
Agent and any other account representing the beneficial interest of a person in
the relevant share class on a recordkeeping system, provided the recordkeeping
system is maintained by a subsidiary of ML & Co.
Shareholder Reports. Only one copy of each shareholder report and certain
shareholder communications will be mailed to each identified shareholder
regardless of the number of accounts such shareholder has. If a shareholder
wishes to receive separate copies of each report and communication for each of
the shareholder's related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Financial Data Services, Inc. at (800) 637-3863.
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"). 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 expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Investment Adviser that they
also expect to resolve the Year 2000 Problem, and the Investment Adviser will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the issuers of securities
in which the Fund invest, and this could hurt the Fund's investment returns.
LEGAL OPINIONS
Certain legal matters in connection with the common stock offered hereby
are passed on for the Fund by Brown & Wood LLP, One World Trade Center, New
York, New York 10048-0557.
INDEPENDENT AUDITORS
The statement of assets and liabilities of the Fund as of March 19, 1999
included in this prospectus has been so included in reliance on the report of
Deloitte & Touche LLP, 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.
42
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder,
Merrill Lynch Senior Floating Rate Fund II, Inc.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Senior Floating Rate Fund II, Inc. as of March 19, 1999. 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, the statement of assets and liabilities presents fairly, in all
material respects, the financial position of Merrill Lynch Senior Floating Rate
Fund II, Inc. as of March 19, 1999, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
March 22, 1999
43
<PAGE> 45
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 19, 1999
<TABLE>
<S> <C>
ASSETS:
Cash................................................... $100,000
Prepaid registration fees and offering costs (Note
1).................................................... 350,000
--------
Total assets...................................... 450,000
--------
LIABILITIES:
Liabilities and accrued expenses....................... 350,000
--------
NET ASSETS:................................................. $100,000
========
NET ASSETS CONSIST OF:
Common Stock, par value $0.10 per share; 1,000,000,000
shares authorized, 10,000 shares issued and
outstanding (Note 1).................................. $ 1,000
--------
Paid-in Capital excess of par.......................... 99,000
--------
Net Assets-Equivalent to $10.00 net asset value per
share based on 10,000 shares of capital stock
outstanding (Note 1).................................. $100,000
========
</TABLE>
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
NOTE I. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on
February 9, 1999 as a closed-end, non-diversified management investment company
and has had no operation other than the sale to Merrill Lynch Asset Management,
L.P. (the "Investment Adviser") of an aggregate of 10,000 shares of common stock
for $100,000 on March 19, 1999. The General Partner of the Investment Adviser is
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The Investment Adviser, on behalf of the Fund, will incur organization
costs estimated at $19,000. Prepaid offering costs consist of legal and printing
fees related to preparing the initial registration statement, and will be
amortized over a 12 month period beginning with the commencement of operations
of the Fund. Prepaid registration fees are charged to income as the related
shares are issued.
NOTE 2. INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and administrative services to the Fund. For advisory services the Investment
Adviser will receive a monthly fee at the annual rate of 0.95 of 1% of the
Fund's average daily net assets. For administrative services, the Investment
Adviser will receive a monthly fee at the annual rate of 0.40 of 1% of the
Fund's average daily net assets.
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 taxable income
(including realized capital gains) that is distributed to shareholders.
44
<PAGE> 46
APPENDIX
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") SECURITY RATINGS
AAA Securities which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally 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 Securities which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade securities. They are rated lower than the best
securities 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 Securities 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 Securities which are rated Baa are considered as 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 securities lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA Securities 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 securities in this class.
B Securities which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payment or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Securities 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 Securities 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 Securities which are rated C are the lowest rated class of securities, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Those securities in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2 and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows;" MIG 2/VMIG 2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG 3 notes are of
"favorable quality . . . but lacking the undeniable strength of the preceding
grades."
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<PAGE> 47
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
46
<PAGE> 48
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF
THE MCGRAW-HILL COMPANIES, INC., CORPORATE DEBT RATINGS
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits 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 debt in this category than for debt in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but presently has the capacity to meet
interest payments and principal repayments. Adverse business, financial or economic conditions
would likely impair capacity or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon
favorable business, financial and economic conditions to meet timely payments of interest and
repayment of principal. In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual
or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt which is assigned an actual
or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy
petition has been filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being paid.
</TABLE>
47
<PAGE> 49
<TABLE>
<S> <C>
D Debt rated D is in payment default. The D rating category is also used when interest payments or
principal repayments are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
</TABLE>
Plus(+) or Minus (-): The rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing with the major rating
categories.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging form "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative
degree of safety is not as high as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for timely payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will be made during such grace
period.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
48
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49
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50
<PAGE> 52
[Graph]
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
<PAGE> 53
INFORMATION ABOUT THE FUND CAN BE REVIEWED AND COPIED AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. CALL 1-800-SEC-0330 FOR INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM. THIS INFORMATION IS ALSO AVAILABLE ON
THE SEC'S INTERNET SITE AT HTTP://WWW.SEC.GOV AND COPIES MAY BE OBTAINED UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE
IS AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 2
Risk Factors and Special
Considerations.................... 6
Fee Table........................... 8
The Fund............................ 9
Use of Proceeds..................... 9
Investment Objective and Policies... 9
Borrowings by the Fund.............. 21
Investment Restrictions............. 22
Purchase of Shares.................. 23
Tender Offers....................... 25
Early Withdrawal Charge............. 27
Directors and Officers.............. 28
Investment Advisory and
Administrative Arrangements....... 30
Portfolio Transactions.............. 33
Dividends .......................... 34
Taxes............................... 35
Automatic Dividend Reinvestment
Plan.............................. 38
Net Asset Value..................... 38
Description of Capital Stock........ 39
Performance Data.................... 40
Custodian........................... 41
Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing
Agent; Shareholder Reports........ 41
Year 2000 Issues.................... 42
Legal Opinions...................... 42
Independent Auditors................ 42
Independent Auditors' Report........ 43
Statement of Assets and
Liabilities....................... 44
Appendix -- Ratings of Securities... 45
</TABLE>
[MERRILL LYNCH LOGO] Code # 19056--0399
MERRILL LYNCH
SENIOR FLOATING
RATE FUND II, INC.
PROSPECTUS [MLYNCH COMPASS]
March 22, 1999
Distributor:
Merrill Lynch
Funds Distributor,
a division of
Princeton Funds
Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 54
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements:
Report of Independent Auditors, Statement of Assets and Liabilities as
of March 19, 1999.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C> <C>
(a) -- Articles of Incorporation of Registrant.(a)
(b) -- By-Laws of Registrant.(b)
(c) -- None.
(d) (1) -- Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant.(c)
(2) -- Form of specimen certificate for common stock.(b)
(e) -- None.
(f) -- None.
(g) (1) -- Form of Investment Advisory Agreement between Registrant and
Merrill Lynch Asset Management, L.P.(b)
(2) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K.
Limited.(b)
(3) -- Form of Administration Agreement between Registrant and
Merrill Lynch Asset Management, L.P.(b)
(h) (1) -- Form of Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, a division of Princeton
Funds Distributor, Inc.(b)
(2) -- Form of Selected Dealer Agreement.(b)
(i) -- None.
(j) -- Form of Custody Agreement between Registrant and The Bank of
New York.
(k) (1) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between Registrant
and Financial Data Services, Inc.
(2) -- Form of Agreement between Merrill Lynch & Co., Inc. and
Registrant relating to use by Registrant of Merrill Lynch
name.(b)
(l) -- Opinion and Consent of Brown & Wood LLP.
(m) -- None.
(n) -- Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
(o) -- None.
(p) -- Certificate of Merrill Lynch Asset Management, L.P.
(q) -- None.
(r) -- Not applicable.
</TABLE>
- ---------------
(a) Filed on February 11, 1999 as an exhibit to the Registrant's Registration
Statement on Form N-2 (File No. 333-72137).
(b) Filed on February 19, 1999 as an exhibit to Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-2 (File No. 333-72137).
(c) 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 herewith as
Exhibit (a) to the Registration Statement; and to Article II, Article III
(Sections 1, 3, 5 and 17), Article VI, Article VII, Article XII, Article
XIII and Article XIV of the Registrant's By-Laws, previously filed as
Exhibit (b) to the Registration Statement.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibits (h)(1) and (h)(2).
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<PAGE> 55
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........................................... $139,000
Printing (other than stock certificates).................... 60,000
Legal fees and expenses..................................... 50,000
Blue Sky fees............................................... 68,140
NASD fees................................................... 30,500
Miscellaneous............................................... 2,360
--------
Total.................................................. $350,000
========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
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.
Reference is made to Article IV of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreement.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant 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 Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. 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 office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
The Registrant 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 activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940, as amended (the "1940 Act"), may
be concerned, such payments will be made
C-2
<PAGE> 56
only on the following conditions: (i) the advances must be limited to amounts
used, or to be used, for the preparation or presentation of a defense to the
action, including costs connected with the preparation of a settlement; (ii)
advances may be made only upon receipt of a written promise by, or on behalf of,
the recipient to repay that amount of the advance which exceeds the amount to
which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification; and (iii)(a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, of (b) a majority of a quorum
of the Registrant's disinterested, non-party Directors, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the 1933 Act,
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or
"MLAM") 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 Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Inc., Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, 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 Real Estate Fund, Inc., Merrill Lynch Ready Assets Trust, 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.A. Government Reserves,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Fund, Inc. and Hotchkis
C-3
<PAGE> 57
and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM) and for the
following closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM
also acts as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill
Lynch Basic Value Equity Portfolio, two investment portfolios of EQ Advisors
Trust.
(b) Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser, acts as the 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 Puerto Rico Tax
Exempt 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., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured Fund
II, Inc., MuniHoldings California Insured Fund III, Inc., MuniHoldings
California Insured Fund IV, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Florida Insured Fund IV, MuniHoldings Fund, Inc., MuniHoldings Fund
II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New Jersey
Insured Fund III, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniHoldings
New York Insured Fund III, Inc., MuniHoldings Pennsylvania Insured Fund,
MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey
Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, 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, Senior High Income Portfolio, Inc. and
WorldWide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Intermediate Government Bond Fund is One
Financial Center, 23rd Floor, Boston, Massachusetts 02110-2665. The address of
the Investment Adviser, FAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Princeton Funds Distributor, Inc. ("PFD") and of
Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081, Princeton, New Jersey
08543-9081. The address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML &
Co.") is North Tower, World Financial Center, 250 Vesey Street, New York, New
York 10281-1201. The address of Financial Data Services, Inc. ("FDS") is 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
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<PAGE> 58
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since August
31, 1996 for his, her or its own account or in the capacity of director,
officer, employee, partner or trustee. In addition, Mr. Glenn is President or
Executive Vice President and Mr. Burke is either Vice President or Vice
President and Treasurer of all or substantially all of the investment companies
listed in the first two paragraphs of this Item 30. Messrs. Glenn and Burke also
hold the same positions with all or substantially all of the investment
companies advised by FAM as they do with those advised by the Investment
Adviser. Messrs. Giordano, Harvey, and Monagle are officers or
directors/trustees of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
ML & Co.............................. Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services................... General Partner General Partner of FAM
Jeffrey M. Peek...................... President President of FAM; 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 Economic
Division of Merrill Lynch from
1995 to 1997
Terry K. Glenn....................... Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President of Princeton Funds
Distributors, Inc. since 1986 and
Director thereof since 1991;
Director of FDS; President of
Princeton Administrators, L.P.
Donald C. Burke...................... Senior Vice President Senior Vice President and Treasurer
and Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services
Michael G. Clark..................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Mark Desario......................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Linda L. Federici.................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Vincent R. Giordano.................. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Elizabeth A. Griffin................. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Norman R. Harvey..................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Michael J. Hennewinkel............... Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of FAM; Senior
Secretary Vice President of Princeton
Services
Philip L. Kirstein................... Senior Vice President Senior Vice President; Senior Vice
President, Director and Secretary
of Princeton Services
</TABLE>
C-5
<PAGE> 59
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
Ronald M. Kloss...................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Debra W. Landsman-Yaros.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Senior Vice President of
PFD
Stephen M. M. Miller................. Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of Princeton
Services
Joseph T. Monagle, Jr................ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Brian A. Murdock..................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Director of PFD
Gregory Upah......................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Ronald L. Welburn.................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
</TABLE>
(c) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc.,
Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, 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 Basic Value Fund, Inc.,
Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults International
Portfolio, Merrill Lynch Convertible Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Developing Capital Markets, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
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 Technology Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill
Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc.,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill
Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch
Senior Floating Rate Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World Income
Fund, Inc., The Municipal Fund Accumulation Program, Inc. and Worldwide
DollarVest Fund, Inc. The address of each of these registered investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
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<PAGE> 60
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since June 1,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Glenn, Albert and Burke are officers of
one or more of the registered investment companies listed in the preceding
paragraphs:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ----------------------- ----------------------------------
<S> <C> <C>
Terry K. Glenn....................... Executive Vice President Executive Vice President of the
Investment Adviser and FAM;
Executive Vice President and
Director of Princeton Services;
President of Princeton Funds
Distributors, Inc. since 1986 and
Director thereof since 1991;
Director of FDS; President of
Princeton Administrators, L.P.
Alan J. Albert....................... Senior Managing Director Vice President of the Investment
Adviser
Nicholas C.D. Hall................... President Director of Merrill Lynch Europe
PLC; General Counsel of Merrill
Lynch International Private
Banking Group
Donald C. Burke...................... Senior Vice President Senior Vice President and Treasurer
of the Investment Adviser and FAM;
Senior Vice President and
Treasurer of Princeton Services
Carol Ann Langham.................... Company Secretary None
Debra Anne Searle.................... Assistant Company None
Secretary
</TABLE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder will be maintained at the
offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey 08536
and FDS, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 32. MANAGEMENT SERVICES.
Not Applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend offerings 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) The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement.
(i) To include any prospectus required by section 10(a)(3) of the
1933 Act;
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<PAGE> 61
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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<PAGE> 62
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 22ND
DAY OF MARCH, 1999.
Merrill Lynch Senior Floating Rate
Fund II, Inc.
(Registrant)
By: /s/ TERRY K. GLENN
------------------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K. Glenn,
Donald C. Burke or Patrick D. Sweeney, 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 persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ TERRY K. GLENN President (Principal March 22, 1999
- --------------------------------------------------- Executive Officer) and
(Terry K. Glenn) Director
/s/ DONALD C. BURKE Treasurer (Principal March 22, 1999
- --------------------------------------------------- Financial and Accounting
(Donald C. Burke) Officer)
/s/ RONALD W. FORBES Director March 22, 1999
- ---------------------------------------------------
(Ronald W. Forbes)
/s/ CYNTHIA A. MONTGOMERY Director March 22, 1999
- ---------------------------------------------------
(Cynthia A. Montgomery)
/s/ CHARLES C. REILLY Director March 22, 1999
- ---------------------------------------------------
(Charles C. Reilly)
/s/ KEVIN A. RYAN Director March 22, 1999
- ---------------------------------------------------
(Kevin A. Ryan)
/s/ RICHARD R. WEST Director March 22, 1999
- ---------------------------------------------------
(Richard R. West)
/s/ ARTHUR ZEIKEL Director March 22, 1999
- ---------------------------------------------------
(Arthur Zeikel)
</TABLE>
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<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C> <C>
(j) -- Form of Custody Agreement between Registrant and The Bank of
New York.
(k) (1) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between Registrant
and Financial Data Services, Inc.
(l) -- Opinion and Consent of Brown & Wood LLP.
(n) -- Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
(p) -- Certificate of Merrill Lynch Asset Management, L.P.
</TABLE>
<PAGE> 1
EXHIBIT J
CUSTODY AGREEMENT
Agreement made as of this day of , 1999, between MERRILL LYNCH
SENIOR FLOATING RATE FUND II, INC., a Maryland corporation organized and
existing under the laws of the State of Maryland, having its principal office
and place of business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536
(hereinafter called the "Fund"), and THE BANK OF NEW YORK, a New York
corporation authorized to do a banking business, having its principal office
and place of business at One Wall Street, New York, New York 10286 (hereinafter
called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
1. "Authorized Persons" shall be deemed to include any person, whether or not
such person is an officer or employee of the Fund, duly authorized by the Board
of Directors of the Fund to execute any Certificate, instruction, notice or
other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry
system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
3. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
4. "Certificate" shall mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement to be given to the Custodian
which is actually received by the Custodian and signed on behalf of the Fund by
any two Authorized Persons, and the term Certificate shall also include
Instructions.
5. "Clearing Member" shall mean a registered broker-dealer which is a clearing
member under the rules of O.C.C. and a member of a national securities exchange
qualified to act as a custodian for an investment company, or any broker-dealer
reasonably believed by the Custodian to be such a clearing member.
6. "Collateral Account" shall mean a segregated account so denominated which is
specifically allocated to a Series and pledged to the Custodian as security
for, and in consideration of, the Custodian's issuance of (a) any Put Option
guarantee letter or similar document described in paragraph 8 of Article V
herein, or (b) any receipt described in Article V or VIII herein.
7. "Composite Currency Unit" shall mean the European Currency Unit or any other
composite unit consisting of the aggregate of specified amounts of specified
Currencies as such unit may be constituted from time to time.
8. "Covered Call Option" shall mean an exchange traded option entitling the
holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying
Securities (excluding Futures Contracts) which are owned by the writer thereof
and subject to appropriate restrictions.
<PAGE> 2
9. "Currency" shall mean money denominated in a lawful currency of any country
or the European Currency Unit.
10. "Depository" shall mean The Depository Trust Company ("DTC"), a clearing
agency registered with the Securities and Exchange Commission, its successor or
successors and its nominee or nominees. The term "Depository" shall further
mean and include any other person authorized to act as a depository under the
Investment Company Act of 1940, its successor or successors and its nominee or
nominees, specifically identified in a certified copy of a resolution of the
Fund's Board of Directors specifically approving deposits therein by the
Custodian.
11. "Financial Futures Contract" shall mean the firm commitment to buy or sell
fixed income securities including, without limitation, U.S. Treasury Bills,
U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at an
agreed upon price.
12. "Futures Contract" shall mean a Financial Futures Contract and/or Stock
Index Futures Contracts.
13. "Futures Contract Option" shall mean an option with respect to a Futures
Contract.
14. "FX Transaction" shall mean any transaction for the purchase by one party
of an agreed amount in one Currency against the sale by it to the other party
of an agreed amount in another Currency.
15. "Instructions" shall mean instructions communications transmitted by
electronic or telecommunications media including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission line, facsimile
transmission signed by an Authorized Person and tested telex.
16. "Margin Account" shall mean a segregated account in the name of a broker,
dealer, futures commission merchant, or a Clearing Member, or in the name of
the Fund for the benefit of a broker, dealer, futures commission merchant, or
Clearing Member, or otherwise, in accordance with an agreement between the
Fund, the Custodian and a broker, dealer, futures commission merchant or a
Clearing Member (a "Margin Account Agreement"), separate and distinct from the
custody account, in which certain Securities and/or money of the Fund shall be
deposited and withdrawn from time to time in connection with such transactions
as the Fund may from time to time determine. Securities held in the Book-Entry
System or the Depository shall be deemed to have been deposited in, or
withdrawn from, a Margin Account upon the Custodian's effecting an appropriate
entry in its books and records.
17. "Money Market Security" shall be deemed to include, without limitation,
certain Reverse Repurchase Agreements, debt obligations issued or guaranteed as
to interest and principal by the government of the United States or agencies or
instrumentalities thereof, any tax, bond or revenue anticipation note issued by
any state or municipal government or public authority, commercial paper,
certificates of deposit and bankers' acceptances, repurchase agreements with
respect to the same and bank time deposits, where the purchase and sale of such
securities normally requires settlement in federal funds on the same day as
such purchase or sale.
18. "O.C.C." shall mean the Options Clearing Corporation, a clearing agency
registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
19. "Option" shall mean a Call Option, Covered Call Option, Stock Index Option
and/or a Put Option.
<PAGE> 3
20. "Oral Instructions" shall mean verbal instructions actually received by the
Custodian from an Authorized Person or from a person reasonably believed by
the Custodian to be an Authorized Person.
21. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement pursuant to which
the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
23. "Security" shall be deemed to include, without limitation, Money Market
Securities, Call Options, Put Options, Stock Index Options, Stock Index Futures
Contracts, Stock Index Futures Contract Options, Financial Futures Contracts,
Financial Futures Contract Options, Reverse Repurchase Agreements, common
stocks and other securities having characteristics similar to common stocks,
preferred stocks, debt obligations issued by state or municipal governments and
by public authorities, (including, without limitation, general obligation
bonds, revenue bonds, industrial bonds and industrial development bonds),
bonds, debentures, notes, mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights to receive,
purchase, sell or subscribe for the same, or evidencing or representing any
other rights or interest therein, or any property or assets, and agreements
representing corporate loans and interests therein as defined form time to time
in the Fund's prospectus or statement of additional information.
24. "Senior Security Account" shall mean an account maintained and specifically
allocated to a Series under the terms of this Agreement as a segregated
account, by recordation or otherwise, within the custody account in which
certain Securities and/or other assets of the Fund specifically allocated to
such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such
transactions as the Fund may from time to time determine.
25. "Series" shall mean the various portfolios, if any, of the Fund listed on
Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of capital stock of the Fund, each of which
is, in the case of a Fund having Series, allocated to a particular Series.
27. "Stock Index Futures Contract" shall mean a bilateral agreement pursuant to
which the parties agree to take or make delivery of an amount of cash equal to
a specified dollar amount times the difference between the value of a
particular stock index at the close of the last business day of the contract
and the price at which the futures contract is originally struck.
28. "Stock Index Option" shall mean an exchange traded option entitling the
holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian of the
Securities and money at any time owned by the Fund during the period of this
Agreement.
2. The Custodian hereby accepts appointment as such custodian and agrees to
perform the duties thereof as hereinafter set forth.
ARTICLE III.
<PAGE> 4
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in Article
VIII, the Fund will deliver or cause to be delivered to the Custodian all
Securities and all money owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and money not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and money is not
finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all
Securities eligible for deposit therein, regardless of the Series to which the
same are specifically allocated and to utilize the Book-Entry System to the
extent possible in connection with its performance hereunder, including,
without limitation, in connection with settlements of purchases and sales of
Securities, loans of Securities and deliveries and returns of Securities
collateral. Prior to a deposit of Securities specifically allocated to a
Series in the Depository, the Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit B hereto, approving, authorizing and instructing the Custodian on a
continuous and ongoing basis until instructed to the contrary by a Certificate
actually received by the Custodian to deposit in the Depository all Securities
specifically allocated to such Series eligible for deposit therein, and to
utilize the Depository to the extent possible with respect to such Securities
in connection with its performance hereunder, including, without limitation, in
connection with settlements of purchases and sales of Securities, loans of
Securities, and deliveries and returns of Securities collateral. Securities
and money deposited in either the Book-Entry System or the Depository will be
represented in accounts which include only assets held by the Custodian for
customers, including, but not limited to, accounts in which the Custodian acts
in a fiduciary or representative capacity and will be specifically allocated on
the Custodian's books to the separate account for the applicable Series. Prior
to the Custodian's accepting, utilizing and acting with respect to Clearing
Member confirmations for Options and transactions in Options for a Series as
provided in this Agreement, the Custodian shall have received a certified
resolution of the Fund's Board of Directors, substantially in the form of
Exhibit C hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a
Certificate actually received by the Custodian, to accept, utilize and act in
accordance with such confirmations as provided in this Agreement with respect
to such Series.
2. The Custodian shall establish and maintain separate accounts, in the name of
each Series, and shall credit to the separate account for each Series all money
received by it for the account of the Fund with respect to such Series. Money
credited to a separate account for a Series shall be disbursed by the Custodian
only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and address of the person
to whom the payment is to be made, the Series account from which payment is to
be made and the purpose for which payment is to be made; or
<PAGE> 5
(c) In payment of the fees and in reimbursement of the expenses and liabilities
of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian shall
furnish the Fund with confirmations and a summary, on a per Series basis, of
all transfers to or from the account of the Fund for a Series, either hereunder
or with any co-custodian or sub-custodian appointed in accordance with this
Agreement during said day. Where Securities are transferred to the account of
the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible
bulk of Securities registered in the name of the Custodian (or its nominee) or
shown on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall
furnish the Fund with a detailed statement, on a per Series basis, of the
Securities and money held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in Article
VIII, all Securities held by the Custodian hereunder, which are issued or
issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the
name of any duly appointed registered nominee of the Custodian as the Custodian
may from time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or the
Depository any Securities which it may hold hereunder and which may from time
to time be registered in the name of the Fund. The Custodian shall hold all
such Securities specifically allocated to a Series which are not held in the
Book-Entry System or in the Depository in a separate account in the name of
such Series physically segregated at all times from those of any other person
or persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or
through the use of the Book-Entry System or the Depository with respect to
Securities held hereunder and therein deposited, shall with respect to all
Securities held for the Fund hereunder in accordance with preceding paragraph
4:
(a) Collect all income, dividends and distributions due or payable;
(b) Give notice to the Fund and present payment and collect the amount payable
upon such Securities which are called, but only if either (i) the Custodian
receives a written notice of such call, or (ii) notice of such call appears in
one or more of the publications listed in Appendix C annexed hereto, which may
be amended at any time by the Custodian without the prior notification or
consent of the Fund;
(c) Present for payment and collect the amount payable upon all Securities
which mature;
(d) Surrender Securities in temporary form for definitive Securities;
(e) Execute, as custodian, any necessary declarations or certificates of
ownership under the Federal Income Tax Laws or the laws or regulations of any
other taxing authority now or hereafter in effect;
(f) Hold directly, or through the Book-Entry System or the Depository with
respect to Securities therein deposited, for the account of a Series, all
rights and similar securities issued with respect to any Securities held by the
Custodian for such Series hereunder; and
<PAGE> 6
(g) Deliver to the Fund all notices, proxies, proxy soliciting materials,
consents and other written information (including, without limitation, notices
of tender offers and exchange offers, pendency of calls, maturities of
Securities and expiration of rights) relating to Securities held pursuant to
this Agreement which are actually received by the Custodian, such proxies and
other similar materials to be executed by the registered owner (if Securities
are registered otherwise than in the name of the Fund), but without indicating
the manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian, directly or
through the use of the Book-Entry System or the Depository, shall:
(a) Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate in exchange for other Securities or cash issued
or paid in connection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation, or the exercise
of any conversion privilege and receive and hold hereunder specifically
allocated to such Series any cash or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate to any protective committee, reorganization
committee or other person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets of any corporation,
and receive and hold hereunder specifically allocated to such Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Series specified in
such Certificate, and take such other steps as shall be stated in such
Certificate to be for the purpose of effectuating any duly authorized plan of
liquidation, reorganization, merger, consolidation or recapitalization of the
Fund; and
(e) Present for payment and collect the amount payable upon Securities not
described in preceding paragraph 5(b) of this Article which may be called as
specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the Custodian
shall not be required to obtain possession of any instrument or certificate
representing any Futures Contract, any Option, or any Futures Contract Option
until after it shall have determined, or shall have received a Certificate from
the Fund stating, that any such instruments or certificates are available. The
Fund shall deliver to the Custodian such a Certificate no later than the
business day preceding the availability of any such instrument or certificate.
Prior to such availability, the Custodian shall comply with Section 17(f) of
the Investment Company Act of 1940, as amended, in connection with the
purchase, sale, settlement, closing-out or writing of Futures Contracts,
Options, or Futures Contract Options by making payments or deliveries specified
in Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing-out upon its receipt from a broker,
dealer, or futures commission merchant of a statement or confirmation
reasonably believed by the Custodian to be in the form customarily used by
brokers, dealers, or futures commission merchants with respect to such Futures
Contracts, Options, or Futures Contract Options, as the case may be, confirming
that such Security is held by such broker, dealer or futures commission
merchant, in book-entry form or otherwise, in the name of the Custodian (or any
nominee of the
<PAGE> 7
Custodian) as custodian for the Fund, provided, however, that notwithstanding
the foregoing, payments to or deliveries from the Margin Account, and payments
with respect to Securities to which a Margin Account relates, shall be made in
accordance with the terms and conditions of the Margin Account Agreement.
Whenever any such instruments or certificates are available, the Custodian
shall, notwithstanding any provision in this Agreement to the contrary, make
payment for any Futures Contract, Option, or Futures Contract Option for which
such instruments or such certificates are available only against the delivery
to the Custodian of such instrument or such certificate, and deliver any
Futures Contract, Option or Futures Contract Option for which such instruments
or such certificates are available only against receipt by the Custodian of
payment therefor. Any such instrument or certificate delivered to the
Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND OTHER THAN OPTIONS, FUTURES
CONTRACTS AND FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total
amount payable upon such purchase; (g) the name of the person from whom or the
broker through whom the purchase was made, and the name of the clearing broker,
if any; and (h) the name of the broker to whom payment is to be made. The
Custodian shall, upon receipt of Securities purchased by or for the Fund, pay
to the broker specified in the Certificate out of the money held for the
account of such Series the total amount payable upon such purchase, provided
that the same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a sale of any
Option, Futures Contract, Futures Contract Option, or any Reverse Repurchase
Agreement, the Fund shall deliver to the Custodian (i) with respect to each
sale of Securities which are not Money Market Securities, a Certificate, and
(ii) with respect to each sale of Money Market Securities, a Certificate or
Oral Instructions, specifying with respect to each such sale: (a) the Series
to which such Securities were specifically allocated; (b) the name of the
issuer and the title of the Security; (c) the number of shares or principal
amount sold, and accrued interest, if any; (d) the date of sale; (e) the sale
price per unit; (f) the total amount payable to the Fund upon such sale; (g)
the name of the broker through whom or the person to whom the sale was made,
and the name of the clearing broker, if any; and (h) the name of the broker to
whom the Securities are to be delivered. The Custodian shall deliver the
Securities specifically allocated to such Series to the broker specified in
the Certificate against payment of the total amount payable to the Fund upon
such sale, provided that the same conforms to the total amount payable as set
forth in such Certificate or Oral Instructions.
ARTICLE V.
<PAGE> 8
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund shall
deliver to the Custodian a Certificate specifying with respect to each Option
purchased: (a) the Series to which such Option is specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer and the title and
number of shares subject to such Option or, in the case of a Stock Index
Option, the stock index to which such Option relates and the number of Stock
Index Options purchased; (d) the expiration date; (e) the exercise price; (f)
the dates of purchase and settlement; (g) the total amount payable by the Fund
in connection with such purchase; (h) the name of the Clearing Member through
whom such Option was purchased; and (i) the name of the broker to whom payment
is to be made. The Custodian shall pay, upon receipt of a Clearing Member's
statement confirming the purchase of such Option held by such Clearing Member
for the account of the Custodian (or any duly appointed and registered nominee
of the Custodian) as custodian for the Fund, out of money held for the account
of the Series to which such Option is to be specifically allocated, the total
amount payable upon such purchase to the Clearing Member through whom the
purchase was made, provided that the same conforms to the total amount payable
as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant to
paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund
upon such sale; and (h) the name of the Clearing Member through whom the sale
was made. The Custodian shall consent to the delivery of the Option sold by
the Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased by the
Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a
Certificate specifying with respect to such Call Option: (a) the Series to
which such Call Option was specifically allocated; (b) the name of the issuer
and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise
price per share; (f) the total amount to be paid by the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such Call Option
was exercised. The Custodian shall, upon receipt of the Securities underlying
the Call Option which was exercised, pay out of the money held for the account
of the Series to which such Call Option was specifically allocated the total
amount payable to the Clearing Member through whom the Call Option was
exercised, provided that the same conforms to the total amount payable as set
forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased by the
Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a
Certificate specifying with respect to such Put Option: (a) the Series to
which such Put Option was specifically allocated; (b) the name of the issuer
and the title and number of shares subject to the Put Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise
price per share; (f) the total amount to be paid to the Fund upon such
exercise; and (g) the name of
<PAGE> 9
the Clearing Member through whom such Put Option was exercised. The Custodian
shall, upon receipt of the amount payable upon the exercise of the Put Option,
deliver or direct the Depository to deliver the Securities specifically
allocated to such Series, provided the same conforms to the amount payable to
the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund
in connection with such exercise; and (h) the Clearing Member from whom such
payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Covered
Call Option: (a) the Series for which such Covered Call Option was written;
(b) the name of the issuer and the title and number of shares for which the
Covered Call Option was written and which underlie the same; (c) the expiration
date; (d) the exercise price; (e) the premium to be received by the Fund; (f)
the date such Covered Call Option was written; and (g) the name of the Clearing
Member through whom the premium is to be received. The Custodian shall deliver
or cause to be delivered, in exchange for receipt of the premium specified in
the Certificate with respect to such Covered Call Option, such receipts as are
required in accordance with the customs prevailing among Clearing Members
dealing in Covered Call Options and shall impose, or direct the Depository to
impose, upon the underlying Securities specified in the Certificate
specifically allocated to such Series such restrictions as may be required by
such receipts. Notwithstanding the foregoing, the Custodian has the right,
upon prior written notification to the Fund, at any time to refuse to issue any
receipts for Securities in the possession of the Custodian and not deposited
with the Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in the
preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered
Call Option and specifying: (a) the Series for which such Covered Call Option
was written; (b) the name of the issuer and the title and number of shares
subject to the Covered Call Option; (c) the Clearing Member to whom the
underlying Securities are to be delivered; and (d) the total amount payable to
the Fund upon such delivery. Upon the return and/or cancellation of any
receipts delivered pursuant to paragraph 6 of this Article, the Custodian shall
deliver, or direct the Depository to deliver, the underlying Securities as
specified in the Certificate against payment of the amount to be received as
set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to such Put Option: (a)
the Series for which such Put Option was written; (b) the name of the issuer
and the title and number of shares for which the Put Option is written and
which underlie the same; (c) the expiration date; (d) the exercise price; (e)
the premium to be received by the Fund; (f) the date such Put Option is
written; (g) the name of the Clearing Member through whom the premium is to be
received and to whom a Put Option guarantee letter is to be delivered; (h) the
amount of cash, and/or the amount and kind of Securities, if any, specifically
allocated
<PAGE> 10
to such Series to be deposited in the Senior Security Account for such Series;
and (i) the amount of cash and/or the amount and kind of Securities
specifically allocated to such Series to be deposited into the Collateral
Account for such Series. The Custodian shall, after making the deposits into
the Collateral Account specified in the Certificate, issue a Put Option
guarantee letter substantially in the form utilized by the Custodian on the
date hereof, and deliver the same to the Clearing Member specified in the
Certificate against receipt of the premium specified in said Certificate.
Notwithstanding the foregoing, the Custodian shall be under no obligation to
issue any Put Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and described in the preceding
paragraph is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Put Option was written;
(b) the name of the issuer and title and number of shares subject to the Put
Option; (c) the Clearing Member from whom the underlying Securities are to be
received; (d) the total amount payable by the Fund upon such delivery; (e) the
amount of cash and/or the amount and kind of Securities specifically allocated
to such Series to be withdrawn from the Collateral Account for such Series and
(f) the amount of cash and/or the amount and kind of Securities, specifically
allocated to such Series, if any, to be withdrawn from the Senior Security
Account. Upon the return and/or cancellation of any Put Option guarantee
letter or similar document issued by the Custodian in connection with such Put
Option, the Custodian shall pay out of the money held for the account of the
Series to which such Put Option was specifically allocated the total amount
payable to the Clearing Member specified in the Certificate as set forth in
such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written;
(b) whether such Stock Index Option is a put or a call; (c) the number of
options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Security Account for
such Series; (j) the amount of cash and/or the amount and kind of Securities,
if any, specifically allocated to such Series to be deposited in the Collateral
Account for such Series; and (k) the amount of cash and/or the amount and kind
of Securities, if any, specifically allocated to such Series to be deposited in
a Margin Account, and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium specified in the
Certificate, make the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such receipts, if any,
which the Custodian has specifically agreed to issue, which are in accordance
with the customs prevailing among Clearing Members in Stock Index Options and
make the deposits into the Collateral Account specified in the Certificate, or
(2) make the deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in the
preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written;
(b) such information as may be necessary to identify the Stock Index Option
being
<PAGE> 11
exercised; (c) the Clearing Member through whom such Stock Index Option is
being exercised; (d) the total amount payable upon such exercise, and whether
such amount is to be paid by or to the Fund; (e) the amount of cash and/or
amount and kind of Securities, if any, to be withdrawn from the Margin Account;
and (f) the amount of cash and/or amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account for such Series; and the amount of
cash and/or the amount and kind of Securities, if any, to be withdrawn from the
Collateral Account for such Series. Upon the return and/or cancellation of the
receipt, if any, delivered pursuant to the preceding paragraph of this Article,
the Custodian shall pay out of the money held for the account of the Series to
which such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously written
Option described in paragraphs, 6, 8 or 10 of this Article in a transaction
expressly designated as a "Closing Purchase Transaction" in order to liquidate
its position as a writer of an Option, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to the Option being purchased:
(a) that the transaction is a Closing Purchase Transaction; (b) the Series for
which the Option was written; (c) the name of the issuer and the title and
number of shares subject to the Option, or, in the case of a Stock Index
Option, the stock index to which such Option relates and the number of Options
held; (d) the exercise price; (e) the premium to be paid by the Fund; (f) the
expiration date; (g) the type of Option (put or call); (h) the date of such
purchase; (i) the name of the Clearing Member to whom the premium is to be
paid; and (j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin Account,
or the Senior Security Account for such Series. Upon the Custodian's payment
of the premium and the return and/or cancellation of any receipt issued
pursuant to paragraphs 6, 8 or 10 of this Article with respect to the Option
being liquidated through the Closing Purchase Transaction, the Custodian shall
remove, or direct the Depository to remove, the previously imposed restrictions
on the Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein,
and upon the return and/or cancellation of any receipts issued by the
Custodian, shall make such withdrawals from the Collateral Account, and the
Margin Account and/or the Senior Security Account as may be specified in a
Certificate received in connection with such expiration, exercise, or
consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund shall
deliver to the Custodian a Certificate specifying with respect to such Futures
Contract, (or with respect to any number of identical Futures Contract(s)):
(a) the Series for which the Futures Contract is being entered; (b) the
category of Futures Contract (the name of the underlying stock index or
financial instrument); (c) the number of identical Futures Contracts entered
into; (d) the delivery or settlement date of the Futures Contract(s); (e) the
date the Futures Contract(s) was (were) entered into and the maturity date; (f)
whether the Fund is buying (going long) or selling (going short) on such
Futures Contract(s); (g) the amount of cash and/or the amount and kind of
Securities, if any, to be
<PAGE> 12
deposited in the Senior Security Account for such Series; (h) the name of the
broker, dealer, or futures commission merchant through whom the Futures
Contract was entered into; and (i) the amount of fee or commission, if any, to
be paid and the name of the broker, dealer, or futures commission merchant to
whom such amount is to be paid. The Custodian shall make the deposits, if any,
to the Margin Account in accordance with the terms and conditions of the Margin
Account Agreement. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be made by
the Fund to a broker, dealer, or futures commission merchant with respect to an
outstanding Futures Contract, shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker, dealer,
or futures commission merchant to the Fund with respect to an outstanding
Futures Contract, shall be received and dealt with by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is retained by
the Fund until delivery or settlement is made on such Futures Contract, the
Fund shall deliver to the Custodian a Certificate specifying: (a) the Futures
Contract and the Series to which the same relates; (b) with respect to a Stock
Index Futures Contract, the total cash settlement amount to be paid or
received, and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the broker, dealer, or
futures commission merchant to or from whom payment or delivery is to be made
or received; and (d) the amount of cash and/or Securities to be withdrawn from
the Senior Security Account for such Series. The Custodian shall make the
payment or delivery specified in the Certificate, and delete such Futures
Contract from the statements delivered to the Fund pursuant to paragraph 3 of
Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a Futures
Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
5. Notwithstanding any other provision in this Agreement to the contrary, the
Custodian shall deliver cash and Securities to a futures commission merchant
upon receipt of a Certificate from the Fund specifying: (a) the name of the
futures commission merchant; (b) the specific cash and Securities to be
delivered; (c) the date of such delivery; and (d) the date of the agreement
between the Fund and such futures commission merchant entered pursuant to Rule
17f-6 under the Investment Company Act 1940, as amended. Each delivery of such
a Certificate by the Fund shall constitute (x) a representation and warranty by
the Fund that the Rule 17f-6 agreement has been duly authorized, executed and
delivered by the Fund and the futures commission merchant and complies with
Rule
<PAGE> 13
17f-6, and (y) an agreement by the Fund that the Custodian shall not be liable
for the acts or omissions of any such futures commission merchant.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the Fund, the
Fund shall promptly deliver to the Custodian a Certificate specifying with
respect to such Futures Contract Option: (a) the Series to which such Option
is specifically allocated; (b) the type of Futures Contract Option (put or
call); (c) the type of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the Futures Contract
Option purchased; (d) the expiration date; (e) the exercise price; (f) the
dates of purchase and settlement; (g) the amount of premium to be paid by the
Fund upon such purchase; (h) the name of the broker or futures commission
merchant through whom such option was purchased; and (i) the name of the
broker, or futures commission merchant, to whom payment is to be made. The
Custodian shall pay out of the money specifically allocated to such Series, the
total amount to be paid upon such purchase to the broker or futures commissions
merchant through whom the purchase was made, provided that the same conforms to
the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by the Fund
pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) the
Series to which such Futures Contract Option was specifically allocated; (b)
the type of Futures Contract Option (put or call); (c) the type of Futures
Contract and such other information as may be necessary to identify the Futures
Contract underlying the Futures Contract Option; (d) the date of sale; (e) the
sale price; (f) the date of settlement; (g) the total amount payable to the
Fund upon such sale; and (h) the name of the broker or futures commission
merchant through whom the sale was made. The Custodian shall consent to the
cancellation of the Futures Contract Option being closed against payment to the
Custodian of the total amount payable to the Fund, provided the same conforms
to the total amount payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall make, out of the money and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Futures
Contract Option: (a) the Series for which such Futures Contract Option was
written; (b) the type of Futures Contract Option (put or call); (c) the type of
Futures Contract and such other information as may be necessary to identify the
<PAGE> 14
Futures Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the Fund; (g)
the name of the broker or futures commission merchant through whom the premium
is to be received; and (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the money and Securities specifically allocated to
such Series the deposits into the Senior Security Account, if any, as specified
in the Certificate. The deposits, if any, to be made to the Margin Account
shall be made by the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a call is
exercised, the Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d)
the name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and which is
a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type
of Futures Contract underlying such Futures Contract Option; (d) the name of
the broker or futures commission merchant through whom such Futures Contract
Option is exercised; (e) the net total amount, if any, payable to the Fund upon
such exercise; (f) the net total amount, if any, payable by the Fund upon such
exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such Series, if any. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the money and Securities
specifically allocated to such Series, the payments, if any, and the deposits,
if any, into the Senior Security Account as specified in the Certificate. The
deposits to and/or withdrawals from the Margin Account, if any, shall be made
by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to a
previously written Futures Contract Option described in this Article in order
to liquidate its position as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect
to the Futures Contract Option being purchased: (a) the Series to which such
Option is specifically allocated; (b) that the transaction is a closing
transaction; (c) the type of Futures Contract and such other information as may
be necessary to identify the Futures Contract underlying the Futures Option
Contract; (d) the exercise price; (e) the premium to be paid by the Fund; (f)
the expiration date; (g) the name of the broker or futures commission merchant
<PAGE> 15
to whom the premium is to be paid; and (h) the amount of cash and/or the amount
and kind of Securities, if any, to be withdrawn from the Senior Security
Account for such Series. The Custodian shall effect the withdrawals from the
Senior Security Account specified in the Certificate. The withdrawals, if any,
to be made from the Margin Account shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing transaction with
respect to, any Futures Contract Option written or purchased by the Fund and
described in this Article, the Custodian shall (a) delete such Futures Contract
Option from the statements delivered to the Fund pursuant to paragraph 3 of
Article III herein and, (b) make such withdrawals from and/or in the case of an
exercise such deposits into the Senior Security Account as may be specified in
a Certificate. The deposits to and/or withdrawals from the Margin Account, if
any, shall be made by the Custodian in accordance with the terms and conditions
of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a Futures
Contract Option described in this Article shall be subject to Article VI
hereof.
10. Notwithstanding any other provision in this Agreement to the contrary, the
Custodian shall deliver cash and Securities to a futures commission merchant
upon receipt of a Certificate from the Fund specifying: (a) the name of the
futures commission merchant; (b) the specific cash and Securities to be
delivered; (c) the date of such delivery; and (d) the date of the agreement
between the Fund and such futures commission merchant entered pursuant to Rule
17f-6 under the Investment Company Act 1940, as amended. Each delivery of such
a Certificate by the Fund shall constitute (x) a representation and warranty by
the Fund that the Rule 17f-6 agreement has been duly authorized, executed and
delivered by the Fund and the futures commission merchant and complies with
Rule 17f-6, and (y) an agreement by the Fund that the Custodian shall not be
liable for the acts or omissions of any such futures commission merchant.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund shall
promptly deliver to the Custodian a Certificate specifying: (a) the Series for
which such short sale was made; (b) the name of the issuer and the title of the
Security; (c) the number of shares or principal amount sold, and accrued
interest or dividends, if any; (d) the dates of the sale and settlement; (e)
the sale price per unit; (f) the total amount credited to the Fund upon such
sale, if any, (g) the amount of cash and/or the amount and kind of Securities,
if any, which are to be deposited in a Margin Account and the name in which
such Margin Account has been or is to be established; (h) the amount of cash
and/or the amount and kind of Securities, if any, to be deposited in a Senior
Security Account, and (i) the name of the broker through whom such short sale
was made. The Custodian shall upon its receipt of a statement from such broker
confirming such sale and that the total amount credited to the Fund upon such
sale, if any, as specified in the Certificate is held by such broker for the
account of the Custodian (or any nominee of the Custodian) as custodian of the
Fund, issue a receipt or make the deposits into the Margin Account and the
Senior Security Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing-out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
<PAGE> 16
effect such closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net total amount
payable to the broker upon such closing-out; (h) the amount of cash and the
amount and kind of Securities to be withdrawn, if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such closing-out, and
the return and/or cancellation of the receipts, if any, issued by the Custodian
with respect to the short sale being closed-out, pay out of the money held for
the account of the Fund to the broker the net total amount payable to the
broker, and make the withdrawals from the Margin Account and the Senior
Security Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters into a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate, or in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate or Oral Instructions
specifying: (a) the Series for which the Reverse Repurchase Agreement is
entered; (b) the total amount payable to the Fund in connection with such
Reverse Repurchase Agreement and specifically allocated to such Series; (c) the
broker or dealer through or with whom the Reverse Repurchase Agreement is
entered; (d) the amount and kind of Securities to be delivered by the Fund to
such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and
(f) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in a Senior Security
Account for such Series in connection with such Reverse Repurchase Agreement.
The Custodian shall, upon receipt of the total amount payable to the Fund
specified in the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior Security Account,
specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money
Market Security, a Certificate or Oral Instructions to the Custodian
specifying: (a) the Reverse Repurchase Agreement being terminated and the
Series for which same was entered; (b) the total amount payable by the Fund in
connection with such termination; (c) the amount and kind of Securities to be
received by the Fund and specifically allocated to such Series in connection
with such termination; (d) the date of termination; (e) the name of the broker
or dealer with or through whom the Reverse Repurchase Agreement is to be
terminated; and (f) the amount of cash and/or the amount and kind of Securities
to be withdrawn from the Senior Securities Account for such Series. The
Custodian shall, upon receipt of the amount and kind of Securities to be
received by the Fund specified in the Certificate or Oral Instructions, make
the payment to the broker or dealer, and the withdrawals, if any, from the
Senior Security Account, specified in such Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
<PAGE> 17
1. Promptly after each loan of portfolio Securities specifically allocated to a
Series held by the Custodian hereunder, the Fund shall deliver or cause to be
delivered to the Custodian a Certificate specifying with respect to each such
loan: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities, (c) the
number of shares or the principal amount loaned, (d) the date of loan and
delivery, (e) the total amount to be delivered to the Custodian against the
loan of the Securities, including the amount of cash collateral and the
premium, if any, separately identified, and (f) the name of the broker, dealer,
or financial institution to which the loan was made. The Custodian shall
deliver the Securities thus designated to the broker, dealer or financial
institution to which the loan was made upon receipt of the total amount
designated as to be delivered against the loan of Securities. The Custodian
may accept payment in connection with a delivery otherwise than through the
Book-Entry System or Depository only in the form of a certified or bank
cashier's check payable to the order of the Fund or the Custodian drawn on New
York Clearing House funds and may deliver Securities in accordance with the
customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by the Fund, the
Fund shall deliver or cause to be delivered to the Custodian a Certificate
specifying with respect to each such loan termination and return of
Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be returned, (d)
the date of termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any offsetting credits
as described in said Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will be returned. The
Custodian shall receive all Securities returned from the broker, dealer, or
financial institution to which such Securities were loaned and upon receipt
thereof shall pay, out of the money held for the account of the Fund, the total
amount payable upon such return of Securities as set forth in the Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the Custodian into, or
withdrawn from, a Senior Securities Account, the Custodian shall be under no
obligation to make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin Account to the
broker, dealer, futures commission merchant or Clearing Member in whose name,
or for whose benefit, the account was established as specified in the Margin
Account Agreement.
3. Amounts received by the Custodian as payments or distributions with respect
to Securities deposited in any Margin Account shall be dealt with in accordance
with the terms and conditions of the Margin Account Agreement.
<PAGE> 18
4. The Custodian shall have a continuing lien and security interest in and to
any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a statement
with respect to each Margin Account in which money or Securities are held
specifying as of the close of business on the previous business day: (a) the
name of the Margin Account; (b) the amount and kind of Securities held therein;
and (c) the amount of money held therein. The Custodian shall make available
upon request to any broker, dealer, or futures commission merchant specified in
the name of a Margin Account a copy of the statement furnished the Fund with
respect to such Margin Account.
6. Promptly after the close of business on each business day in which cash
and/or Securities are maintained in a Collateral Account for any Series, the
Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding
the delivery to the Fund of such statement, the Fund shall furnish to the
Custodian a Certificate specifying the then market value of the Securities
described in such statement. In the event such then market value is indicated
to be less than the Custodian's obligation with respect to any outstanding Put
Option guarantee letter or similar document, the Fund shall promptly specify in
a Certificate the additional cash and/or Securities to be deposited in such
Collateral Account to eliminate such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of the
Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, either (i) setting forth with respect to the Series specified
therein the date of the declaration of a dividend or distribution, the date of
payment thereof, the record date as of which shareholders entitled to payment
shall be determined, the amount payable per Share of such Series to the
shareholders of record as of that date and the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund on
the payment date, or (ii) authorizing with respect to the Series specified
therein the declaration of dividends and distributions on a daily basis and
authorizing the Custodian to rely on Oral Instructions or a Certificate setting
forth the date of the declaration of such dividend or distribution, the date of
payment thereof, the record date as of which shareholders entitled to payment
shall be determined, the amount payable per Share of such Series to the
shareholders of record as of that date and the total amount payable to the
Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral Instructions or
Certificate, as the case may be, the Custodian shall pay out of the money held
for the account of each Series the total amount payable to the Dividend Agent
and any sub-dividend agent or co-dividend agent of the Fund with respect to
such Series.
<PAGE> 19
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the Custodian a
Certificate duly specifying:
(a) the Series, the number of Shares sold, trade date, and price; and
(b) the amount of money to be received by the Custodian for the sale of such
Shares and specifically allocated to the separate account in the name of such
Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian shall
credit such money to the separate account in the name of the Series for which
such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Whenever the Fund desires the Custodian to make payment out of the money
held by the Custodian hereunder in connection with a redemption of any Shares,
it shall furnish to the Custodian:
(a) a resolution by the Board of Directors of the Fund directing the Transfer
Agent to redeem the Shares; and
(b) a Certificate specifying the number and Series of Shares redeemed; and
(c) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the Series
and number of Shares received by the Transfer Agent for redemption and that
such Shares are in good form for redemption, the Custodian shall make payment
to the Transfer Agent out of the money held in the separate account in the name
of the Series the total amount specified in the Certificate issued pursuant to
the foregoing paragraph 4 of this Article.
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian should in its sole discretion advance funds on behalf of
any Series which results in an overdraft because the money held by the
Custodian in the separate account for such Series shall be insufficient to pay
the total amount payable upon a purchase of Securities specifically allocated
to such Series, as set forth in a Certificate or Oral Instructions, or which
results in an overdraft in the separate account of such Series for some other
reason, or if the Fund is for any other reason indebted to the Custodian with
respect to a Series, including any indebtedness to The Bank of New York under
the Fund's Cash Management and Related Services Agreement (except a borrowing
for investment or for temporary or emergency purposes using Securities as
collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum (based on a
360-day year for the actual number of days involved) equal to 1/2% over
Custodian's prime commercial lending rate in effect from time to time, such
rate to be adjusted on the effective date of any change in such prime
commercial lending rate but in no event to be less than 6% per annum. In
addition, the Fund hereby agrees that the Custodian shall have a continuing
lien, security interest, and security entitlement in and to any property
including any investment property or any financial asset specifically allocated
to such Series at any time held by it for
<PAGE> 20
the benefit of such Series or in which the Fund may have an interest which is
then in the Custodian's possession or control or in possession or control of
any third party acting in the Custodian's behalf. The Fund authorizes the
Custodian, in its sole discretion, at any time to charge any such overdraft or
indebtedness together with interest due thereon against any balance of account
standing to such Series' credit on the Custodian's books. In addition, the
Fund hereby covenants that on each Business Day on which either it intends to
enter a Reverse Repurchase Agreement and/or otherwise borrow from a third
party, or which next succeeds a Business Day on which at the close of business
the Fund had outstanding a Reverse Repurchase Agreement or such a borrowing, it
shall prior to 9 a.m., New York City time, advise the Custodian, in writing, of
each such borrowing, shall specify the Series to which the same relates, and
shall not incur any indebtedness not so specified other than from the
Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank (including,
if the borrowing is pursuant to a separate agreement, the Custodian) from which
it borrows money for investment or for temporary or emergency purposes using
Securities held by the Custodian hereunder as collateral for such borrowings, a
notice or undertaking in the form currently employed by any such bank setting
forth the amount which such bank will loan to the Fund against delivery of a
stated amount of collateral. The Fund shall promptly deliver to the Custodian
a Certificate specifying with respect to each such borrowing: (a) the Series
to which such borrowing relates; (b) the name of the bank, (c) the amount and
terms of the borrowing, which may be set forth by incorporating by reference an
attached promissory note, duly endorsed by the Fund, or other loan
agreement,(d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the total
amount payable to the Fund on the borrowing date, (g) the market value of
Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities, and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan
is in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in the
Certificate. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all
rights therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall deliver such Securities as additional
collateral as may be specified in a Certificate to collateralize further any
transaction described in this paragraph. The Fund shall cause all Securities
released from collateral status to be returned directly to the Custodian, and
the Custodian shall receive from time to time such return of collateral as may
be tendered to it. In the event that the Fund fails to specify in a
Certificate the Series, the name of the issuer, the title and number of shares
or the principal amount of any particular Securities to be delivered as
collateral by the Custodian, the Custodian shall not be under any obligation to
deliver any Securities.
ARTICLE XV.
INSTRUCTIONS
1. With respect to any software provided by the Custodian to a Fund in order
for the Fund to transmit Instructions to the Custodian (the "Software"), the
Custodian grants to such Fund a personal, nontransferable and nonexclusive
<PAGE> 21
license to use the Software solely for the purpose of transmitting Instructions
to, and receiving communications from, the Custodian in connection with its
account(s). The Fund shall use the Software solely for its own internal and
proper business purposes, and not in the operation of a service bureau, and
agrees not to sell, reproduce, lease or otherwise provide, directly or
indirectly, the Software or any portion thereof to any third party without the
prior written consent of the Custodian. The Fund acknowledges that the
Custodian and its suppliers have title and exclusive proprietary rights to the
Software, including any trade secrets or other ideas, concepts, know how,
methodologies, or information incorporated therein and the exclusive rights to
any copyrights, trademarks and patents (including registrations and
applications for registration of either) or statutory or legal protections
available with respect thereof. The Fund further acknowledges that all or a
part of the Software may be copyrighted or trademarked (or a registration or
claim made therefor) by the Custodian or its suppliers. The Fund shall not
take any action with respect to the Software inconsistent with the foregoing
acknowledgments, nor shall the Fund attempt to decompile, reverse engineer or
modify the Software. The Fund may not copy, sell, lease or provide, directly
or indirectly, any of the Software or any portion thereof to any other person
or entity without the Custodian's prior written consent. The Fund may not
remove any statutory copyright notice, or other notice including the software
or on any media containing the Software. The Fund shall reproduce any such
notice on any reproduction of the Software and shall add statutory copyright
notice or other notice to the Software or media upon the Bank's request.
Custodian agrees to provide reasonable training, instruction manuals and access
to Custodian's "help desk" in connection with the Fund's user support necessary
to use of the Software. At the Fund's request, Custodian agrees to permit
reasonable testing of the Software by the Fund.
2. The Fund shall obtain and maintain at its own cost and expense all equipment
and services, including but not limited to communications services, necessary
for it to utilize the Software and transmit Instructions to the Custodian. The
Custodian shall not be responsible for the reliability, compatibility with the
Software or availability of any such equipment or services or the performance
or nonperformance by any nonparty to this Custody Agreement.
3. The Fund acknowledges that the Software, all data bases made available to
the Fund by utilizing the Software (other than data bases relating solely to
the assets of the Fund and transactions with respect thereto), and any
proprietary data, processes, information and documentation (other than which
are or become part of the public domain or are legally required to be made
available to the public) (collectively, the "Information"), are the exclusive
and confidential property of the Custodian. The Fund shall keep the
Information confidential by using the same care and discretion that the Fund
uses with respect to its own confidential property and trade secrets and shall
neither make nor permit any disclosure without the prior written consent of the
Custodian. Upon termination of this Agreement or the Software license granted
hereunder for any reason, the Fund shall return to the Custodian all copies of
the Information which are in its possession or under its control or which the
Fund distributed to third parties. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all Information whether or not copyrighted.
4. The Custodian reserves the right to modify, at its own expense, the Software
from time to time without prior notice and the Fund shall install new releases
of the Software as the Custodian may direct. The Fund agrees not to modify or
attempt to modify the Software without the Custodian's prior written consent.
<PAGE> 22
The Fund acknowledges that any modifications to the Software, whether by the
Fund or the Custodian and whether with or without the Custodian's consent,
shall become the property of the Custodian.
5. The Custodian and its manufacturers and suppliers make no warranties or
representations of any kind with regard to the Software or the method(s) by
which the Fund may transmit Instructions to the Custodian, express or implied,
including but not limited to any implied warranties of merchantability or
fitness for a particular purpose.
6. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY UNITED STATES
LAW. THE FUND AGREES THAT IT WILL NOT UNDER ANY CIRCUMSTANCES RESELL, DIVERT,
TRANSFER, TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM) IN OR TO
ANY OTHER COUNTRY. IF THE CUSTODIAN DELIVERS THE SOFTWARE TO THE FUND OUTSIDE
THE UNITED STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN
ACCORDANCE WITH EXPORT ADMINISTRATIVE REGULATIONS. DIVERSION CONTRARY TO U.S.
LAWS PROHIBITED. The Fund hereby authorizes Custodian to report its name and
address to government agencies to which Custodian is required to provide such
information by law.
7. Where the method for transmitting Instructions by the Fund involves an
automatic systems acknowledgment by the Custodian of its receipt of such
Instructions, then in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act pursuant to such Instructions, the Fund
may not claim that such Instructions were received by the Custodian, and the
Fund shall deliver a Certificate by some other means.
8. (a) The Fund agrees that where it delivers to the Custodian Instructions
hereunder, it shall be the Fund's sole responsibility to ensure that only
persons duly authorized by the Fund transmit such Instructions to the
Custodian. The Fund will cause all persons transmitting Instructions to the
Custodian to treat applicable user and authorization codes, passwords and
authentication keys with extreme care, and irrevocably authorizes the Custodian
to act in accordance with and rely upon Instructions received by it pursuant
hereto.
(b) The Fund hereby represents, acknowledges and agrees that it is fully
informed of the protections and risks associated with the various methods of
transmitting Instructions to the Custodian and that there may be more secure
methods of transmitting instructions to the Custodian than the method(s)
selected by the Fund. The Fund hereby agrees that the security procedures (if
any) to be followed in connection with the Fund's transmission of Instructions
provide to it a commercially reasonable degree of protection in light of its
particular needs and circumstances.
9. The Fund hereby represents, warrants and covenants to the Custodian that
this Agreement has been duly approved by a resolution of its Board of
Directors, and that its transmission of Instructions pursuant hereto shall at
all times comply with the Investment Company Act.
10. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours after
the earliest of (i) discovery thereof, (ii) the Business Day on which discovery
should have occurred through the exercise of reasonable care and (iii) in the
case of any error, the date of actual receipt of the earliest notice which
reflects such error, it being agreed that discovery and receipt of notice may
only occur on a business day. The Custodian shall promptly advise the Fund
whenever the Custodian learns of any errors, omissions or interruption in, or
delay or unavailability of, the Fund's ability to send Instructions.
11. Custodian will indemnify and hold harmless the Fund with respect to any
liability, damages, loss or claim incurred by or brought against Fund by reason
<PAGE> 23
any claim or infringement against any patent, copyright, license or other
property right arising out or by reason of the Fund's use of the Software in
the form provided under this Section. Custodian at its own expense will defend
such action or claim brought against Fund to the extent that it is based on a
claim that the Software in the form provided by Custodian infringes any
patents, copyrights, license or other property right, provided that Custodian
is provided with reasonable written notice of such claim, provided that the
Fund has not settled, compromised or confessed any such claim without the
Custodian's written consent, in which event Custodian shall have no liability
or obligation hereunder, and provided Fund cooperates with and assists
Custodian in the defense of such claim. Custodian shall have the right to
control the defense of all such claims, lawsuits and other proceedings. If, as
a result of any claim of infringement against any patent, copyright, license or
other property right, Custodian is enjoined from using the Software, or if
Custodian believes that the System is likely to become the subject of a claim
of infringement, Custodian at its option may in its sole discretion either (a)
at its expenses procure the right for the Fund to continue to use the Software,
or (b), replace or modify the Software so as to make it non-infringing, or (c)
may discontinue the license granted herein upon written notice to Customer.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF ANY SERIES HELD OUTSIDE OF
THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-custodian for
each Series' Securities for which the primary market is outside the United
States ("Foreign Securities") and other assets, the foreign banking
institutions and foreign securities depositories and clearing agencies
designated on Schedule I hereto ("Foreign Sub-Custodians"). The Fund may
designate any additional foreign sub-custodian with which the Custodian has an
agreement for such entity to act as the Custodian's agent, as its sub-custodian
and any such additional foreign sub-custodian shall be deemed added to Schedule
I. Upon receipt of a Certificate from the Fund, the Custodian shall cease the
employment of any one or more Foreign Sub-Custodians for maintaining custody of
the Fund's assets and such Foreign Sub-Custodian shall be deemed deleted from
Schedule I.
2. Each delivery of a Certificate to the Custodian in connection with a
transaction involving the use of a Foreign Sub-Custodian shall constitute a
representation and warranty by the Fund that its Board of Directors, or its
third party foreign custody manager as defined in Rule 17f-5 under the
Investment Company Act of 1940, as amended, if any, has determined that use of
such Foreign Sub-Custodian satisfies the requirements of such Investment
Company Act of 1940 and such Rule 17f-5 thereunder.
3. The Custodian shall identify on its books as belonging to each Series of the
Fund the Foreign Securities of such Series held by each Foreign Sub-Custodian.
At the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims by the Fund or any Series
against a Foreign Sub-Custodian as a consequence of any loss, damage, cost,
expense, liability or claim sustained or incurred by the Fund or any Series if
and to the extent that the Fund or such Series has not been made whole for any
such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the terms of
the applicable Foreign Sub-Custodian agreement, use reasonable efforts to
arrange for the independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as such books and
records
<PAGE> 24
relate to the performance of such Foreign Sub-Custodian under its agreement
with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually agreed
upon, statements in respect of the securities and other assets of each Series
held by Foreign Sub-Custodians, including but not limited to an identification
of entities having possession of each Series' Foreign Securities and other
assets, and advices or notifications of any transfers of Foreign Securities to
or from each custodial account maintained by a Foreign Sub-Custodian for the
Custodian on behalf of the Series.
6. The Custodian shall transmit promptly to the Fund all notices, reports or
other written information received pertaining to the Fund's Foreign Securities,
including without limitation, notices of corporate action, proxies and proxy
solicitation materials.
7. Notwithstanding any provision of this Agreement to the contrary, settlement
and payment for securities received for the account of any Series and delivery
of securities maintained for the account of such Series may be effected in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to
the purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later payment
for such securities from such purchaser or dealer.
8. Notwithstanding any other provision in this Agreement to the contrary, with
respect to any losses or damages arising out of or relating to any actions or
omissions of any Foreign Sub-Custodian the sole responsibility and liability of
the Custodian shall be to take appropriate action at the Fund's expense to
recover such loss or damage from the Foreign Sub-Custodian. It is expressly
understood and agreed that the Custodian's sole responsibility and liability
shall be limited to amounts so recovered from the Foreign Sub-Custodian.
ARTICLE XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions specifying
with respect to such FX Transaction: (a) the Series to which such FX
Transaction is specifically allocated; (b) the type and amount of Currency to
be purchased by the Fund; (c) the type and amount of Currency to be sold by the
Fund; (d) the date on which the Currency to be purchased is to be delivered;
(e) the date on which the Currency to be sold is to be delivered; and (f) the
name of the person from whom or through whom such currencies are to be
purchased and sold. Unless otherwise instructed by a Certificate or Oral
Instructions, the Custodian shall deliver, or shall instruct a Foreign
Sub-Custodian to deliver, the Currency to be sold on the date on which such
delivery is to be made, as set forth in the Certificate, and shall receive, or
instruct a Foreign Sub-Custodian to receive, the Currency to be purchased on
the date as set forth in the Certificate.
2. Where the Currency to be sold is to be delivered on the same day as the
Currency to be purchased, as specified in the Certificate or Oral Instructions,
the Custodian or a Foreign Sub-Custodian may arrange for such deliveries and
receipts to be made in accordance with the customs prevailing from time to time
among brokers or dealers in Currencies, and such receipt and delivery may not
be completed simultaneously. The Fund assumes all responsibility and liability
for all credit risks involved in connection with such receipts and deliveries,
which responsibility and liability shall continue until the Currency to be
received by the Fund has been received in full.
<PAGE> 25
3. Any FX Transaction effected by the Custodian in connection with this
Agreement may be entered with the Custodian, any office, branch or subsidiary
of The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as
principal or otherwise through customary banking channels. The Fund may issue
a standing Certificate with respect to FX Transaction but the Custodian may
establish rules or limitations concerning any foreign exchange facility made
available to the Fund. The Fund shall bear all risks of investing in
Securities or holding Currency. Without limiting the foregoing, the Fund shall
bear the risks that rules or procedures imposed by a Foreign Sub-Custodian or
foreign depositories, exchange controls, asset freezes or other laws, rules,
regulations or orders shall prohibit or impose burdens or costs on the transfer
to, by or for the account of the Fund of Securities or any cash held outside
the Fund's jurisdiction or denominated in Currency other than its home
jurisdiction or the conversion of cash from one Currency into another currency.
The Custodian shall not be obligated to substitute another Currency for a
Currency (including a Currency that is a component of a Composite Currency
Unit) whose transferability, convertibility or availability has been affected
by such law, regulation, rule or procedure. Neither the Custodian nor any
Foreign Sub-Custodian shall be liable to the Fund for any loss resulting from
any of the foregoing events.
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI, neither the
Custodian nor its nominee shall be liable for any loss or damage, including
counsel fees, resulting from its action or omission to act or otherwise, either
hereunder or under any Margin Account Agreement, except for any such loss or
damage arising out of its own negligence or willful misconduct. In no event
shall the Custodian be liable to the Fund or any third party for special,
indirect or consequential damages or lost profits or loss of business, arising
under or in connection with this Agreement, even if previously informed of the
possibility of such damages and regardless of the form of action. The
Custodian may, with respect to questions of law arising hereunder or under any
Margin Account Agreement, apply for and obtain the advice and opinion of
counsel to the Fund, or of its own counsel, at the expense of the Fund, and
shall be fully protected with respect to anything done or omitted by it in good
faith in conformity with such advice or opinion. The Custodian shall be liable
to the Fund for any loss or damage resulting from the use of the Book-Entry
System or any Depository arising by reason of any negligence or willful
misconduct on the part of the Custodian or any of its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian shall be
under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold, or written by
or for the Fund, the legality of the purchase, sale or writing thereof, or the
propriety of the amount paid or received therefor;
(b) The legality of the sale or redemption of any Shares, or the propriety of
the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any dividend by the Fund;
(d) The legality of any borrowing by the Fund using Securities as collateral;
(e) The legality of any loan of portfolio Securities, nor shall the Custodian
be under any duty or obligation to see to it that any cash collateral delivered
to it by a broker, dealer, or financial institution or held by it at any time
as a result of such loan of portfolio Securities of the Fund is adequate
collateral for the Fund against any loss it might sustain as a result of such
loan. The
<PAGE> 26
Custodian specifically, but not by way of limitation, shall not be under any
duty or obligation periodically to check or notify the Fund that the amount of
such cash collateral held by it for the Fund is sufficient collateral for the
Fund, but such duty or obligation shall be the sole responsibility of the Fund.
In addition, the Custodian shall be under no duty or obligation to see that any
broker, dealer or financial institution to which portfolio Securities of the
Fund are lent pursuant to Article X of this Agreement makes payment to it of
any dividends or interest which are payable to or for the account of the Fund
during the period of such loan or at the termination of such loan, provided,
however, that the Custodian shall promptly notify the Fund in the event that
such dividends or interest are not paid and received when due; or
(f) The sufficiency or value of any amounts of money and/or Securities held in
any Margin Account, Senior Security Account or Collateral Account in connection
with transactions by the Fund. In addition, the Custodian shall be under no
duty or obligation to see that any broker, dealer, futures commission merchant
or Clearing Member makes payment to the Fund of any variation margin payment or
similar payment which the Fund may be entitled to receive from such broker,
dealer, futures commission merchant or Clearing Member, to see that any payment
received by the Custodian from any broker, dealer, futures commission merchant
or Clearing Member is the amount the Fund is entitled to receive, or to notify
the Fund of the Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the Custodian of,
any money, whether or not represented by any check, draft, or other instrument
for the payment of money, received by it on behalf of the Fund until the
Custodian actually receives and collects such money directly or by the final
crediting of the account representing the Fund's interest at the Book-Entry
System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable for
ascertaining or acting upon any calls, conversions, exchange offers, tenders,
interest rate changes or similar matters relating to Securities held in the
Depository, unless the Custodian shall have actually received timely notice
from the Depository. In no event shall the Custodian have any responsibility
or liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed,
retired, called or otherwise become payable. However, upon receipt of a
Certificate from the Fund of an overdue amount on Securities held in the
Depository the Custodian shall make a claim against the Depository on behalf of
the Fund, except that the Custodian shall not be under any obligation to appear
in, prosecute or defend any action, suit or proceeding in respect to any
Securities held by the Depository which in its opinion may involve it in
expense or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
5. The Custodian shall not be under any duty or obligation to take action to
effect collection of any amount due to the Fund from the Transfer Agent of the
Fund nor to take any action to effect payment or distribution by the Transfer
Agent of the Fund of any amount paid by the Custodian to the Transfer Agent of
the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take action to
effect collection of any amount if the Securities upon which such amount is
payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by
a Certificate and (ii) it shall be assured to its satisfaction of reimbursement
of its costs and expenses in connection with any such action.
<PAGE> 27
7. The Custodian may in addition to the employment of Foreign Sub-Custodians
pursuant to Article XVI appoint one or more banking institutions as Depository
or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-Custodian or
Co-Custodians including, but not limited to, banking institutions located in
foreign countries, of Securities and money at any time owned by the Fund, upon
such terms and conditions as may be approved in a Certificate or contained in
an agreement executed by the Custodian, the Fund and the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to ascertain
whether any Securities at any time delivered to, or held by it or by any
Foreign Sub-Custodian, for the account of the Fund and specifically allocated
to a Series are such as properly may be held by the Fund or such Series under
the provisions of its then current prospectus, or (b) to ascertain whether any
transactions by the Fund, whether or not involving the Custodian, are such
transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to pay to the
Custodian all out-of-pocket expenses and such compensation as may be agreed
upon from time to time between the Custodian and the Fund. The Custodian may
charge such compensation and any expenses with respect to a Series incurred by
the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian
shall also be entitled to charge against any money held by it for the account
of a Series such Series' pro rata share (based on such Series, net asset value
at the time of the charge to the aggregate net asset value of all Series at
that time) of the amount of any loss, damage, liability or expense, including
counsel fees, for which it shall be entitled to reimbursement under the
provisions of this Agreement. The expenses for which the Custodian shall be
entitled to reimbursement hereunder shall include, but are not limited to, the
expenses of sub-custodians and foreign branches of the Custodian incurred in
settling outside of New York City transactions involving the purchase and sale
of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate, notice or
other instrument in writing received by the Custodian and reasonably believed
by the Custodian to be a Certificate. The Custodian shall be entitled to rely
upon any Oral Instructions actually received by the Custodian hereinabove
provided for. The Fund agrees to forward to the Custodian a Certificate or
facsimile thereof confirming such Oral Instructions in such manner so that such
Certificate or facsimile thereof is received by the Custodian, whether by hand
delivery, telecopier or other similar device, or otherwise, by the close of
business of the same day that such Oral Instructions are given to the
Custodian. The Fund agrees that the fact that such confirming instructions are
not received, or that contrary instructions are received, by the Custodian
shall in no way affect the validity of the transactions or enforceability of
the transactions hereby authorized by the Fund. The Fund agrees that the
Custodian shall incur no liability to the Fund in acting upon Oral Instructions
given to the Custodian hereunder concerning such transactions provided such
instructions reasonably appear to have been received from an Authorized Person.
11. The Custodian shall be entitled to rely upon any instrument, instruction or
notice received by the Custodian and reasonably believed by the Custodian to
be given in accordance with the terms and conditions of any Margin Account
Agreement. Without limiting the generality of the foregoing, the Custodian
shall be under no duty to inquire into, and shall not be liable for, the
accuracy of any statements or representations contained in any such instrument
<PAGE> 28
or other notice including, without limitation, any specification of any amount
to be paid to a broker, dealer, futures commission merchant or Clearing Member.
12. The books and records pertaining to the Fund which are in the possession of
the Custodian shall be the property of the Fund. Such books and records shall
be prepared and maintained as required by the Investment Company Act of 1940,
as amended, and other applicable securities laws and rules and regulations.
The Fund, or the Fund's authorized representatives, shall have access to such
books and records during the Custodian's normal business hours. Upon the
reasonable request of the Fund, copies of any such books and records shall be
provided by the Custodian to the Fund or the Fund's authorized representative,
and the Fund shall reimburse the Custodian its expenses of providing such
copies. Upon reasonable request of the Fund, the Custodian shall provide in
hard copy or on micro-film, whichever the Custodian elects, any records
included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by the
Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against and save the Custodian
harmless from all liability, claims, losses and demands whatsoever, including
attorney's fees, howsoever arising or incurred because of or in connection with
this Agreement, except for any such liability, claim, loss and demand arising
out of the Custodian's own negligence or willful misconduct.
15. Subject to the foregoing provisions of this Agreement, including, without
limitation, those contained in Article XVI and XVII the Custodian may deliver
and receive Securities, and receipts with respect to such Securities, and
arrange for payments to be made and received by the Custodian in accordance
with the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and liability
for all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever except
such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XIX.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving to the
other party a notice in writing specifying the date of such termination, which
shall be not less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it shall be accompanied
by a copy of a resolution of the Board of Directors of the Fund, certified by
the Secretary or any Assistant Secretary, electing to terminate this Agreement
and designating a successor custodian or custodians, each of which shall be a
bank or trust company having not less than $2,000,000 aggregate capital,
surplus and undivided profits. In the event such notice is given by the
Custodian, the Fund shall, on or before the termination date, deliver to the
Custodian a copy of a
<PAGE> 29
resolution of the Board of Directors of the Fund, certified by the Secretary or
any Assistant Secretary, designating a successor custodian or custodians. In
the absence of such designation by the Fund, the Custodian may designate a
successor custodian which shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided profits. Upon the date set
forth in such notice this Agreement shall terminate, and the Custodian shall
upon receipt of a notice of acceptance by the successor custodian on that date
deliver directly to the successor custodian all Securities and money then owned
by the Fund and held by it as Custodian, after deducting all fees, expenses and
other amounts for the payment or reimbursement of which it shall then be
entitled.
2. If a successor custodian is not designated by the Fund or the Custodian in
accordance with the preceding paragraph, the Fund shall upon the date specified
in the notice of termination of this Agreement and upon the delivery by the
Custodian of all Securities (other than Securities held in the Book-Entry
System which cannot be delivered to the Fund) and money then owned by the Fund
be deemed to be its own custodian and the Custodian shall thereby be relieved
of all duties and responsibilities pursuant to this Agreement, other than the
duty with respect to Securities held in the Book Entry System which cannot be
delivered to the Fund to hold such Securities hereunder in accordance with this
Agreement.
ARTICLE XX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the present
Authorized Persons of the Fund under its seal, setting forth the names and the
signatures of the present Authorized Persons of the Fund. The Fund agrees to
furnish to the Custodian a new Certificate in similar form in the event that
any such present Authorized Person ceases to be an Authorized Person of the
Fund, or in the event that other or additional Authorized Persons are elected
or appointed. Until such new Certificate shall be received, the Custodian
shall be fully protected in acting under the provisions of this Agreement or
Oral Instructions upon the signatures of the Authorized Persons as set forth in
the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by this
Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by this
Agreement to be given to the Fund shall be sufficiently given if addressed to
the Fund and mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund may from time to
time designate in writing.
4. This Agreement may not be amended or modified in any manner except by a
written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Directors of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties hereto,
and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by the Fund without the written consent of
the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Directors.
6. This Agreement shall be construed in accordance with the laws of the State
of New York without giving effect to conflict of laws principles thereof. Each
<PAGE> 30
party hereby consents to the jurisdiction of a state or federal court situated
in New York City, New York in connection with any dispute arising hereunder and
hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers, thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
MERRILL LYNCH SENIOR
FLOATING RATE FUND II, INC.
[SEAL]
By:
--------------------------------
Attest:
- -------------------------------------
THE BANK OF NEW YORK
[SEAL]
By:
--------------------------------
Name:
Title:
Attest:
- -------------------------------------
APPENDIX A
I, , and I, ,
of MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC., a Maryland corporation
(the "Fund"), do hereby certify that:
The following persons have been duly authorized in conformity with the Fund's
Articles of Incorporation and By-Laws to execute any Certificate, instruction,
notice or other instrument on behalf of the Fund and the signatures set forth
opposite their respective names are their true and correct signatures:
Name
Position
Signature
- ------------------------------
- ------------------------------
- ------------------------------
APPENDIX B
SERIES
APPENDIX C
I, Jorge E. Ramos, a Vice President with THE BANK OF NEW YORK do hereby
designate the following publications:
The Bond Buyer
Depository Trust Company Notices
<PAGE> 31
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
EXHIBIT A
CERTIFICATION
The undersigned, , hereby certifies that he or she is the
duly elected and acting of MERRILL LYNCH SENIOR FLOATING RATE
FUND II, INC., a Maryland corporation (the "Fund"), and further certifies that
the following resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on , 1999, at which a quorum was at all
times present and that such resolution has not been modified or rescinded and
is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of ,
1999, (the "Custody Agreement") is authorized and instructed on a continuous
and ongoing basis to deposit in the Book-Entry System, as defined in the
Custody Agreement, all securities eligible for deposit therein, regardless of
the Series to which the same are specifically allocated, and to utilize the
Book-Entry System to the extent possible in connection with its performance
thereunder, including, without limitation, in connection with settlements of
purchases and sales of securities, loans of securities, and deliveries and
returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MERRILL LYNCH
SENIOR FLOATING RATE FUND II, INC., as of the day of ,
1999.
- -------------------------------
[SEAL]
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies that he or she is the
duly elected and acting of MERRILL LYNCH SENIOR FLOATING RATE
FUND II, INC., a Maryland corporation (the "Fund"), and further certifies that
the following resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on , 1999, at which a quorum was at all
times present and that such resolution has not been modified or rescinded and
is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of ,
1999, (the "Custody Agreement") is authorized and instructed on a continuous
and ongoing basis until such time as it receives a Certificate, as defined in
the Custody Agreement, to the contrary to deposit in the Depository, as defined
in the Custody Agreement, all securities eligible for deposit therein,
regardless of the Series to which the same are specifically allocated, and to
utilize the Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in connection with
settlements of purchases and sales of securities, loans of securities, and
deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MERRILL LYNCH
SENIOR FLOATING RATE FUND II, INC., as of the day of ,
1999.
<PAGE> 32
- -----------------------------
[SEAL]
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby certifies that he or she is the
duly elected and acting of MERRILL LYNCH SENIOR FLOATING
RATE FUND II, INC., a Maryland corporation (the "Fund"), and further certifies
that the following resolution was adopted by the Board of Directors of the Fund
at a meeting duly held on , 1999, at which a quorum was at
all times present and that such resolution has not been modified or rescinded
and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of ,
1999, (the "Custody Agreement") is authorized and instructed on a continuous
and ongoing basis until such time as it receives a Certificate, as defined in
the Custody Agreement, to the contrary to deposit in the Participants Trust
Company as Depository, as defined in the Custody Agreement, all securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated, and to utilize the Participants Trust Company to the
extent possible in connection with its performance thereunder, including,
without limitation, in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of securities
collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MERRILL LYNCH
SENIOR FLOATING RATE FUND II, INC., as of the day of , 1999.
- -----------------------------
[SEAL]
EXHIBIT C
CERTIFICATION
The undersigned, , hereby certifies that he or
she is the duly elected and acting of MERRILL LYNCH SENIOR
FLOATING RATE FUND II, INC., a Maryland corporation (the "Fund"), and further
certifies that the following resolution was adopted by the Board of Directors
of the Fund at a meeting duly held on , 1999, at which a
quorum was at all times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of , 1999,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary, to accept, utilize and act with respect to
Clearing Member confirmations for Options and transaction in Options,
regardless of the Series to which the same are specifically allocated, as such
terms are defined in the Custody Agreement, as provided in the Custody
Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MERRILL LYNCH
SENIOR FLOATING RATE FUND II, INC., as of the day of , 1999.
- -----------------------------
[SEAL]
EXHIBIT D
<PAGE> 33
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MERRILL LYNCH SENIOR FLOATING
RATE FUND II, INC., a Maryland corporation (the "Fund"), further certifies that
the following resolutions were adopted by the Board of Directors of the Fund at
a meeting duly held on , 1999, at which a quorum was at all times
present and that such resolutions have not been modified or rescinded and are
in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to the Custody
Agreement between The Bank of New York and the Fund dated as of ,
1999 (the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis to act in accordance with, and to rely on Instructions (as
defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant use of such
access codes only to Authorized Persons of the Fund as defined in the Custody
Agreement, shall establish internal safekeeping procedures to safeguard and
protect the confidentiality and availability of user and access codes,
passwords and authentication keys, and shall use Instructions only in a manner
that does not contravene the Investment Company Act of 1940, as amended, or the
rules and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MERRILL LYNCH
SENIOR FLOATING RATE FUND II, INC., as of the day of , 1999.
- -------------------------------
[SEAL]
??
<PAGE> 1
EXHIBIT (K)(1)
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY AND
SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT, made as of April 1, 1999, by and between MERRILL LYNCH
SENIOR FLOATING RATE FUND II, INC., a Maryland corporation (the "Fund") and
FINANCIAL DATA SERVICES, INC., a Florida corporation ("FDS").
WITNESSETH:
WHEREAS, the Corporation wishes to appoint FDS to be the Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund
upon, and subject to, the terms and provisions of this Agreement, and FDS is
desirous of accepting such appointment upon, and subject to, such terms and
provisions;
NOW, THEREFORE, in consideration of mutual covenants contained in this
Agreement, the Corporation and FDS agree as follows:
1. APPOINTMENT OF FDS AS TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
SHAREHOLDER SERVICING AGENT.
(a) The Corporation hereby appoints FDS to act as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund upon,
and subject to, the terms and provisions of this Agreement.
(b) FDS hereby accepts the appointment as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund, and agrees to
act as such upon, and subject to, the terms and provisions of this Agreement.
2. DEFINITIONS.
(a) In this Agreement:
(I) The term "Act" means the Investment Company Act of 1940 as
amended from time to time and any rule or regulation thereunder;
(II) The term "Account" means any account of a Shareholder, as
defined below, or, if the shares are held in an account in the name of a
Broker-Dealer, as defined below,
<PAGE> 2
for the benefit of an identified person, such account, including a Plan
Account, any account under a plan (by whatever name referred to in the
Prospectus) pursuant to the Self-Employed Individuals Retirement Act of 1962
("Keogh Act Plan") and any account under a plan (by whatever name referred to
in the Prospectus) pursuant to Section 401(k) of the Internal Revenue Code
("Corporation Master Plan");
(III) The term "application" means an application made by a
shareholder or prospective shareholder respecting the opening of an Account;
(IV) The term "Fund Distributor" means Merrill Lynch Funds
Distributor, a division of Princeton Funds Distributor, Inc., a Delaware
corporation;
(V) The term "Broker-Dealer" means a registered broker-dealer
that sells shares of the Fund pursuant to a selected dealer's agreement with
the Corporation;
(VI) The term "Officer's Instruction" means an instruction in
writing given on behalf of the Fund to FDS, and signed on behalf of the Fund
by the President, any Vice President, the Secretary or the Treasurer of the
Corporation;
(VII) The term "Plan Account" means an account opened by a
Shareholder or prospective Shareholder in respect to an open account, monthly
payment or withdrawal plan (in each case by whatever name referred to in the
Prospectus), and may also include an account relating to any other plan if and
when provision is made for such plan in the Prospectus;
(VIII) The term "Prospectus" means the Prospectus and the
Statement of Additional Information of the relevant Fund as from time to time
in effect;
(IX) The term "Shareholder" means a holder of record of Shares;
(X) The term "Shares" means shares of stock of the Corporation
irrespective of class or series.
<PAGE> 3
3. DUTIES OF FDS AS TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
SHAREHOLDER SERVICING AGENT.
(a) Subject to the succeeding provisions of the Agreement, FDS
hereby agrees to perform the following functions as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund;
(I) Issuing, transferring and redeeming Shares;
(II) Opening, maintaining, servicing and closing Accounts;
(III) Acting as agent for the Fund's Shareholders and/or
customers of a Broker-Dealer in connection with Plan Accounts, upon the terms
and subject to the conditions contained in the Prospectus and application
relating to the specific Plan Account;
(IV) Acting as agent of the Fund and/or a Broker-Dealer,
maintaining such records as may permit the imposition of such contingent
deferred sales charges as may be described in the Prospectus, including such
reports as may be reasonably requested by the Corporation with respect to such
Shares as may be subject to a contingent deferred sales charge;
(V) Upon the redemption of Shares subject to such a contingent
deferred sales charge, calculating and deducting from the redemption proceeds
thereof the amount of such charge in the manner set forth in the Prospectus.
FDS shall pay, on behalf of the Fund Distributor, to a Broker-Dealer such
deducted contingent deferred sales charges imposed upon all Shares maintained
in the name of that Broker-Dealer, or maintained in the name of an account
identified as a customer account of that Broker-Dealer. Sales charges imposed
upon any other Shares shall be paid by FDS to the Fund Distributor;
(VI) Exchanging the investment of a Shareholder into, or from,
the shares of other open-end investment companies or other series portfolios of
the Corporation, if any, if and to the extent permitted by the Prospectus at
the direction of such Shareholder;
(VII) Processing redemptions;
(VIII) Examining and approving legal transfers;
(IX) Furnishing such confirmations of transactions relating to
their Shares as required by applicable law;
<PAGE> 4
(X) Acting as agent for the Corporation with respect to
furnishing each Shareholder such appropriate periodic statements relating to
Accounts, together with additional enclosures, including appropriate income tax
information and income tax forms duly completed, as required by applicable law,
as well as furnishing such information to each Broker-Dealer to enable the
Broker-Dealer to provide such information to its customers;
(XI) Acting as agent for the Corporation with respect to
mailing annual, semi-annual and quarterly reports prepared by or on behalf of
the Fund, and mailing new Prospectuses upon their issue to each Shareholder as
required by applicable law as well as causing such materials to be mailed to
each Broker-Dealer to enable the Broker-Dealer to deliver such materials to its
customers;
(XII) Furnishing such periodic statements of transactions
effected by FDS, reconciliations, balances and summaries as the Fund may
reasonably request;
(XIII) Maintaining such books and records relating to
transactions effected by FDS as are required by the Act, or by any other
applicable provision of law, rule or regulation, to be maintained by the
Corporation or its transfer agent with respect to such transactions, and
preserving, or causing to be preserved, any such books and records for such
periods as may be required by any such law, rule or regulation and as may be
agreed upon from time to time between FDS and the Corporation. In addition,
FDS agrees to maintain and preserve master files and historical computer tapes
on a daily basis in multiple separate locations a sufficient distance apart to
ensure preservation of at least one copy of such information;
(XIV) Withholding taxes on non-resident alien Accounts,
preparing and filing U.S. Treasury Department Form 1099 and other appropriate
forms as required by applicable law with respect to dividends and
distributions; and
(XV) Reinvesting dividends for full and fractional Shares and
disbursing cash dividends, as applicable, pursuant to instructions received
from the Shareholder at the time an Account is established.
(b) FDS agrees to act as proxy agent in connection with the holding of
annual, if any, and special meetings of Shareholders, mailing such notices,
proxies and proxy statements in
<PAGE> 5
connection with the holding of such meetings as may be required by applicable
law, receiving and tabulating votes cast by proxy and communicating to the
Corporation the results of such tabulation accompanied by appropriate
certificates, and preparing and furnishing to the Corporation certified lists
of Shareholders as of such date, in such form and containing such information
as may be required by the Corporation.
(c) FDS agrees to deal with, and answer in a timely manner, all
correspondence and inquiries relating to the functions of FDS under this
Agreement with respect to Accounts.
(d) FDS agrees to furnish to the Corporation such information and at
such intervals as is necessary for the Fund to comply with the registration
and/or the reporting requirements (including applicable escheat laws) of the
Securities and Exchange Commission, Blue Sky authorities or other governmental
authorities.
(e) FDS agrees to provide to the Corporation such information as may
reasonably be required to enable the Fund to reconcile the number of
outstanding Shares between FDS' records and the account books of the
Corporation.
(f) Notwithstanding anything in the foregoing provisions of this
paragraph, FDS agrees to perform its functions thereunder subject to such
modification (whether in respect of particular cases or in any particular class
of cases) as may from time to time be agreed in a writing signed by both
parties.
4. COMPENSATION.
(a) The Corporation agrees to pay FDS the fees and charges, as well as
FDS' out of pocket costs, for services described in this Agreement as set forth
in the Schedule of Fees attached hereto.
5. RIGHT OF INSPECTION.
(a) FDS agrees that it will, in a timely manner, make available
to, and permit, any officer, accountant, attorney or authorized agent of the
Corporation to examine and make transcripts and copies (including photocopies
and computer or other electronical information storage media and print-outs) of
any and all of its books and records which relate to any transaction or
function performed by FDS under or pursuant to this Agreement.
<PAGE> 6
6. CONFIDENTIAL RELATIONSHIP.
(a) FDS agrees that it will, on behalf of itself and its officers and
employees, treat all transactions contemplated by this Agreement, and all
information germane thereto, as confidential and not to be disclosed to any
person (other than the Shareholder concerned, or the Corporation, or as may be
disclosed in the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the Corporation by
way of an Officer's Instruction.
7. INDEMNIFICATION.
(a) The Corporation shall indemnify and hold FDS harmless from any
loss, costs, damage and reasonable expenses, including reasonable attorney's
fees (provided that such attorney is appointed with the Corporation's consent,
which consent shall not be unreasonably withheld) incurred by it resulting from
any claim, demand, action or suit in connection with the performance of its
duties hereunder, provided that this indemnification shall not apply to actions
or omissions of FDS in cases of willful misconduct, failure to act in good
faith or negligence by FDS, its officers, employees or agents, and further
provided that prior to confessing any claim against it which may be subject to
this indemnification, FDS shall give the Corporation reasonable opportunity to
defend against said claim in its own name or in the name of FDS. An action
taken by FDS upon any Officer's Instruction reasonably believed by it to have
been properly executed shall not constitute willful misconduct, failure to act
in good faith or negligence under this Agreement.
8. REGARDING FDS.
(a) FDS hereby agrees to hire, purchase, develop and maintain such
dedicated personnel, facilities, equipment, software, resources and
capabilities as both parties may mutually determine to be reasonably necessary
for the satisfactory performance of the duties and responsibilities of FDS. FDS
warrants and represents that its officers and supervisory personnel charged
with carrying out its functions as Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent for the Corporation possess the special skill
and technical knowledge appropriate for that purpose. FDS shall at all times
exercise due care and diligence in
<PAGE> 7
the performance of its functions as Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent for the Corporation. FDS agrees that, in
determining whether it has exercised due care and diligence, its conduct shall
be measured by the standard applicable to persons possessing such special skill
and technical knowledge.
(b) FDS warrants and represents that it is duly authorized and
permitted to act as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent under all applicable laws and that it will immediately notify
the Corporation of any revocation of such authority or permission or of the
commencement of any proceeding or other action which may lead to such
revocation.
9. TERMINATION.
(a) This Agreement shall become effective as of the date first above
written and shall remain in force for two years thereafter and shall thereafter
continue from year to year. This Agreement may be terminated by the
Corporation or FDS (without penalty to the Corporation or FDS) provided that
the terminating party gives the other party written notice of such termination
at least sixty (60) days in advance, except that the Corporation may terminate
this Agreement immediately upon written notice to FDS if the authority or
permission of FDS to act as Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent has been revoked or if any proceeding or other
action which the Corporation reasonably believes will lead to such revocation
has been commenced.
(b) Upon termination of this Agreement, FDS shall deliver all
Shareholder records, books, stock ledgers, instruments and other documents
(including computerized or other electronically stored information) made or
accumulated in the performance of its duties as Transfer Agent, Disbursing
Agent and Shareholder Servicing Agent for the Corporation along with a
certified locator document clearly indicating the complete contents therein, to
such successor as may be specified in a notice of termination or Officer's
Instruction; and the Corporation assumes all responsibility for failure
thereafter to produce any paper, record or document so delivered and identified
in the locator document, if and when required to be produced.
<PAGE> 8
10. AMENDMENT.
(a) Except to the extent that the performance by FDS or its functions
under this Agreement may from time to time be modified by an Officer's
Instruction, this Agreement may be amended or modified only by further written
agreement between the parties.
11. GOVERNING LAW.
(a) This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective duly authorized officers and their respective
corporate seals hereunto duly affixed and attested, as of the day and year
above written.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
By:
----------------------------
Name:
Title:
FINANCIAL DATA SERVICES, INC.
By:
----------------------------
Name: William A. Bridy
Title: President
<PAGE> 9
SCHEDULE OF FEES
FUND PRICING SCHEDULE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION CHANNEL CLOSED BASE TRANSACTION
PER ACCOUNT ACCOUNT FEE FEE
CHARGES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MLPF&S $14.00 $0.20/month N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
FDS $23.00 $0.20/month N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
MFA ERISA* 0.10% N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
"Large" and "Mid" market employee benefit $14.00 N/A N/A $1.00
accounts
- ------------------------------------------------------------------------------------------------------------------------------------
"Small" market Account size** N/A N/A N/A N/A
employee benefit ------------------- ------------------------------------
accounts <$1,000 $7.00 N/A
------------------- ------------------------------------
$1,000<$2,500 $11.00 N/A
------------------- ------------------------------------
>$2,500 $11.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*ERISA accounts held in the MFA (Mutual Fund Advisor) program or any other
program requiring equalization under ERISA
**As of the last business day of each month
Note 1: The above schedule is exclusive of out of pocket costs
Note 2: All charges are on an annual position basis
<PAGE> 10
SCHEDULE OF FEES (CONTINUED)
OUT OF POCKET COSTS
<TABLE>
<S> <C>
- - Postage - Handling costs (ADP)
- - Envelopes/stationary - Fed wire charges (excluding wires to/from Fund'
custody accounts)
- - Record storage and retrieval
- Forms
- - Telephone (local and Long distance
- Any other costs as agreed in writing by the parties
- - Pre-authorized checks
- - Returned check fees/charges and other similar
fees/charges
</TABLE>
<PAGE> 1
EXHIBIT L
Brown & Wood LLP
One World Trade Center
New York, N.Y. 10048-0557
Telephone: (212) 839-5300
Facsimile: (212) 839-5599
March 22, 1999
Merrill Lynch Senior Floating Rate Fund II, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
This opinion is being furnished in connection with the registration by
Merrill Lynch Senior Floating Rate Fund II, Inc., a Maryland corporation (the
"Fund"), of shares of common stock, par value $0.10 per share (the "Shares"),
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to the Fund's registration statement on Form N-2, as amended (the "Registration
Statement"), under the Securities Act, in the amount set forth under "Amount
Being Registered" on the facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund, and such other documents as
we have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement, will
be legally issued, fully paid and non-assessable shares of common stock of the
Fund.
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We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus
constituting a part thereof.
Very truly yours,
/s/ Brown & Wood LLP
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EXHIBIT (n)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Senior Floating Rate Fund II, Inc.:
We consent to the use in Pre-Effective Amendment No. 2 to Registration
Statement No. 333-72137 of our report dated March 22, 1999 and to the reference
to us under the caption "Independent Auditors" both of which appear in the
Prospectus, which is a part of such Registration Statement.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
March 22, 1999
<PAGE> 1
EXHIBIT P
CERTIFICATE OF THE SOLE STOCKHOLDER OF
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
Princeton Services, Inc., as the general partner (the "General
Partner") of Merrill Lynch Asset Management, L.P. ("MLAM"), which is the holder
of 10,000 shares of common stock, par value $0.10 per share, of Merrill Lynch
Senior Floating Rate Fund II, Inc. (the "Fund"), a Maryland corporation, does
hereby confirm to the Fund its representation that it purchased such shares for
investment purposes, with no present intention of redeeming or reselling any
portion thereof, and further agrees that if it redeems (by tender offer or
otherwise) any portion of such shares prior to the amortization of the Fund's
organizational expenses, the proceeds thereof will be reduced by the
proportionate amount of unamortized organizational expenses which the number of
shares being redeemed bears to the number of shares initially purchased and
outstanding at the time of redemption. The General Partner, on behalf of MLAM,
further agrees that, in the event such shares are sold or otherwise transferred
to any other party, prior to such sale or transfer MLAM will obtain on behalf
of the Fund an agreement from such other party to comply with the foregoing as
to the reduction of redemption proceeds and to obtain a similar agreement from
any transferee of such party.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC.,
its general partner
By: /s/ Terry K. Glenn
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Terry K. Glenn
Authorized Officer
Dated: March 19, 1999
