<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1999.
SECURITIES ACT FILE NO. 333-83085
INVESTMENT COMPANY ACT FILE NO. 811-09479
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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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THE MARKET PARTICIPATION PRINCIPAL PROTECTION FUND, INC.*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
TERRY K. GLENN
THE MARKET PARTICIPATION PRINCIPAL PROTECTION FUND, 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)
------------------------
COPIES TO:
<TABLE>
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FRANK P. BRUNO, ESQ MICHAEL J. HENNEWINKEL, 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. [ ]
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 delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT(1) OFFERING PRICE(1) FEE(2)
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Common Stock ($.10 par value).......... 10,000,000 shares $10.00 $100,000,000 $27,800
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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* The Fund is in the process of changing its name to The S&P 500(R) Protected Equity Fund, Inc.
</TABLE>
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<PAGE> 2
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 17, 1999
PROSPECTUS
10,000,000 SHARES
THE S&P 500(R) PROTECTED EQUITY FUND, INC.
COMMON STOCK
------------------------
The S&P 500(R) Protected Equity Fund, Inc. (the "Fund") is a newly
organized, non-diversified, fixed-term, closed-end fund. The investment
objective of the Fund is to return to shareholders on or about the Fund's
maturity date of November 30, 2007 (i) $10.00 per share (the Fund's initial net
asset value per share) plus (ii) an amount equal to $10.00 multiplied by the
percentage increase in the price appreciation of the S&P 500 Index, if any, from
the value of the Index on October , 1999 to the value of the Index at the
close of the market on October 31, 2007, as reduced by the application of an
annual index adjustment factor of % per year [expected to be between 2.00% and
2.50% per year], any deferred investment advisory fee and remaining Fund
expenses. The price appreciation of the S&P 500 does not include any of the
dividends paid on the stocks included in the S&P 500. The Fund will seek to
achieve its investment objective by investing primarily in a portfolio of the
common stocks of substantially all of the companies represented in the S&P 500
and purchasing one or more privately-negotiated put option contracts intended to
protect the Fund's initial net asset value at the maturity date by limiting the
risk of loss caused by a decline in the market value of the Fund's common stock
portfolio. There can be no assurance that the investment objective of the Fund
will be achieved.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. Initial investors expecting to sell their
shares in a relatively short period after completion of the public offering
typically face greater risk of loss. The shares of the Fund are being sold to
the public without a sales load or underwriting commission. The Fund plans to
apply to list its shares on the New York Stock Exchange or another national
securities exchange under the symbol "PEF".
------------------------
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.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 6 OF THIS
PROSPECTUS.
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PER SHARE TOTAL
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Public Offering Price........ $10.00 $100,000,000
Sales Load................... None None
Proceeds to Fund............. $10.00 $100,000,000
</TABLE>
The Fund's investment adviser or an affiliate will pay the underwriter a
commission in the amount of % of the public offering price per share in
connection with the sale of the common stock and will bear all other offering
and organization expenses of the Fund.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about October , 1999.
------------------------
MERRILL LYNCH & CO.
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The date of this prospectus is October , 1999.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors and Special Considerations..................... 6
Fee Table................................................... 11
The Fund.................................................... 12
Use of Proceeds............................................. 12
Investment Objective and Policies........................... 12
Other Investment Policies................................... 16
Investment Restrictions..................................... 20
Directors and Officers...................................... 22
Investment Advisory and Management Arrangements............. 24
Portfolio Transactions...................................... 26
Dividends and Distributions................................. 28
Taxes....................................................... 28
Net Asset Value............................................. 31
Repurchase of Shares........................................ 31
Description of Capital Stock................................ 32
Custodian................................................... 35
Underwriting................................................ 35
Transfer Agent, Dividend Disbursing Agent and Registrar..... 36
Legal Opinions.............................................. 36
Experts..................................................... 36
Additional Information...................................... 36
Independent Auditors' Report................................ 38
Statement of Assets, Liabilities and Capital................ 39
</TABLE>
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"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500" and
"500" are trademarks of The McGraw-Hill Companies, Inc., and have been licensed
for use by Merrill Lynch Asset Management, L.P. and its affiliates. The Fund is
not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation and
Standard & Poor's Corporation makes no representation regarding the advisability
of investing in the Fund.
------------------------
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 SEC'S PUBLIC REFERENCE SECTION OF
THE SEC, WASHINGTON, D.C., 20549-6009.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that the information
appearing in this prospectus is accurate as of the date on the front cover of
this prospectus only. Our business, financial condition, results of operations
and prospects may have changed since that date.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus.
THE FUND The S&P 500(R) Protected Equity Fund, Inc. (the "Fund") is a
newly organized, non-diversified, fixed-term, closed-end fund.
The Fund's maturity date is November 30, 2007 (the "Maturity
Date"). The Fund will distribute substantially all of its net
assets on or about the Maturity Date and then terminate.
THE OFFERING The Fund is offering 10,000,000 shares of common stock at an
initial offering price of $10.00 per share. The common stock is
being offered by Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), as underwriter.
INVESTMENT
OBJECTIVE
AND POLICIES The investment objective of the Fund is to return to shareholders
on or about the Maturity Date (i) $10.00 per share (the Fund's
initial net asset value per share) plus (ii) an amount equal to
$10.00 multiplied by the percentage increase in the price
appreciation of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500" or the "Index"), if any, from the value of
the Index on October , 1999 (the "Starting Value") to the value
of the Index at the close of the market on October 31, 2007, as
reduced by the application of an annual index adjustment factor
of % per year [expected to be between 2.00% and 2.50% per year]
(the "Index Adjustment Factor"), any deferred investment advisory
fee and remaining Fund expenses, as discussed below. The price
appreciation of the S&P 500 does not include any of the dividends
paid on the stocks included in the S&P 500. The Fund will seek to
achieve its investment objective by investing primarily in a
portfolio of the common stocks of all or substantially all of the
companies represented in the S&P 500 and purchasing one or more
privately-negotiated put option contracts intended to protect the
Fund's initial net asset value at the Maturity Date (the "Put
Contracts"), as described below. There can be no assurance that
the investment objective of the Fund will be achieved.
With the proceeds of this offering, the Fund intends to purchase
Put Contracts on the S&P 500. The Put Contracts are expected to
represent approximately 15% to 20% of the Fund's initial net
assets. With the remaining proceeds, the Fund will invest
primarily in a portfolio of stocks that will match as closely as
practicable the composition and proportions of the stocks in the
S&P 500 Index. Because a portion of the Fund's initial assets
will be used to purchase the Put Contracts, at any time less than
100% of the Fund's assets will be invested in the S&P 500. With
less than 100% of the Fund's assets invested in the S&P 500, the
Fund's return on the Maturity Date is expected to lag the
performance of the S&P 500 Index if the value of the S&P 500 on
the Maturity Date is greater than its Starting Value. This lag in
Fund performance is quantified in part by the Index Adjustment
Factor, which is intended to help you better understand the
relationship between the Fund's net asset value and the S&P 500
Index on the Maturity Date. The Fund's portfolio on the Maturity
Date is expected to lag the S&P 500 in positive markets by at
least the % annual Index Adjustment Factor [expected to be
2.0% to 2.5% per year] because less than 100% of the Fund's
assets is invested in the S&P 500. Deferred investment advisory
fees and remaining
3
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Fund expenses, if any, will further reduce the Fund's return.
Quantifying the lag on the Maturity Date illustrates the "costs"
of principal protection and certain annual performance sacrifices
associated with an investment in the Fund. The Index Adjustment
Factor is not a separate fee or charge.
Because Merrill Lynch Asset Management, L.P. serves as the Fund's
investment adviser, the Fund is prohibited under Federal
securities laws from purchasing principal protection from Merrill
Lynch. The Fund only may purchase the Put Contracts from eligible
counterparties that are not affiliated with Merrill Lynch.
CONSEQUENTLY, THE FUND'S ABILITY TO RETURN $10 PER SHARE WHEN THE
VALUE OF THE S&P 500 ON THE MATURITY DATE IS LESS THAN ITS
STARTING VALUE DOES NOT DEPEND UPON MERRILL LYNCH'S CREDIT
QUALITY, BUT INSTEAD DEPENDS UPON THE CREDIT QUALITY OF THE
COUNTERPARTIES TO THE FUND'S PUT CONTRACTS.
The Fund will pay a fee for the Put Contracts and the Put
Contracts will require the counterparties to make a payment to
the Fund upon expiration of the options in the event that the S&P
500 is below a specified level. In the event that the S&P 500 on
the Maturity Date is less than this specified level, the Put
Contracts will obligate the counterparties to make a payment to
the Fund which is intended approximately to equal the difference
between the Fund's initial net asset value and the Fund's net
asset value on the Maturity Date. As a result, the Fund's return
on the Maturity Date is expected to exceed the performance of the
S&P 500 if the value of the S&P 500 on the Maturity Date is less
than its Starting Value.
Of the Fund's total assets, 80% to 85% initially is expected to
be invested in a portfolio of S&P 500 stocks, financial
instruments, including options (other than the Put Contracts) and
futures, and to a lesser extent, in cash or cash equivalents.
At times when the Fund believes that it is more cost-efficient to
do so, the Fund may determine not to invest in substantially all
of the common stocks in the S&P 500 or in the same weightings as
in the S&P 500. At those times, the Fund may instead invest in a
statistically selected sample of the stocks in the S&P 500 which
has aggregate investment characteristics, such as market
capitalization and industry weightings, similar to the S&P 500 as
a whole. In addition, the Fund may purchase stocks not included
in the S&P 500 when it would be a cost-efficient way of
approximating the S&P 500's performance. However, under normal
circumstances, the Fund will invest at least 90% to 95% of its
initial assets remaining after purchase of the Put Contracts in
securities in the S&P 500 Index and not more than 5% of its total
portfolio in derivatives (other than the Put Contracts) or other
financial instruments and cash equivalents. The Fund may also
engage in securities lending.
LISTING There is currently no public market for the Fund's common stock.
However, the Fund plans to apply to list its shares of common
stock on the New York Stock Exchange or another national
securities exchange under the symbol "PEF".
LEVERAGE The Fund is authorized to borrow money in amounts up to 33 1/3%
of the value of its total assets, but under current market
conditions does not intend to do so. The Fund
4
<PAGE> 6
may borrow to finance repurchases of its common stock, to pay
required distributions, if any, to investors or for extraordinary
or emergency purposes.
INVESTMENT
ADVISER AND THE
ADVISORY FEE Merrill Lynch Asset Management, L.P., the Fund's investment
adviser, provides investment advisory and management services to
the Fund. The Fund will pay the investment adviser on a quarterly
basis an investment advisory fee in arrears at an annual rate
equal to 1.00% of the Fund's average weekly net assets. In lieu
of liquidating portfolio investments to pay the investment
advisory fee, the investment adviser will be paid its accrued
investment advisory fee from income from stock dividends on the
Fund's portfolio or other available cash (together, "Available
Assets") remaining after payment of any extraordinary or other
expenses of the Fund not covered by the investment advisory fee.
To the extent that Available Assets are not sufficient to pay all
of the investment advisory fee at the conclusion of a quarterly
period, the investment adviser will defer collecting the portion
of the investment advisory fee not covered by such Available
Assets (the "Deferred Advisory Fee") until the conclusion of the
next quarterly period. To the extent that there are additional
Available Assets after paying the then current Advisory Fee in
such subsequent quarter, such additional amount will be applied
to the payment of the Deferred Advisory Fee, and any unpaid
Deferred Advisory Fee balance will be carried forward from
quarter to quarter until paid. To the extent that Available
Assets are not sufficient to pay the then current investment
advisory fee, such unpaid investment advisory fee will be added
to the Deferred Advisory Fee balance, if any. On the Maturity
Date, any Deferred Advisory Fee will only be paid to the extent
that the Fund will be able to return at least $10.00 per share to
investors. If payment of any portion of the Deferred Advisory Fee
would otherwise result in a return to investors on the Maturity
Date of less than $10.00 per share (as adjusted for any early
return of capital), that portion of the Deferred Advisory Fee
will be waived. The Fund will not pay the investment adviser any
interest on the Deferred Advisory Fee.
DIVIDENDS AND
DISTRIBUTIONS The Fund will seek to minimize Federal income tax recognition of
taxable income and capital gains by shareholders prior to the
Maturity Date primarily by minimizing the Fund's sales of stock
in its portfolio. However, to the extent the Fund has any net
investment income or any net realized capital gains prior to the
Maturity Date, it intends to distribute to shareholders at least
annually substantially all of such amounts.
REPURCHASE OF
SHARES The Board of Directors of the Fund may consider open market share
repurchases from time to time if the Fund's shares trade at a
discount to the Fund's net asset value. There can be no assurance
that the Fund will in fact repurchase any of its shares.
5
<PAGE> 7
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves certain risks. The Fund is subject to
financial, market and credit risks. As with any security, a risk of loss is
inherent in investment in shares of common stock of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to return to shareholders on or
about the Maturity Date (i) $10.00 per share (the Fund's initial net asset value
per share) plus (ii) an amount equal to $10.00 multiplied by the percentage
increase in the price appreciation of the S&P 500, if any, from the Starting
Value to the value of the Index at the close of the market on November 30, 2007,
as reduced by the annual application of the Index Adjustment Factor, any
Deferred Advisory Fees, and remaining Fund expenses. The price appreciation of
the S&P 500 does not include any of the dividends paid on the stocks included in
the S&P 500. There is no assurance that the Fund will be able to achieve this
investment objective. The Put Contracts and the Fund's other investment
techniques have certain risks. The following discussion describes potential
risks associated with the Put Contracts and the different types of investment
techniques used by the Fund as described under "Investment Objectives and
Policies" and "Other Investment Policies".
With a portion of the proceeds of this offering, the Fund intends to
purchase one or more Put Contracts on the S&P 500. With the remaining proceeds,
the Fund will invest primarily in a portfolio that will match as closely as
practicable the composition and proportions of the stocks included in the S&P
500 Index. Because a portion of the Fund's initial assets will be used to
purchase the Put Contracts, at any time less than 100% of the Fund's assets will
be invested in the S&P 500 Index. With less than 100% of the Fund's assets
invested in the S&P 500, the Fund's return on the Maturity Date is expected to
lag the performance of the S&P 500 Index if the value of the S&P 500 on the
Maturity Date is greater than its Starting Value. However, as the Fund will use
a portion of its assets to purchase the Put Contracts, the Fund's return on the
Maturity Date is expected to exceed the performance of the S&P 500 if the value
of the S&P 500 on the Maturity Date is less than its Starting Value.
The Put Contracts. Because Merrill Lynch Asset Management, L.P. serves as
the Fund's investment adviser, the Fund is prohibited under Federal securities
laws from purchasing principal protection from Merrill Lynch. The Fund only may
purchase the Put Contracts on the S&P 500 Index from Eligible Counterparties (as
defined below under "Counterparty Credit Risk") that are not affiliated with
Merrill Lynch. CONSEQUENTLY, THE FUND'S ABILITY TO RETURN $10 PER SHARE WHEN THE
VALUE OF THE S&P 500 ON THE MATURITY DATE IS LESS THAN ITS STARTING VALUE DOES
NOT DEPEND UPON MERRILL LYNCH'S CREDIT QUALITY, BUT INSTEAD DEPENDS UPON THE
CREDIT QUALITY OF THE COUNTERPARTIES TO THE FUND'S PUT CONTRACTS.
The Fund will pay a fee for the Put Contracts and the Put Contracts will
require the Eligible Counterparties to make a payment to the Fund upon
expiration of the options in the event that the S&P 500 is below a specified
level. In the event that the S&P 500 on the Maturity Date is less than this
specified level, the Put Contracts will obligate the Eligible Counterparties to
make a payment to the Fund which is intended approximately to equal the
difference between the Fund's initial net asset value and the value of the
Fund's assets invested in S&P 500 stocks on the Maturity Date. As a result, the
Fund's return on the Maturity Date is expected to exceed the performance of the
S&P 500 if the value of the S&P 500 on the Maturity Date is less than its
Starting Value.
6
<PAGE> 8
Options contracts on securities or securities indices may be listed and
traded on exchanges or entered into in private transactions.
Privately-negotiated securities or financial contracts such as the Put Contracts
that are not traded on an organized exchange are known as an "over-the-counter"
or "OTC" instruments. The Put Contracts that the Fund intends to purchase will
differ from exchange traded financial contracts such as listed options in
several respects. Generally, exchange traded options have standardized terms and
the performance of the parties' obligations in connection with the options is
guaranteed by the exchange upon which they are listed or a related clearing
corporation. OTC instruments offer greater flexibility than exchange traded
instruments such as listed options. However, OTC instruments such as the Put
Contracts are transacted directly with dealers or other counterparties and not
through a clearing corporation, and involve a risk of non-performance by such
counterparties as a result of the insolvency of such counterparties or
otherwise. IN THE EVENT OF NON-PERFORMANCE BY A COUNTERPARTY TO A PUT CONTRACT,
THE FUND MAY SUFFER SIGNIFICANT LOSSES AND MAY BE UNABLE TO RETURN $10.00 PER
SHARE TO INVESTORS ON OR ABOUT THE MATURITY DATE IF THE VALUE OF THE S&P 500 ON
THE MATURITY DATE IS LESS THAN ITS STARTING VALUE. The Fund will seek to limit
such risks by entering into OTC Put Contracts only with Eligible Counterparties
(as defined below).
The purchase of the Put Contracts limits the Fund's risk of loss in the
event of a decline in the S&P 500. As described below, if the market value of
S&P 500 on the Maturity Date is greater than the market level specified in the
Put Contracts, the Put Contracts will expire worthless. Consequently, the Fund
would realize a lower return on its stock portfolio than it would have without
the purchase of the Put Contracts.
The value of the Put Contracts primarily will be affected by the value of
the S&P 500 and by other factors that generally affect the value of put options.
Because the Put Contracts require the counterparties to pay the Fund in the
event of a decline in the S&P 500 at the expiration of such contracts, in
general, an increase in the value of the S&P 500 is expected to decrease the
value of the Put Contracts and, conversely, a decrease in the value of the S&P
500 is expected to increase the value of the Put Contracts. In general, the
value of the Put Contracts is expected to decrease when interest rates increase
or when dividend yields on the stocks in the S&P 500 decrease. Further, the
value of the Put Contracts is expected to decrease as anticipated fluctuations
in the future value, or volatility, of the S&P 500 decrease.
The value of the Put Contracts is expected to decrease over time if the S&P
500 is above its Starting Value and, conversely, the value of the Put Contracts
is expected to increase over time if the S&P 500 is below its Starting Value.
Counterparty Credit Risk. The Fund may enter into OTC put and call options
contracts, including the Put Contracts, only with counterparties that are rated
Aa3 or better by Moody's Investors Service, Inc. ("Moody's") or AA- or better by
Standard & Poor's Corporation ("S&P") (or whose obligations are guaranteed by
Eligible Counterparties so rated) as described below or are determined by the
investment adviser to be of comparable credit quality ("Eligible
Counterparties"). THE FUND'S ABILITY TO MEET ITS INVESTMENT OBJECTIVE UNDER
CERTAIN MARKET CONDITIONS WILL DEPEND SIGNIFICANTLY UPON THE ABILITY OF ANY
ELIGIBLE COUNTERPARTY THAT SERVES AS COUNTERPARTY TO THE FUND'S PUT CONTRACTS TO
MEET ITS OBLIGATIONS UNDER THOSE CONTRACTS. MERRILL LYNCH IS NOT PERMITTED TO
SELL PUT CONTRACTS TO THE FUND, AND THE FUND WILL NOT BE ABLE TO LOOK TO MERRILL
LYNCH FOR PRINCIPAL PROTECTION IF ANY COUNTERPARTY TO THE FUND'S PUT CONTRACTS
FAILS TO MEET ITS OBLIGATIONS. S&P indicates that it assigns a AA- rating to
obligors that have a very strong capacity to meet their financial commitments,
differing from the highest rated obligors only in small degree. Moody's
indicates that counterparties rated Aa3 offer excellent financial security but
are
7
<PAGE> 9
rated lower than Aaa counterparties because long-term risks appear somewhat
larger. The margins of protection may not be as large as with Aaa
counterparties, or fluctuations of protective elements may be of greater
amplitude. Eligible Counterparties in the ordinary course of business may
purchase securities or enter into arrangements with broker-dealers, banks or
other market participants in order to hedge the market risks associated with
such Eligible Counterparties' obligations under the Put Contracts. Although
unlikely, such hedging arrangements theoretically could affect the price of
certain stocks and the value of the S&P 500 or the Fund's investments in a
manner that would be adverse to investors in the Fund.
Liquidity. OTC contracts generally are considered illiquid. While some OTC
contracts have contractual provisions that appear to provide a measure of
liquidity, such liquidity will generally be provided only by the counterparty to
the contract. Consequently, any liquidity will be subject to, among other
things, such counterparty's ability and willingness to provide liquidity at any
given time.
Concentration. The Put Contracts on the date that they are executed are
expected to represent approximately 15% to 20% of the Fund's initial net assets.
The common stocks of companies in the S&P 500 in the financial service industry
are expected to represent approximately 12% to 15% of the Fund's initial net
assets. Consequently, the Fund's portfolio will be concentrated in the
securities or obligations of issuers in the industry group consisting of
financial institutions and their holding companies, including broker-dealers,
commercial banks, thrift institutions, insurance companies and finance
companies. As a result, the Fund is subject to certain credit quality risks
associated with such institutions. General economic conditions are important to
the operation of these institutions, with exposure to, among other things,
market fluctuations, changes in interest rates, and credit losses resulting from
possible financial difficulties of borrowers potentially having an adverse
effect. The Fund will not enter into a Put Contract with any one broker-dealer
as a counterparty that represents in excess of 5% of the Fund's net assets as of
the date that the Fund enters into such Put Contract. Increases in the value of
the S&P 500 portion of the Fund's portfolio resulting in a decrease in the
relative value of the Put Contracts or changes in the weighting or composition
of the S&P 500 may result in the Fund being no longer concentrated in the
financial services industry.
Risk Factors in Options and Futures Transactions. In addition to
transactions in OTC options, including the Put Contracts, and exchange traded
options, the Fund also may engage in transactions in futures and options on
futures. Use of options and futures transactions involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the prices of the underlying securities. In addition, many options (particularly
OTC options such as the Put Contracts) have limited liquidity and the Fund may
not be able to sell or unwind its options positions prior to their maturity.
There is a risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with whom the Fund has an open position in an
option, a futures contract or an option related to a futures contract.
Furthermore, the Fund's ability to enter into new OTC contracts or restructure
existing OTC contracts may be limited by market conditions. For additional
information on the considerations involved in the use of options and futures,
see "Other Investment Policies".
Price Appreciation of the S&P 500. The investment objective of the Fund is
to return to shareholders on or about the Maturity Date (i) $10.00 per share
(the Fund's initial net asset value per share) plus (ii) an amount equal to
$10.00 multiplied by the percentage increase in the price appreciation of the
S&P 500, if any, from the Starting Value to the value of the Index at the close
of the market on October 31, 2007, as reduced by the annual application of the
Index Adjustment Factor, any Deferred
8
<PAGE> 10
Advisory Fees, and remaining Fund expenses. The price appreciation of the S&P
500 does not include any of the dividends paid on the stocks included in the S&P
500. Dividends received by the Fund from the stocks held in its portfolio will
be used to pay the Fund's expenses. To the extent that these expenses match or
exceed the dividends paid on the Fund's portfolio, the Fund's return will not
reflect the payment of dividends on stocks. Thus, the Fund's return from its
stock portfolio will be less than the return that you would receive if you owned
directly the same portfolio.
The market price of Fund shares is affected by, but not directly correlated
with, the current value of the S&P 500.
Early Return of Capital. It is expected that stocks in the Fund's
portfolio may be the subject of corporate acquisitions or liquidation in which
the Fund will receive cash for such stocks. The Fund may be required to
distribute a portion of such cash payments to investors. It is also possible
that the Fund may be required to sell portfolio stocks in order to make required
distributions or to finance share repurchases. Some of these such payments may
result in an early return of part of your investment and the $10.00 per share
that the Fund seeks to return on or about the Maturity Date would be reduced pro
rata by such amounts.
Net Asset Value. The net asset value of the Fund will equal the sum of the
value of the assets of the Fund less the liabilities of the Fund. The assets
will consist primarily of the Fund's stock portfolio and the Put Contracts. See
"The Put Contracts" above for a description of the factors affecting the value
of the Put Contracts.
TAX EFFECT OF THE PUT CONTRACTS
Because the Put Contracts offset the Fund's risk of loss on the stock
portfolio, the stock portfolio and the Put Contracts will constitute a
"straddle" for Federal income tax purposes. Individual stocks in the portfolio
and certain other options entered into by the Fund may likewise constitute
straddles. Special tax rules applicable to straddles will require the Fund to
postpone recognition for tax purposes of losses incurred on sales of stock in
the portfolio and on certain closing transactions in connection with the Put
Contracts and with any other options. As a result, the Fund will not be able to
reduce its income by such losses. This increases the possibility that the Fund
will have income which it must distribute to shareholders in order to satisfy
its distribution requirement for Federal income tax purposes. The Fund may have
to borrow in order to meet its distribution requirement. Furthermore, because
the stock portfolio and the Put Contracts will constitute a straddle, the
straddle rules will require the Fund to treat any gains recognized as a result
of sales of stock in the portfolio as short-term capital gains to the Fund even
if the stock was owned by the Fund for more than 12 months.
LIQUIDITY AND MARKET PRICE OF SHARES
The Fund is newly organized and has no operating history or history of
public trading. Shares of closed-end funds that trade in a secondary market
frequently trade at a market price that is below their net asset value. This is
commonly referred to as "trading at a discount." (This risk is independent of
the risk that the net asset value of the Fund's shares will fluctuate and may
decline.) The resulting risk of loss typically may be greater for initial
investors who sell their shares within a relatively short period after
completion of the public offering. Accordingly, the Fund is designed primarily
for long-term investors and should not be considered a vehicle for trading
purposes.
9
<PAGE> 11
LEVERAGE
The Fund is authorized to borrow money in amounts up to 33 1/3% of the
value of its total assets, although it does not intend to do so under current
market conditions. The Fund may borrow money to pay required distributions,
finance repurchases, or for extraordinary or emergency purposes. Borrowing
creates the risk of increased volatility in the net asset value and market price
of the Fund's common stock. Leverage also creates the risk that the investment
return on the Fund's common stock will be reduced to the extent the cost of the
borrowings exceeds the return on portfolio investments.
REPURCHASE OF SHARES
Subject to its borrowing restrictions, the Fund may borrow to finance
repurchases. Interest on any borrowings will increase the Fund's expenses and
reduce its income. If the Fund must liquidate portfolio securities to repurchase
shares, there may be certain tax consequences and transaction costs. There can
be no assurance that share repurchases will cause Fund shares to trade at prices
equal to their net asset value.
SECURITIES LENDING
The Fund may lend securities to financial institutions. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. As a result, the Fund may lose money and there may be a
delay in recovering the loaned securities. The Fund could also lose money if it
does not recover the securities and the value of the collateral falls. These
events could trigger adverse tax consequences to the Fund.
NON-DIVERSIFICATION
The Fund is a non-diversified fund, which means that it can invest its
assets in fewer companies than if it were a diversified fund. If the Fund
concentrates in a smaller number of investments, the Fund's risk is increased
because each investment has a greater effect on the Fund's performance. Even as
a non-diversified fund, the Fund must still meet the diversification
requirements of applicable Federal income tax laws.
ANTITAKEOVER PROVISIONS
The Fund's Articles of Incorporation and By-Laws include provisions that
could limit or delay the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors without
shareholder approval. Such provisions could limit the ability of shareholders to
sell their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund.
10
<PAGE> 12
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering
price)................................................ None
Dividend Reinvestment Plan Fees........................ None
ANNUAL EXPENSES (as a percentage of net assets attributable
to common stock)
Management Fees(a)..................................... 1.00%
Interest payments on Borrowed Funds.................... None
Other Expenses(a)...................................... 0.00
----
Total Annual Expenses(a).......................... 1.00%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
Investment assuming a 5% annual return throughout
the periods:........................................ $10 $32 $55 $122
</TABLE>
- ------------
(a) Other Expenses are estimated to be 0.00015% of net assets during the Fund's
first fiscal year. The investment adviser will bear all of the Fund's
structuring, organizational and offering expenses, as well as the expenses
of ordinary operation of the Fund, including administration, custodial,
transfer agency, legal, auditing and accounting fees. The Fund will pay
brokerage and other transaction costs, the fees and expenses of directors
(and their counsel) who are not affiliated with the investment adviser and
extraordinary expenses that may arise as well as any expenses required to
liquidate portfolio investments and terminate the Fund at the Maturity Date.
See "Investment Advisory and Management Arrangements" -- page 24.
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 first fiscal year. The Example set forth above
assumes reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by Securities and Exchange Commission regulations.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR
ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE
MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
11
<PAGE> 13
THE FUND
The S&P 500(R) Protected Equity Fund, Inc. (the "Fund") is a newly
organized, non-diversified, fixed-term, closed-end management investment
company. The Fund was incorporated under the laws of the State of Maryland on
July 15, 1999 and has registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund's Articles of Incorporation provide that the
Fund will terminate on November 30, 2007 (the "Maturity Date") without
shareholder approval, at which time the Fund will distribute substantially all
of its net assets to shareholders. The Fund's principal office is located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536 and its telephone number is
(609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as mutual funds) in that closed-end investment companies do not
redeem their securities at the option of the shareholder, while open-end
companies issue securities redeemable at net asset value at any time at the
option of the shareholder and typically engage in a continuous offering of their
shares. Accordingly, open-end companies are subject to continuous asset in-flows
and out-flows that can complicate portfolio management. However, shares of
closed-end investment companies frequently trade at a discount from net asset
value. This risk may be greater for investors expecting to sell their shares in
a relatively short period after completion of the public offering. The shares of
the Fund are being sold to the public without a sales load or underwriting
commission.
USE OF PROCEEDS
The proceeds of this offering to the Fund will be $100,000,000. The
proceeds to the Fund will not be reduced by payment of organizational and
offering costs which will be borne by the Fund's investment adviser or an
affiliate. Such proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies on or about October , 1999. See
"Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to return to shareholders on or
about the Maturity Date (i) $10.00 per share (the Fund's initial net asset value
per share) plus (ii) an amount equal to $10.00 multiplied by the percentage
increase in the price appreciation of the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500" or the "Index"), if any, from the value of the Index
on October , 1999 (the "Starting Value") to the value of the Index at the
close of the market on October 31, 2007, as reduced by the application of an
annual index adjustment factor of % per annum [expected to be between 2.00%
and 2.50% per year] (the "Index Adjustment Factor"), any deferred investment
advisory fee and remaining Fund expenses. The price appreciation of the S&P 500
does not include any of the dividends paid on the stocks included in the S&P
500. The Fund will seek to achieve its investment objective by investing
primarily in a portfolio of the common stocks of all or substantially all of the
companies represented in the S&P 500 and purchasing one or more
privately-negotiated put option contracts intended to protect the Fund's initial
net asset value at the Maturity Date (the "Put Contracts") as described below.
There can be no assurance that the investment objective of the Fund will be
achieved. The investment objective of the Fund is a fundamental policy and may
not be changed without shareholder approval.
12
<PAGE> 14
THE PUT CONTRACTS AND THE STOCK PORTFOLIO
With the proceeds of this offering, the Fund intends to purchase the Put
Contracts relating to the S&P 500. The Put Contracts will represent
approximately 15% to 20% of the Fund's initial net assets. With the remaining
proceeds, the Fund will invest primarily in a portfolio that will match as
closely as practicable the composition and proportions of the stocks included in
the S&P 500 Index.
A put option provides its purchaser with downside protection (i.e., by
hedging against a decline in the value of a specified asset such as a particular
stock or index) and generally gives its purchaser the right to sell (or receive
the depreciated value of) that specified asset at a predetermined price within a
specified time. The Fund will purchase Put Contracts intended to protect the
Fund's initial net asset value at the Maturity Date. Because Merrill Lynch Asset
Management, L.P. ("MLAM" or the "Investment Adviser") serves as the Fund's
investment adviser, the Fund is prohibited under Federal securities laws from
purchasing principal protection from Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The Fund only may purchase the Put Contracts on
the S&P 500 Index from Eligible Counterparties that are not affiliated with
Merrill Lynch. CONSEQUENTLY, THE FUND'S ABILITY TO RETURN $10 PER SHARE WHEN THE
VALUE OF THE S&P 500 ON THE MATURITY DATE IS LESS THAN ITS STARTING VALUE DOES
NOT DEPEND UPON MERRILL LYNCH'S CREDIT QUALITY, BUT INSTEAD DEPENDS UPON THE
CREDIT QUALITY OF THE COUNTERPARTIES TO THE FUND'S PUT CONTRACTS.
The Put Contracts are expected to have a maturity equal to or approximately
equal to that of the Fund. The value of the Put Contracts primarily will be
affected by the value of the S&P 500 and by other factors that generally affect
the value of put options. Because the Put Contracts require the Eligible
Counterparties to pay the Fund if the S&P 500 is below a specific level at the
expiration of such contracts, in general, an increase in the value of the S&P
500 is expected to decrease the value of the Put Contracts. In addition, the
value of the Put Contracts generally is expected to decrease when interest rates
increase or when dividend yields on the stocks in the S&P 500 decrease. Further,
the value of the Put Contracts is expected to decrease as anticipated
fluctuations in the future value, or volatility, of the S&P 500 decrease. The
value of the Put Contracts is expected to increase over time if the S&P 500 is
below the Starting Value. Because the counterparty to a Put Contract is
responsible for paying the Fund the decrease in value, if any, in the S&P 500 at
maturity, the performance of the individual stocks in the Fund's portfolio has
somewhat limited bearing on the Fund's ability to protect invested capital. See
"Risk Factors and Special Considerations -- Investment Objective and
Policies -- Counterparty Credit Risk".
With the proceeds of this offering remaining after purchase of the Put
Contracts, expected to represent 80% to 85% of its initial net assets, the Fund
will invest primarily in a portfolio of the common stocks included in, and
financial instruments related to, the S&P 500. With respect to its stock
portfolio, the Fund will not attempt to buy or sell securities based on
economic, financial or market analysis, but will instead seek to employ a
"passive" investment approach. This means that with substantially all of the
Fund assets remaining after purchase of the Put Contracts, the Fund will attempt
to remain invested at all times in a portfolio of common stocks the performance
of which is expected to match approximately that of the S&P 500 (before
deduction of transaction costs and certain other Fund expenses). The Fund will
generally seek to buy or sell securities only when the Fund believes it is
necessary to do so in order to match the performance of the S&P 500.
Accordingly, it is anticipated that the Fund's portfolio turnover and trading
costs will be lower than those of actively managed funds.
13
<PAGE> 15
Because less than 100% of the Fund's assets at any time will be invested in
the S&P 500 and other factors, the Fund's return on the Maturity Date is
expected to lag the performance of the S&P 500 Index if the value of the S&P 500
on the Maturity Date is greater than its Starting Value. This lag in Fund
performance is quantified in part by the Index Adjustment Factor, which is
intended to help an investor better understand the relationship between the
Fund's net asset value and the S&P 500 Index on the Maturity Date. The Fund's
portfolio on the Maturity Date is expected to lag the S&P 500 in positive
markets at least by the annual Index Adjustment Factor because less than 100% of
the Fund's assets is invested in the S&P 500. Deferred investment advisory fees
and remaining Fund expenses, if any, will further reduce the Fund's return.
Quantifying the lag on the Maturity Date illustrates the "costs" of principal
protection and certain annual performance sacrifices associated with an
investment in the Fund. The Index Adjustment Factor is not a separate fee or
charge.
In seeking to match the return of its stock portfolio to that of the S&P
500 Index, the Fund generally will invest in all 500 stocks in the S&P 500,
other than the stock of Merrill Lynch & Co. Inc., in approximately the same
proportions as their weightings in the S&P 500. For example, if 5% of the S&P
500 is made up of the stock of a particular company, the Fund will normally
invest approximately 5% of its assets (other than the Put Contracts) in that
company. Such a strategy is known as "full replication." However, when the Fund
believes it would be cost efficient, the Fund is authorized to deviate from full
replication and to instead invest in a statistically selected sample of the 500
stocks in the S&P 500 which has aggregate investment characteristics, such as
average market capitalization and industry weightings, similar to the S&P 500 as
a whole. The Fund may also purchase stocks not included in the S&P 500 when it
believes that it would be a cost efficient way of approximating the S&P 500's
performance to do so. If the Fund uses these techniques, the Fund may not track
the S&P 500 as closely as it would if it were fully replicating the S&P 500.
However, under normal circumstances, the Fund will be substantially invested in
securities in the Index and will invest at least 90% to 95% of its assets other
than the Put Contracts in securities in the S&P 500 Index and not more than 5%
of its total portfolio in other financial instruments and cash equivalents.
An investment in the shares of the Fund's common stock does not represent
any ownership interest in the stocks of the companies included in the Index.
While the Fund's assets other than the Put Contracts are expected to be
substantially invested in the common stocks included in the S&P 500, the Fund
may use options other than the Put Contracts as well as futures contracts and
options on futures relating to all or a portion of the S&P 500. In addition, the
Fund will invest in short-term money market instruments for cash management,
liquidity and other purposes. See "Other Investment Policies."
As described under "Investment Advisory and Management Arrangements", the
Investment Adviser will defer receipt of payment of all or a portion of its
investment advisory fee until the Maturity Date if the Fund's income from stock
dividends or other available cash or cash equivalents are not sufficient to pay
the fee. Distributions to investors upon termination of the Fund at the Maturity
Date will, on a per share basis, be reduced by the amount of any deferred
investment advisory fee payable to the Investment Adviser, as well as by all
other outstanding and unpaid liabilities and obligations of the Fund, including
any unpaid brokerage and transaction costs, expenses, including the expenses of
liquidation, and principal and interest on any outstanding borrowings. The
Investment Adviser will waive payment of any portion of
14
<PAGE> 16
the deferred investment advisory fee that would reduce the amount payable per
share of the Fund to less than $10.00 (as adjusted for any early return of
capital).
THE S&P 500 INDEX
The S&P 500 is composed of 500 common stocks. The stocks represented in the
Index are issued by large-capitalization companies in a wide range of businesses
and which collectively represent a substantial portion of all common stocks
publicly traded in the U.S. The S&P 500 is a market-weighted index (an index in
which the weighting of each security is based on its market capitalization),
which means that the largest stocks represented in the index have the most
effect on the index's performance. Currently, the largest stocks in the S&P 500
have many times the effect of most other stocks in the Index. The Index does not
reflect the payment of dividends on the stocks underlying it.
The stocks in the S&P 500 are chosen by Standard & Poor's ("S&P"), a
division of The McGraw-Hill Companies, Inc. S&P chooses stocks for inclusion in
the S&P 500 based on market capitalization, trading activity and the overall mix
of industries represented in the Index, among other factors. The S&P 500 is
generally considered broadly representative of the performance of publicly
traded U.S. large capitalization stocks. S&P's selection of a stock for the S&P
500 does not mean that S&P believes the stock to be an attractive investment.
Over time, the S&P 500 Index is expected to be rebalanced to reflect
additions to, or removals from, the S&P 500, including as a result of capital
changes (e.g., mergers, spin-offs, or a change in the business or character of a
component company).
If S&P discontinues publication of the Index and S&P or another entity
publishes a successor or substitute index that the Investment Adviser
determines, with the approval of the Board of Directors of the Fund, to be
comparable to the S&P 500 (any such index being a "Successor Index"), then, upon
such determination, the Successor Index will be substituted for the S&P. Upon
any selection of a Successor Index, notice thereof will be given to shareholders
of the Fund.
LICENSE AGREEMENT
S&P and MLAM have entered into a non-exclusive license agreement providing
for the license to MLAM, in exchange for a fee, of the right to use the S&P 500
as a component of certain financial products including the Fund.
The license agreement between S&P and MLAM provides that the following
language must be stated in this prospectus.
The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the owners of shares of the
Fund or any member of the public regarding the advisability of investing in
securities generally or in the Fund particularly or the ability of the Index to
track general stock market performance. S&P's only relationship to MLAM is the
licensing of certain trademarks and trade names of S&P and of the Index which is
determined, composed and calculated by S&P without regard to MLAM or the Fund.
S&P has no obligation to take the needs of MLAM or the shareholders of the Fund
into consideration in determining, composing or calculating the Index. S&P is
not responsible for and has not participated in the determination of the prices
and amount of the Fund
15
<PAGE> 17
shares or the timing of the issuance and sale of shares of the Fund or in the
determination or calculation by which the Fund shares may be converted to cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the Index or
any data included therein and S&P shall have no liability for any errors,
omissions or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the Fund, holders of the shares, or any other
person or entity from the use of the Index or any data included therein. S&P
makes no express or implied warranties, and hereby expressly disclaims all
warranties of merchantability or fitness for a particular purpose or use with
respect to the Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect or consequential damage (including lost profits), even if notified of
the possibility of such damages.
Information in this prospectus regarding the Index, including its make-up,
method of calculation and changes in its components, is derived from publicly
available information prepared by S&P. The Fund does not assume any
responsibility for the accuracy or completeness of such information.
OTHER INVESTMENT POLICIES
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, (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, and not more than 10% of the voting
securities of a single issuer will be held. 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.
The Fund has adopted certain other policies as set forth below.
Money Market Instruments. The Fund will invest in short-term money market
instruments as cash reserves to maintain liquidity and for other cash management
purposes. The Fund will not invest in money market instruments in order to
lessen the Fund's exposure to common stocks as a defensive strategy, but will
instead attempt to remain as fully invested as practicable at all times.
The Fund may invest in short term U.S. Government securities, U.S.
Government agency securities and other money market instruments. The other money
market instruments in which the Fund may invest include certificates of deposit,
bankers' acceptances, time deposits, repurchase agreements, commercial paper
rated within the two highest grades by S&P or Moody's Investors Service, Inc.,
or, if not rated, of comparable quality as determined by the Investment Adviser,
and have remaining maturities of 397 days
16
<PAGE> 18
or less, and shares of investment companies which invest exclusively in such
money market instruments (subject to applicable limitations under the 1940 Act).
A repurchase agreement involves the purchase of a security together with a
simultaneous agreement to resell the security to the seller at a later date at
approximately the purchase price less an amount that represents interest to the
buyer. Repurchase agreements are considered relatively safe, liquid investments
for short-term cash, but involve the risk that the seller will fail to
repurchase the security and that the Fund will have to attempt to sell the
security in the market for its current value, which may be less than the amount
the Fund paid for the security. In the event of a default, the Fund may also
incur delays or losses in connection with realizing its interest in the
collateral for the repurchase agreement. The Fund will only enter into
repurchase agreements with counterparties that the Investment Adviser deems to
be creditworthy.
Standard & Poor's Depositary Receipts or "SPDRs". The Fund may invest in
Standard & Poor's Depositary Receipts ("SPDRs"), which are securities issued by
SPDR Trust, Series 1, a registered unit investment trust. The SPDRs are
exchange-listed and generally trade like shares of common stock. The investment
objective of the SPDR Trust is to provide investment results that generally
correspond to the price and yield performance of the component stocks of the S&P
500. Because SPDRs are designed to track the S&P 500, the Fund may use SPDRs to
invest cash balances to provide investment results that would generally
correspond to the price and yield performance of the component stocks of the S&P
500 Index. There can be no assurance that the SPDR Trust will at all times be
able to replicate substantially the performance of the S&P 500 Index. Because
SPDRs are securities issued by another investment company, the Fund's use of
SPDRs will be limited by the Fund's investment restrictions and applicable law.
See "Investment Restrictions".
Options and Futures. The Fund may use futures and options. In general, the
Fund will invest a portion of its portfolio other than the Put Contracts in such
derivative instruments linked to the performance of the S&P 500. The Fund may
invest in options, futures and other derivative instruments to gain market
exposure quickly, to maintain liquidity and to help keep trading costs low. The
Fund may also engage in anticipatory hedging to offset the risk that securities
in which it intends to invest will increase in value before the Fund has an
opportunity to purchase the securities. Futures and options on futures may be
employed to provide liquidity or, for example, be employed as a proxy for a
direct investment in securities underlying the S&P 500. More detailed
information with respect to use of options and futures is provided below.
Futures are exchange-traded contracts involving the obligation of the
seller to deliver, and the buyer to receive, certain assets (or a money payment
based on the change in value of certain assets or an index) at a specified time.
Futures involve leverage risk (the risk associated with certain types of
investments or trading strategies that relatively small market movements may
result in large changes in value of an investment).
Options are exchange-traded or OTC contracts involving the right of a
holder to deliver (a "put") or receive (a "call") certain assets (or a money
payment based on the change of certain assets or an index) from another party at
a specified price within a specified time period. Options also involve leverage
risk, and OTC options also involve credit risk (the risk that the other party
will not be able to complete its contractual obligations) and liquidity risk
(the risk that the Fund will not be able to find a buyer at an
17
<PAGE> 19
acceptable price if it wants to sell). Index options are similar to options on
securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option gives
the holder the right to receive cash upon exercise of the option if the level of
the index upon which the option is based is greater than (with respect to a call
option) or less than (with respect to a put option) the exercise price of the
option.
Call Options on Portfolio Securities. The Fund may purchase call options
on any of the types of securities in which it may invest. A purchased call
option gives the Fund the right to buy, and obligates the seller to sell, the
underlying security at the exercise price at any time during the option period.
The Fund also is authorized to write (i.e., sell) covered call options on the
securities in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered call option is
an option where the Fund, in return for a premium, gives another party a right
to buy specified securities owned by the Fund at a specified future date and
price set at the time of the contract. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options also serve as a partial hedge against the price of the underlying
security declining. The Fund may also purchase and sell call options on indices
such as the S&P 500.
Put Options on Portfolio Securities. In addition to the Put Contracts
intended to protect on the Maturity Date at least 100% of the value of the
Fund's initial assets, the Fund is authorized to purchase put options. By buying
a put option, the Fund has a right to sell the underlying security at the
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. The
Fund also has authority to write (i.e., sell) put options on the types of
securities which may be held by the Fund, provided that such put options are
covered, meaning that such options are secured by segregated, liquid
instruments. The Fund will receive a premium for writing a put option, which
increases the Fund's return. The Fund will not sell puts if, as a result, more
than 50% of the Fund's assets would be required to cover its potential
obligations under its hedging and other investment transactions.
Furthermore, the Fund may also purchase and sell additional put options on
indices. Rather than taking or making delivery of securities underlying the
option at a specified price upon exercise, an index option gives the holder the
right to receive cash upon exercise of the option if the level of the index upon
which the option is based is less than the exercise price of the option.
OTC Options. OTC options and assets used to cover OTC options written by
the Fund are considered by the staff of the SEC to be illiquid. The illiquidity
of such options or assets may prevent a
18
<PAGE> 20
successful sale of such options or assets, result in a delay of sale, or reduce
the amount of proceeds that might otherwise be realized.
Financial Futures and Options Thereon. The Fund is authorized to engage in
transactions in financial futures contracts ("futures contracts") and related
options on such futures contracts either as a hedge against adverse changes in
the market value of its portfolio securities and interest rates or to enhance
the Fund's income. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date or, in the
case of an index futures contract to make and accept a cash settlement based
upon the difference in value of the index between the time the contract was
entered into and the time of its settlement. A majority of transactions in
futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Futures contracts are
standardized, exchange-traded agreements that have been designed by boards of
trade which have been designated "contract markets" by the Commodities Futures
Trading Commission ("CFTC"). Transactions by the Fund in futures contracts and
financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions".
The Fund also has authority to purchase and write call and put options on
futures contracts. Generally, these strategies are utilized under the same
market and market sector conditions (i.e., conditions relating to specific types
of investments) in which the Fund enters into futures transactions. The Fund may
purchase put options or write call options on futures contracts rather than
selling the underlying futures contract. Similarly, the Fund may purchase call
options, or write call options on futures contracts, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends to purchase.
Restrictions on the Use of Futures Transactions. Under regulations of the
CFTC, the futures trading activity described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any such
contracts and options. Margin deposits may consist of cash or securities
acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash or liquid instruments will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of variation margin held in the account of its
broker, equals the market value of the futures contract, thereby ensuring that
the use of such futures is unleveraged.
Securities Lending. The Fund may lend portfolio securities having a value
of up to 33 1/3% of total assets. The Fund may lend portfolio securities to
financial institutions in return for collateral in the form of U.S. Government
securities or cash. The Fund will either receive a fee from the borrower or pay
the borrower interest in return for the right to seek to invest cash collateral
at a higher rate. If a borrower fails to return the Fund's security, the Fund
will have to attempt to liquidate the borrower's collateral, which may be worth
less than the Fund's security.
19
<PAGE> 21
Leverage. The Fund may borrow to finance repurchases of its common stock
and for other purposes, including payment of required distributions to holders
of shares. If the Fund borrows to finance repurchases of its common stock, it
will not be necessary for the Fund to dispose of Fund securities to finance such
repurchases. The Fund may also borrow money as a temporary measure for
extraordinary or emergency purposes. The Fund may borrow in an amount up to
approximately 33 1/3% of its total assets (including the amount borrowed). The
Fund has no current intention of borrowing.
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.
Capital raised through leverage will be subject to interest costs which may
or may not exceed the income and appreciation on the assets purchased. The Fund
also may be required to maintain minimum average balances in connection with
borrowings or to pay a commitment or other fee to maintain a line of credit.
Either of these requirements will increase the cost of borrowing over the stated
interest rate. Borrowing creates an opportunity for greater return per share of
common stock, but at the same time such borrowing 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 that have floating rates of interest.
Unless the income and appreciation, if any, on assets acquired with borrowed
funds exceeds the cost of borrowing, the use of leverage will diminish the
investment performance of the Fund compared with what it would have been without
leverage.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverage and portfolio
composition requirements. It is not anticipated that these covenants will impede
the Investment Adviser from managing the Fund's portfolio in accordance with the
Fund's investment objectives and policies.
Under the 1940 Act, the Fund is not permitted to borrow unless immediately
after such incurrence the Fund has an asset coverage of 300% of the aggregate
outstanding principal balance of indebtedness (i.e., such indebtedness may not
exceed 33 1/3% of the Fund's total assets). Additionally, under the 1940 Act the
Fund may not declare any dividend or other distribution upon any class of
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.
The Fund's willingness to borrow money to finance repurchases of its common
stock, 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.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares of common stock (which for
20
<PAGE> 22
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). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, commodities or commodity contracts,
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money, except as permitted by
Section 18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities.
5. Make loans to other persons, except that the acquisition of
corporate debt securities and investment in U.S. Government and agency
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend portfolio securities provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in this prospectus.
6. Invest more than 25% of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any 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; provided further, that to the extent that the Fund
invests in the Put Contracts and the S&P 500, the Fund may invest more than
25% of its assets in securities of issuers in the industry group consisting
of financial institutions and their holding companies, including
broker-dealers, commercial banks, thrift institutions, insurance companies
and finance companies; and provided further, that in replicating the
weighting of a particular industry in the S&P 500, the Fund may invest more
that 25% in its total assets in securities of issuers in that industry.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors, provide that the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same Investment
Adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings
21
<PAGE> 23
mentioned in investment restriction (3) above or except as may be necessary
in connection with the Put Contracts and other options or future
transactions as described in this prospectus.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities.
d. Make short sales of securities except for short sales "against the
box" or invest in put, call or other options except as described in this
prospectus.
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. However, if borrowings exceed the limit permitted by
Section 18 of the 1940 Act, the Fund will have three business days to comply
with Section 18 of the 1940 Act.
Because of the affiliation of Merrill Lynch with the Investment Adviser,
the Fund is prohibited from engaging in certain transactions involving Merrill
Lynch except pursuant to an exemptive order or otherwise in compliance with the
provisions of the 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".
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
each Director, executive officer and portfolio manager 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 Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; President of Princeton Funds Distributor, Inc. ("PFD")
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
JACK B. SUNDERLAND (71) -- Director(2) -- P.O. Box 7, West Cornwall,
Connecticut 06796. President and Director of American Independent Oil Company,
Inc. (energy company) since 1987; Member of Council of Foreign Relations since
1971.
STEPHEN B. SWENSRUD (66) -- Director(2) -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman, Fernwood Advisors (investment adviser)
since 1996; Principal, Fernwood Associates (financial consultant) since 1975.
J. THOMAS TOUCHTON (60) -- Director(2) -- Suite 3405, One Tampa City
Center, Tampa, Florida, 33602. Managing Partner of The Witt-Touchton Company and
its predecessor The Witt Co. (private investment partnership) since 1972;
Trustee Emeritus of Washington and Lee University; Director of TECO Energy Inc.
(electric utility holding company).
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<PAGE> 24
ERIC S. MITOFSKY (45) -- Senior Vice President and Portfolio
Manager(1)(2) -- First Vice President of the Investment Adviser since 1997; Vice
President of the Investment Adviser from 1992 to 1997.
DONALD C. BURKE (39) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President of
PFD since 1999; First Vice President of the Investment Adviser from 1997 to
1999; Vice President of the Investment Adviser from 1990 to 1997; Director of
Taxation of the Investment Adviser since 1990.
IRA P. SHAPIRO (36) -- Secretary(1)(2) -- First Vice President of the
Investment Adviser since 1998; Director (Legal Advisory) of the Investment
Adviser from 1997 to 1998; Vice President of the Investment Adviser from 1996 to
1997; Attorney with the Investment Adviser and FAM from 1993 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 Fund Asset Management, L.P. acts as Investment Adviser
or manager.
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 Merrill Lynch & Co., Inc. ("ML & Co.") or
its subsidiaries as well as such Directors' actual out-of-pocket expenses
relating to attendance at meetings. The Fund pays each Director not affiliated
with the Investment Adviser (each a "non-affiliated Director") a fee of $2,500
per year plus $250 per meeting attended and pays the non-affiliated Directors'
actual out-of-pocket expenses relating to attendance at meetings. The Fund also
pays members of the Board's Audit and Nominating Committee, which consists of
all of the non-affiliated Directors, an annual fee of $1,000.
The following table shows the estimated compensation to be paid by the Fund
to the non-affiliated Directors projected through the end of the Fund's first
full fiscal year and for the calendar year ended December 31, 1998 the aggregate
compensation paid to non-affiliated Directors from all registered investment
companies advised by the Investment Adviser and its affiliate Fund Asset
Management, L.P. ("FAM/MLAM - advised funds").
23
<PAGE> 25
<TABLE>
<CAPTION>
PENSION OR AGGREGATE FROM FUND
RETIREMENT BENEFITS AND FAM/MLAM
COMPENSATION ACCRUED AS PART OF ADVISED FUNDS PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSE TO DIRECTORS
- ---------------- ------------ ------------------- -------------------
<S> <C> <C> <C>
Jack B. Sunderland(1)....................... $4,500 None $133,600
Stephen B. Swensrud(1)...................... $4,500 None $195,583
J. Thomas Touchton(1)....................... $4,500 None $133,600
</TABLE>
- ------------
(1) The Directors serve on the boards of other FAM/MLAM - advised funds as
follows: Mr. Sunderland (19 registered investment companies consisting of 31
portfolios); Mr. Swensrud (25 registered investment companies consisting of
58 portfolios); Mr. Touchton (19 registered investment companies consisting
of 31 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT 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 management services. The Asset Management
Group of ML & Co. (which includes the Investment Adviser) acts as the investment
adviser to more than 100 registered investment companies. The Investment Adviser
also offers investment advisory services to individuals and institutions. As of
July, 1999, the Asset Management Group had a total of approximately $518 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. The principal business address of the Investment Adviser
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
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 will also be responsible for the performance of certain
administrative and management services for the Fund. Mr. Eric Mitofsky is the
portfolio manager of the Fund and is primarily responsible for the Fund's
day-to-day management.
The Fund will pay the Investment Adviser an investment advisory fee
quarterly in arrears at an annual rate of 1.00% of the Fund's average weekly net
assets ("average weekly net assets" means the average weekly value of the total
assets of the Fund minus accrued liabilities of the Fund). For purposes of this
calculation, the amount of average weekly net assets is determined at the end of
the calendar quarter on the basis of the average net assets of the Fund for each
week during the calendar quarter. The assets for each weekly period are
determined by averaging the net assets at the last business day of a week with
the net assets at the last business day of the prior week.
In lieu of liquidating portfolio investments to pay the investment advisory
fee, the Investment Adviser will be paid its accrued investment advisory fee
from income from the stock dividends on the Fund's
24
<PAGE> 26
portfolio and other available cash or cash equivalents (together, "Available
Assets") remaining after payment of any extraordinary or other expenses of the
Fund not covered by the investment advisory fee. To the extent that Available
Assets are not sufficient to pay all of the investment advisory fee at the
conclusion of a quarterly period, the Investment Adviser will defer collecting
the portion of the investment advisory fee not covered by such Available Assets
(the "Deferred Advisory Fee") until the conclusion of the next quarterly period.
To the extent that there are additional Available Assets after paying the then
current investment advisory fee, such additional amount will be applied to the
payment of the Deferred Advisory Fee, and any unpaid Deferred Advisory Fee
balance will be carried forward from quarter to quarter until paid. To the
extent that Available Assets are not sufficient to pay the then current Advisory
Fee, such unpaid Advisory Fee will be added to the Deferred Advisory Fee
balance, if any. On the Maturity Date, any Deferred Advisory Fee will only be
payable to the extent that the Fund will be able to return at least $10.00 per
share to investors. If payment of any portion of the Deferred Advisory Fee would
otherwise result in a return to investors on the Maturity Date of less than
$10.00 per share (as adjusted for any early return of capital), that portion of
the Deferred Advisory Fee will be waived. The Fund will not pay the Investment
Adviser any interest on the Deferred Advisory Fee.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Investment Adviser will bear
all of the Fund's ordinary operating expenses, including administration,
custodial, transfer agency, legal, auditing and accounting fees. The Fund will
pay the fees and expenses of non-affiliated Directors and their counsel,
brokerage and transactions costs, and the cost of any extraordinary expenses
that may arise, including expenses as may be required to liquidate portfolio
investments and terminate the Fund pursuant to its Articles of Incorporation.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940 Act)
of any such party. Such contract is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.
Securities held by the Fund 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 affiliates) 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.
The Investment Adviser has also entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of the
Investment Adviser, pursuant to which
25
<PAGE> 27
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 the Investment Adviser actually receives pursuant
to the Investment Advisory Agreement. MLAM U.K. has offices at Milton Gate, 1
Moor Lane, London EC2Y 9HA, England. 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.
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 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, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to deal
with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Fund. Where possible, the Fund deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the best results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread or commission), the size, type and difficulty of
the transaction involved, the firm's general execution and operations facilities
and the firm's risk in positioning the securities involved. The cost of
portfolio securities transactions of the Fund primarily consists of dealer or
underwriter spreads and brokerage commissions. While reasonable competitive
spreads or commissions are sought, the Fund will not necessarily be paying the
lowest spread or commission available.
Subject to obtaining the best net results, dealers who provide supplemental
investment research (such as quantitative and modeling information assessments
and statistical data and provide other similar services) to the Investment
Adviser may receive orders for transactions by the Fund. Information so
26
<PAGE> 28
received will be in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Investment Advisory Agreement and
the expense of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information. Supplemental investment
research obtained from such dealers might be used by the Investment Adviser in
servicing all of its accounts and such research might not be used by the
Investment Adviser in connection with the Fund.
Under the 1940 Act, persons affiliated with the Fund and persons who are
affiliated with such persons are prohibited from dealing with the Fund as
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Securities and Exchange
Commission (the "Commission"). Since transactions in the over-the-counter market
usually involve transactions with dealers acting as principal for their own
accounts, affiliated persons of the Fund, including Merrill Lynch and any of its
affiliates, will not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, the Fund may
not purchase securities during the existence of any underwriting syndicate for
such securities of which Merrill Lynch is a member or in a private placement in
which Merrill Lynch serves as placement agent except pursuant to procedures
adopted by the Board of Directors of the Fund that either comply with rules
adopted by the Commission or with interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to seek
to recapture underwriting and dealer spreads from affiliated entities. The
Directors have considered all factors deemed relevant and have made a
determination not to seek such recapture at this time. The Directors will
reconsider this matter from time to time.
Section 11(a) of the Securities Exchange Act of 1934 generally prohibits
members of the U.S. national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts that they manage
unless the member (i) has obtained prior express authorization from the account
to effect such transactions, (ii) at least annually furnishes the account with a
statement setting forth the aggregate compensation received by the member in
effecting such transactions, and (iii) complies with any rules the Commission
has prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Investment Adviser or
its affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients of the Investment Adviser or an
affiliate when one or more clients of the Investment Adviser or an affiliate are
selling the same security. If purchases or sales of securities arise for
consideration at or about the same time that would involve the Fund or other
clients or funds for which the Investment Adviser or an affiliate act as
investment adviser, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a
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manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or an affiliate during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
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
10%. This portfolio turnover rate may be significantly higher if the Fund
restructures its Put Contracts. (The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average 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 AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income, if any.
Dividends from such net investment income will be paid at least annually. All
net realized capital gains, if any, will also be distributed to Fund
shareholders at least annually.
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. This could affect
the Fund's ability to qualify for the special tax treatment afforded regulated
investment companies ("RICs") under the Internal Revenue Code of 1986, as
amended (the "Code"). See "Taxes". From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with Federal tax requirements that certain percentages of its ordinary income
and capital gains be distributed during the year.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded RICs under the Code. As long as it so qualifies, in any taxable year in
which it distributes at least 90% of its net income ("distribution
requirement"), as described 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.
Although the Fund does not expect to make significant current distributions
to shareholders, any dividends paid by the Fund from its ordinary income or from
an excess of net short-term capital gains over
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net long-term capital losses (together referred to hereafter as "ordinary income
dividends") are taxable to shareholders as ordinary income. Any distributions
from the excess of net long-term capital gains over net short-term capital
losses derived or are taxable as long-term capital gains, regardless of the
length of time the shareholder has owned Fund shares. 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).
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute during each calendar year 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute any 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.
Because the Put Contracts offset the Fund's risk of loss on the stock
portfolio, the stock portfolio and the Put Contracts will constitute a
"straddle" for Federal income tax purposes. Individual stocks in the portfolio
and certain other options entered into by the Fund may likewise constitute
straddles. Special tax rules applicable to straddles will require the Fund to
postpone recognition for tax purposes of losses incurred on any sales of
portfolio stocks and on certain closing transactions in connection with the Put
Contracts and or other options. As a result, the Fund will not be able to reduce
its income by such losses. This increases the possibility that the Fund will
have income which it must distribute to shareholders in order to satisfy the
distribution requirement. The Fund may have to borrow in order to meet any such
distribution requirement. Furthermore, because the stock portfolio and the Put
Contracts will constitute a straddle, the straddle rules will require the Fund
to treat any gains recognized as a result of sales of portfolio stocks will be
characterized as short-term even if the Fund held such stock for the long-term
capital gain holding period.
Distributions by the Fund 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.
To qualify as a RIC, the Fund is required to distribute 90% of its taxable
income each year. If the IRS adjusts the Fund's taxable income on audit, the
Fund may be able to pay a deficiency dividend in order to meet the 90%
requirement for the year to which the adjustment relates and continue to qualify
as a RIC. The Fund may have to borrow to pay such a deficiency dividend.
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.
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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.
A loss realized on a sale 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.
The liquidating distribution a shareholder receives from the Fund at
maturity will be treated as made in exchange for Fund shares, and any capital
gain or loss will be long-term, provided the shares have been held for more than
one year as a capital asset. If a liquidating distribution exceeds a
shareholder's basis in Fund shares, the excess will be treated as gain from the
sale of the shares. If a shareholder receives a liquidating distribution which
is less than such basis, the shareholder will recognize a loss to that extent.
Any gain or loss recognized by the shareholder will be capital if the shares
have been held as a capital asset and will be long-term if the shares have been
held for more than one year.
As previously discussed, at Maturity the Investment Advisor may waive all
or a portion of the Deferred Advisory Fee (if any), if payment of the fee would
result in a return to shareholders of less than $10.00 per share (as adjusted
for any early return of capital). Any such waiver would result in income to the
Fund that is subject to the distribution requirement. The Fund would satisfy any
such distribution requirement by virtue of its liquidating distribution to
shareholders.
Under current law, a holder of common stock whose shares are repurchased by
the Fund and who sells all of its shares and who, after such repurchase, 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 and will be long-term if the shares have been held
for more than one year. Different tax consequences may apply to selling and
non-selling holders of common stock in connection with repurchase. For example,
if a holder of common stock sells 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, or, if the Fund has insufficient earnings and profits, a
return of capital or capital gains, depending on the shareholder's basis in the
repurchased shares. Also, there is a remote risk that non-selling holders of
common stock may be considered to have received a deemed distribution that may
be a taxable dividend in whole or in part. Holders of common stock may wish to
consult their tax advisers prior to selling stock which will be repurchased by
the Fund.
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.
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The Fund does not currently expect to issue preferred stock, but does have
the authority to do so. If preferred stock is issued, the Fund will be required
to comply with tax rules regarding the allocation of ordinary income and capital
gains between the preferred stock and the common stock.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
NET ASSET VALUE
The net asset value per share of common stock is determined after the close
of business on the New York Stock Exchange (the "NYSE")(generally, the NYSE
closes 4:00 p.m., Eastern time), on the last business day in each week. For
purposes of determining the net asset value of a share of common stock, the
value of the securities held by the Fund plus any cash or other assets
(including interest accrued but not yet received) minus all liabilities
(including accrued expenses) is divided by the total number of shares of common
stock outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The Fund will determine and make available for publication the net asset
value of its shares of common stock weekly. Currently, the net asset values of
shares of publicly traded closed-end investment companies are published in
Barrons, the Monday edition of The Wall Street Journal and the Monday and
Saturday editions of The New York Times.
Certain 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. 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. Positions in options are generally valued at the
last sale price on the market where any such option is principally traded.
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.
Instruments such as the Put Contracts 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.
REPURCHASE OF SHARES
Because the Fund is newly organized, its shares have no history of public
trading, and shares of closed-end investment companies frequently trade at a
discount from their net asset value. The risk of loss
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<PAGE> 33
typically may be greater for initial investors expecting to sell their shares in
a relatively short period after completion of the public offering.
Shares of the Fund are being sold to the public without a sales load or
underwriting commission. In addition, the Board of Directors of the Fund may
consider open market share repurchases from time to time to seek to reduce the
market price discount, if any, from net asset value.
Subject to the Fund's fundamental policy with respect to borrowings, the
Fund may incur debt to finance share repurchases. See "Investment Objective and
Policies" and "Investment Restrictions". Interest on any such borrowings will
increase the Fund's expenses and reduce the Fund's net income. See the
discussion of leverage under "Risk Factors and Special Considerations". There
can be no assurance that share repurchases will cause the shares to trade at a
price equal to their net asset value. Nevertheless, the possibility that a
portion of the Fund's outstanding shares may be the subject of repurchases may
reduce the discount between market price and net asset value that might
otherwise exist.
If the Fund must liquidate portfolio securities to repurchase shares, the
Fund may be required to sell portfolio securities for other than investment
purposes and may realize gains and losses.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which are classified as common stock. Although it
has no current intention to do so, the Board of Directors is authorized to
classify or reclassify any unissued shares of capital stock by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption. The Fund's Articles of Incorporation permit the Board
of Directors to increase the number of authorized shares of capital stock
without the vote of shareholders. The shares of common stock, when issued and
outstanding, will be fully paid and nonassessable. Shareholders are entitled to
one vote for each share held for the election of Directors and other matters
submitted to shareholders. There are no preemptive rights. The rights of the
shares with respect to dividends and distributions are described under
"Dividends and Distributions". Each share is entitled to participate equally in
the net distributable assets of the Fund upon liquidation or termination.
The Fund's Articles of Incorporation provide that the Fund will terminate
on November 30, 2007, without shareholder approval. In connection with such
termination, the Fund will liquidate all of its assets and distribute to
shareholders the net proceeds after making appropriate provision for any
liabilities of the Fund. Prior to such termination, however, the Board of
Directors of the Fund will consider whether it is in the best interests of
shareholders to terminate and liquidate the Fund without shareholder approval
notwithstanding the Articles of Incorporation provision. In considering the
matter, the Board of Directors will take into account, among other factors, the
adverse effect which capital losses realized upon disposition of securities in
connection with liquidation (if any such losses are anticipated) would have on
the Fund and its shareholders. In the event that the Board of Directors
determines that under the circumstances, termination and liquidation of the Fund
on November 30, 2007 without a shareholder vote would not be in the best
interests of shareholders, the Board of Directors will call a special meeting of
shareholders to consider an appropriate amendment to the Fund's Articles of
Incorporation. The Fund's Articles of Incorporation would require the
affirmative vote of the holders of at least 66 2/3% of outstanding shares to
approve such an amendment. The foregoing provisions of the Fund's Articles of
Incorporation are
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governed by the laws of the State of Maryland and not the 1940 Act. If the
Fund's Board of Directors calls a special meeting of shareholders to consider
voting upon an amendment to the Fund's Articles of Incorporation to extend the
life of the Fund beyond November 30, 2007, such shareholders will also be
provided the opportunity to vote upon the Fund's fundamental policy as set forth
in the first paragraph under "Investment Objective and Policies."
The Fund has no present intention of offering any additional shares. Other
offerings of its shares, if made, will require approval by the Fund's Board of
Directors. Any additional offering of shares of common stock will be subject to
the requirements of the 1940 Act that shares may not be issued at a price below
the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of a majority of the Fund's outstanding voting securities.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders of record.
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of common stock at $10.000 per share 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 AND BY-LAWS
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 holders of capital
stock may be removed from office with or without cause by vote of the holders of
at least 66 2/3% of the shares of capital stock, 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:
- a merger or consolidation or statutory share exchange of the Fund with
other corporations;
- 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
- a liquidation or dissolution of the Fund except pursuant to the Articles
of Incorporation on November 30, 2007
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with the
by-laws, in which case the affirmative vote of a majority of the Fund's shares
of capital stock is required. Following any issuance of preferred stock by the
Fund, it is anticipated that the approval, adoption or authorization of the
foregoing would also require the
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<PAGE> 35
favorable vote of a majority of the Fund's shares of preferred stock then
entitled to be voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Article of Incorporation. The amendment would
have to be declared advisable by the Board of Directors prior to its submission
to shareholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding shares (including any
preferred stock) entitled to be voted on the matter, voting as a single class
(or a majority of such shares if the amendment was previously approved, adopted
or authorized by two-thirds of the total number of Directors fixed in accordance
with the by-laws), and, assuming preferred stock is issued, the affirmative vote
of a majority of outstanding shares of preferred stock of the Fund, voting as a
separate class. Such a vote also would satisfy a separate requirement in the
1940 Act that the change be approved by the shareholders. Shareholders of an
open-end investment company may require the company to redeem their shares of
common stock at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charge, if
any, as might be in effect at the time of a redemption. All redemptions would
usually be made in cash. If the Fund is converted to an open-end investment
company, it could be required to liquidate portfolio securities to meet requests
for redemption, and the shares would no longer be listed on a stock exchange.
Conversion to an open-end investment company would require a change in the
Fund's fundamental policy as set forth in the first paragraph under "Investment
Objective and Policies" and also would require changes in certain of the Fund's
other investment policies and restrictions.
The Articles of Incorporation and By-Laws provide that the Board of
Directors has the power, to the exclusion of shareholders, to make, alter or
repeal any of the By-Laws (except for any By-Law specified not to be amended or
repealed by the Board), subject to the requirements of the 1940 Act. Neither
this provision of the Articles of Incorporation, nor any of the foregoing
provisions of the Articles requiring the affirmative vote of 66 2/3% of shares
of capital stock of the Fund, can be amended or repealed except by the vote of
such required number of shares.
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 and By-Laws on file
with the Commission for the full text of these provisions.
The Fund's By-Laws generally require that advance notice be given to the
Fund in the event a shareholder desires to nominate a person for election to the
Board of Directors or to transact any other business at an annual meeting of
shareholders. With respect to an annual meeting following the first annual
meeting of shareholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Fund not less
than 60 calendar days nor more than 90 calendar days prior to the anniversary
date of the prior year's annual meeting (subject to certain exceptions). In the
case of the first annual meeting of shareholders, the notice must be given no
later than the tenth calendar day following public disclosure as specified in
the By-Laws of the date of the meeting. Any notice by a shareholder must be
accompanied by certain information as provided in the By-Laws.
The notice provisions are intended to afford shareholders a fair
opportunity to present matters for consideration at shareholder meetings while
assuring that shareholders and Directors will have a reasonable opportunity to
consider the matters proposed and to allow for full information to be
distributed to all
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<PAGE> 36
shareholders about all sides of the particular issue. These provisions could
have the effect of limiting or delaying to some extent the ability of
shareholders to take certain actions at a meeting of shareholders.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
The Chase Manhattan Bank, 4 Chase MetroTech Center, 18th Floor, Brooklyn, New
York 11245.
UNDERWRITING
Merrill Lynch, Pierce, Fenner and Smith Incorporated ("Merrill Lynch" or
the "Underwriter") has agreed, subject to the terms and conditions of a Purchase
Agreement with the Fund and the Investment Adviser, to purchase 10,000,000
shares of common stock from the Fund. The Underwriter is committed to purchase
all of such shares if any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of common stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of common stock in the offering in the amount of $
per share. Such payment is equal to % of the initial public offering price
per share. The Underwriter also has advised the Fund that from this amount the
Underwriter may pay a concession to certain dealers not in excess of $ per
share on sales by such dealers. After the initial public offering, the public
offering price and other selling terms may be changed. Investors must pay for
shares of common stock purchased in the offering on or before October , 1999.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
common stock.
If the Underwriter creates a short position in the shares of common stock
in connection with the offering, i.e., if it sells more shares of common stock
than are set forth on the cover page of this prospectus, the Underwriter may
reduce its short position by purchasing shares of common stock in the open
market.
The Underwriter may also impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of common stock in
the open market to reduce the Underwriter's short position or to stabilize the
price of the shares of common stock, it may reclaim the amount of the selling
concession from the selling group members who sold those shares of common stock
as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of common stock. In addition, neither
the Fund nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
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<PAGE> 37
Prior to this offering, there has been no public market for the shares of
the common stock. The Fund plans to apply to list the Fund's shares of common
stock on the NYSE or another national securities exchange. In order to meet the
requirements for listing, the Underwriter has undertaken to sell lots of 100 or
more shares to a minimum of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as
broker in connection with the execution of its portfolio transactions.
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of the Fund is State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
LEGAL OPINIONS
Certain legal matters in connection with the common stock offered hereby
are passed on for the Fund and the Underwriter by Brown & Wood LLP, New York,
New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of October
, 1999 included in this prospectus has been so included in reliance on the
report of , independent auditors, and on their authority as experts in
auditing and accounting. The selection of independent auditors is subject to
ratification by shareholders of the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith
is required to file reports, proxy statements and other information with the
Commission. Any such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following regional offices of the Commission: Regional Office, at Seven
World Trade Center, Suite 1300, New York, New York 10048; Pacific Regional
Office, at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036;
and Midwest Regional Office, at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can
be obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Fund, that file electronically with the Commission. Reports, proxy
statements and other information concerning the Fund can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This prospectus does not contain all of the information set forth in the
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<PAGE> 38
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
hereby, reference is made to the Registration Statement. Statements contained in
this prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). 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 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 invests, and this could hurt the Fund's investment returns.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
The S&P 500(R) Protected Equity Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital of
The S&P 500(R) Protected Equity Fund, Inc. as of October , 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, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of The S&P 500(R)
Protected Equity Fund, Inc. as of October , 1999 in conformity with generally
accepted accounting principles.
Princeton, New Jersey
October , 1999
38
<PAGE> 40
THE S&P 500(R) PROTECTED EQUITY FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
OCTOBER , 1999
<TABLE>
<S> <C>
ASSETS
Cash................................................... $100,000
Offering costs (Note 1)................................
--------
Total Assets......................................
--------
LIABILITIES
Liabilities and accrued expenses (Note 1)..............
--------
NET ASSETS.................................................. $100,000
========
CAPITAL
Common stock, par value $.10 per share; 200,000,000
shares authorized; 10,000 shares issued and
outstanding (Note 1).................................. $ 1,000
Paid-in Capital in excess of par....................... 99,000
--------
Total Capital-Equivalent to $10.00 net asset value per
share of common stock (Note 1)........................ $100,000
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on July
15, 1999, as a closed-end, non-diversified management investment company and has
had no operations 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 October , 1999. The General Partner of the Investment Adviser is
an indirectly wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The organization costs and costs of the offering have been paid by the
Investment Adviser or an affiliate.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
quarterly fee in arrears at the annual rate of 1.00% of the Fund's average
weekly net assets. The Investment Adviser or an affiliate will pay Merrill
Lynch, Pierce, Fenner & Smith Incorporated a commission in the amount of % of
the price to the public in connection with the initial public offering of the
Fund's common stock.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on a taxable income
(including realized capital gains) that is distributed to shareholders.
39
<PAGE> 41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including January , 2000 (the 90th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
10,000,000 SHARES
THE S&P 500(R) PROTECTED EQUITY FUND, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
OCTOBER , 1999
CODE-19073-0999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 42
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements:
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of October , 1999
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
(a) -- Articles of Incorporation.(a)
(b) -- By-Laws.(b)
(c) -- Not applicable.
(d) (1) -- Portions of the Articles of Incorporation and By-Laws of the
Fund defining the rights of holders of shares of the
Fund.(c)
(2) -- Form of specimen certificate for the shares of common stock
of the Fund.(b)
(e) -- Not applicable.
(f) -- Not applicable.
(g) (1) -- Form of Investment Advisory Agreement between the Fund and
Merrill Lynch Asset Management, L.P.
(g) (2) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K.
Limited.
(h) (1) -- Form of Purchase Agreement between the Fund and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
(2) -- Form of Merrill Lynch Standard Dealer Agreement.
(i) -- Not applicable.
(j) -- Form of Custody Agreement between the Fund and The Chase
Manhattan Bank.*
(k) -- Form of Registrar, Transfer Agency and Service Agreement
between the Fund and State Street Bank and Trust Company.
(l) -- Opinion and Consent of Brown & Wood LLP.*
(m) -- Not applicable.
(n) -- Consent of , independent auditors for the
Fund.*
(o) -- Not applicable.
(p) -- Certificate of Merrill Lynch Asset Management, L.P.*
(q) -- Not applicable.
(r) -- Not applicable.
</TABLE>
- ------------
(a) Filed on July 16, 1999 as an Exhibit to Registrant's Registration Statement
on Form N-2.
(b) Filed on September 3, 1999 as an Exhibit to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2.
(c) Reference is made to Article IV, Article V (sections 2, 3, 4, 5 and 6),
Article VI, Article VII, Article VIII, Article IX, Article X, Article XI and
Article XII of the Registrant's Articles of Incorporation, filed as Exhibit
(a) to this Registration Statement; and to Article II, Article III (sections
1, 2, 3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to this
Registration Statement.
* To be provided by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibits (h)(1) and (h)(2).
C-1
<PAGE> 43
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be incurred in connection with the offering described in
this Registration Statement will be paid by Merrill Lynch Asset Management, L.P.
(the "Investment Adviser" or "MLAM") or an affiliate, not by the Registrant.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Stock -- Common Stock"
and in Note 1 to the Statement of Assets, Liabilities and Capital is
incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit (a)
to this Registration Statement, Article VI of the Registrant's By-Laws, filed as
Exhibit (b) to this Registration Statement, and the Investment Advisory
Agreement, a form of which will be filed as Exhibit (g)(1) to this Registration
Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be provided to directors,
officers and controlling persons of the Fund, pursuant to the foregoing
provisions or otherwise, the Fund has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Fund of expenses incurred or paid by a director, officer or
controlling person of the Fund in connection with any successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Investment Adviser acts as the investment adviser for the following
open-end registered investment companies: Merrill Lynch Adjustable Rate
Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch
Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill
Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch Disciplined Equity 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 Small Cap 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 Ready Assets Trust, Merrill Lynch Real Estate Fund,
C-2
<PAGE> 44
Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Fund, Inc. and Hotchkis
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., Merrill Lynch Senior Floating Rate Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund II, 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 Advisory Trust.
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 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
California Insured Fund V, Inc., MuniHoldings Florida Insured Fund, MuniHoldings
Florida Insured Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings
Florida Insured Fund IV, MuniHoldings Florida Insured Fund V, MuniHoldings Fund,
Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings
Insured Fund I, Inc., MuniHoldings Insured Fund III, Inc., MuniHoldings Michigan
Insured Fund, Inc., MuniHoldings Michigan Insured Fund II, Inc., MuniHoldings
New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc.,
MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings New Jersey Insured
Fund IV, 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 New York Insured Fund IV, Inc.,
MuniHoldings Pennsylvania Insured Fund, MuniVest Florida Fund, MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011 except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 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
C-3
<PAGE> 45
Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower, World Financial Center,
250 Vesey Street, New York, New York 10281-1201. The address of Merrill Lynch
Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
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 position with all or substantially all of the
investment companies advised by FAM as they do with those advised by the
Investment Adviser. Messrs. Giordano, Harvey, Kirstein and Monagle are officers
or directors/trustees of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER 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 since 1997; President
and Director of Princeton Services;
Executive Vice President of ML & Co.;
Managing Director and Co-Head of the
Investment Banking Division of Merrill
Lynch (in 1997); Senior Vice President
and Director of the Global Securities in
Economics 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 and
Director of PFD; Director of FDS;
President of Princeton Administrators
Gregory A. Bundy.................. Chief Operating Officer Chief Operating Officer and Managing
and Managing Director Director of FAM; Chief Operating Officer
and Managing Director of Princeton
Services; Co-CEO of Merrill Lynch
Australia from 1997 to 1999
Donald C. Burke................... Senior Vice President, Senior Vice President and Treasurer of
Treasurer and Director FAM; Senior Vice President and Treasurer
of Taxation of Princeton Services; Vice President of
PFD; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM
from 1990 to 1997
Michael G. Clark.................. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Treasurer and Director of PFD; First
Vice President of MLAM from 1997 to
1999; Vice President of MLAM from 1996
to 1997
</TABLE>
C-4
<PAGE> 46
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- ---- ------------------ ---------------------------------------
<S> <C> <C>
Robert C. Doll.................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999
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
Michael J. Hennewinkel............ Senior Vice President, Senior Vice President, Secretary and
Secretary and General General Counsel of FAM; Senior Vice
Counsel President of Princeton Services
Philip L. Kirstein................ Senior Vice President Senior Vice President of FAM; Senior
Vice President, Secretary, General
Counsel and Director of Princeton
Services
Debra W. Landsman-Yaros........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Vice President of PFD
Stephen M. M. Miller.............. Senior Vice President Executive Vice President of Princeton
Administrators; 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
Gregory D. Upah................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
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., 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 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 Corporate High Yield
Fund, Inc., Merrill Lynch Developing Capital Markets, Inc., Merrill Lynch
Disciplined Equity Fund, 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 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
C-5
<PAGE> 47
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.
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 January 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>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME MLAM U.K. VOCATION OR EMPLOYMENT
- ---- ---------------- ---------------------------------------
<S> <C> <C>
Terry K. Glenn........ Director and Chairman Executive Vice President of MLAM and FAM;
Executive Vice President and Director of
Princeton Services; President and Director
of PFD; President of Princeton
Administrators
Alan J. Albert........ Senior Managing Director Vice President of MLAM
Nicholas C.D. Hall.... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Donald C. Burke....... Treasurer Senior Vice President and Treasurer of MLAM
and FAM; Director of Taxation of MLAM;
Senior Vice President and Treasurer of
Princeton Services; Vice President of PFD;
First Vice President of MLAM from 1997 to
1999; Vice President of MLAM from 1990 to
1997
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 Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its Investment Adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of common
stock covered hereby until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of common stock declines more than 10 percent from its net asset
value per share of common stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of common stock increases to an
amount greater than its net proceeds as stated in the prospectus contained
herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
C-6
<PAGE> 48
(2) For the purpose of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
C-7
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Plainsboro, and State of New Jersey, on the 17th
day of September, 1999.
THE MARKET PARTICIPATION PRINCIPAL
PROTECTION FUND, 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 Ira P. Shapiro or any of them, as attorney-in-fact, to sign
on his 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 dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ TERRY K. GLENN President (Principal September 17, 1999
- --------------------------------------------------- Executive Officer) and
(Terry K. Glenn) Director
/s/ DONALD C. BURKE Treasurer (Principal September 17, 1999
- --------------------------------------------------- Financial and Accounting
(Donald C. Burke) Officer)
/s/ JACK B. SUNDERLAND Director September 17, 1999
- ---------------------------------------------------
(Jack B. Sunderland)
/s/ STEPHEN B. SWENSRUD Director September 17, 1999
- ---------------------------------------------------
(Stephen B. Swensrud)
/s/ J. THOMAS TOUCHTON Director September 17, 1999
- ---------------------------------------------------
(J. Thomas Touchton)
</TABLE>
C-8
<PAGE> 1
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the ____ day of _______, 1999 by and between THE
S&P 500(R) PROTECTED EQUITY FUND, INC., a Maryland corporation (the "Fund"), and
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership (the
"Investment Adviser").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as a closed-end,
non-diversified, management investment company registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the promises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE> 2
ARTICLE I
Duties of the Investment Adviser
The Fund hereby employs the Investment Adviser to act as a manager and
investment adviser of the Fund and to furnish, or arrange for its affiliates to
furnish, the management and investment advisory services described below,
subject to the policies of, review by and overall control of the Board of
Directors of the Fund, for the period and on the terms and conditions set forth
in this Agreement. The Investment Adviser hereby accepts such employment and
agrees during such period, at its own expense, to render, or arrange for the
rendering of, such services and to assume the obligations herein set forth for
the compensation provided for herein. The Investment Adviser and its affiliates
for all purposes herein shall be deemed to be independent contractors and,
unless otherwise expressly provided or authorized, shall have no authority to
act for or represent the Fund in any way or otherwise be deemed agents of the
Fund.
(a) Management and Administrative Services. The Investment Adviser
shall perform, or arrange for its affiliates to perform, the management and
administrative services necessary for the operation of the Fund, including
administering stockholder accounts and handling stockholder relations. The
Investment Adviser shall provide the Fund with office space, facilities,
equipment and necessary personnel and such other services as the Investment
Adviser, subject to review by the Board of Directors, from time to time shall
determine to be necessary or useful to perform its obligations under this
Agreement. The Investment Adviser, also on behalf of the Fund, shall conduct
relations with custodians, depositories, transfer agents, pricing agents,
dividend disbursing agents, other stockholder servicing agents, accountants,
attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers,
banks and such other persons in any such other capacity deemed to be necessary
or desirable. The Investment Adviser generally shall monitor the Fund's
compliance with investment policies and restrictions as set forth in
2
<PAGE> 3
filings made by the Fund under the Federal securities laws. The Investment
Adviser shall make reports to the Board of Directors of its performance of
obligations hereunder and furnish advice and recommendations with respect to
such other aspects of the business and affairs of the Fund as it shall determine
to be desirable.
(b) Investment Advisory Services. The Investment Adviser shall provide,
or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the latter from time to time may consider
necessary for the proper supervision of the assets of the Fund, shall furnish
continuously an investment program for the Fund and shall determine from time to
time which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash, subject always to the
restrictions of the Articles of Incorporation and the By-Laws of the Fund, as
amended from time to time, the provisions of the Investment Company Act and the
statements relating to the Fund's investment objective, investment policies and
investment restrictions as the same are set forth in filings made by the Fund
under the Federal securities laws. The Investment Adviser shall make decisions
for the Fund as to the manner in which voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's portfolio
securities shall be exercised. Should the Board of Directors at any time,
however, make any definite determination as to investment policy and notify the
Investment Adviser thereof in writing, the Investment Adviser shall be bound by
such determination for the period, if any, specified in such notice or until
similarly notified that such determination has been revoked. The Investment
Adviser shall take, on behalf of the Fund, all actions which it deems necessary
to implement the investment policies determined as provided above, and in
particular to place all orders for the purchase or sale of portfolio securities
for the
3
<PAGE> 4
Fund's account with brokers or dealers selected by it, and to that end, the
Investment Adviser is authorized as the agent of the Fund to give instructions
to the custodian of the Fund as to deliveries of securities and payments of cash
for the account of the Fund. In connection with the selection of such brokers or
dealers and the placing of such orders with respect to assets of the Fund, the
Investment Adviser is directed at all times to seek to obtain execution and
prices within the policy guidelines determined by the Board of Directors and set
forth in filings made by the Fund under the Federal securities laws. Subject to
this requirement and the provisions of the Investment Company Act, the
Securities Exchange Act of 1934, as amended, and other applicable provisions of
law, the Investment Adviser may select brokers or dealers with which it or the
Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
ARTICLE II
Allocation of Charges and Expenses
(a) The Investment Adviser. The Investment Adviser shall provide the
staff and personnel necessary to perform its obligations under this Agreement,
shall assume and pay or cause to be paid all expenses incurred in connection
with the maintenance of such staff and personnel, and, at its own expense, shall
provide the office space, facilities, equipment and necessary personnel which it
is obligated to provide under Article I hereof, and shall pay all compensation
of officers of the Fund and all Directors of the Fund who are affiliated persons
of the Investment Adviser. Except as otherwise provided in subsection (b)
hereof, the Investment
4
<PAGE> 5
Adviser also assumes, and shall pay or cause to be paid, all ordinary operating
expenses of the Fund including, without limitation: expenses for legal and
auditing services, costs of printing proxies, stock certificates, stockholder
reports and prospectuses, charges of the custodian, any sub-custodian and
transfer agent, Securities and Exchange Commission fees, expenses of registering
the shares of the Fund under Federal, state and foreign laws, insurance,
accounting and pricing costs (including the calculation of the net asset value).
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
taxes, expenses of portfolio transactions, interest, brokerage costs, fees and
actual out-of-pocket expenses of Directors who are not affiliated persons of the
Investment Adviser including their expenses for legal services, and litigation
and other extraordinary or non-recurring expenses, including expenses that may
be incurred in liquidating portfolio investments and in terminating the Fund's
existence pursuant to the Articles of Incorporation of the Fund.
ARTICLE III
Compensation of the Investment Adviser
(a) Investment Advisory Fee. For the services rendered, the facilities
furnished and the expenses assumed by the Investment Adviser, the Fund shall pay
to the Investment Adviser at the end of each calendar quarter a fee in arrears
based upon the average weekly value of the net assets of the Fund at the annual
rate of 1.00% of the average weekly net assets of the Fund (i.e., the average
weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund), commencing on the day following effectiveness hereof.
For purposes of this calculation, average weekly net assets are determined at
the end of each calendar quarter on the basis of the average net assets of the
Fund for each week during the calendar quarter. The assets
5
<PAGE> 6
for each weekly period are determined by averaging the net assets at the last
business day of a week with the net assets at the last business day of the prior
week.
The Investment Adviser will receive its quarterly fee from the common
stock dividends on the Fund's portfolio and other available cash or cash
equivalents (together, "Available Assets") remaining after payment of expenses
borne by the Fund pursuant to subsection (b) of Article II. To the extent that
Available Assets are not sufficient to pay all of the fee due to the Investment
Adviser in a given calendar quarter, the Investment Adviser will defer
collecting the portion of the fee not covered by such Available Assets (the
"Deferred Advisory Fee") until the conclusion of the next calendar quarter. To
the extent that there are additional Available Assets after accruing for the
then current fee, such additional Available Assets will be applied to the
payment of the Deferred Advisory Fee, and any unpaid Deferred Advisory Fee
balance will be carried forward from quarter to quarter until paid. To the
extent that Available Assets are not sufficient to pay the then current fee owed
to the Investment Adviser, such unpaid fee will be added to the Deferred
Advisory Fee balance, if any. At the termination of the Fund's existence
pursuant to the Articles of Incorporation of the Fund, any Deferred Advisory Fee
will only be payable to the extent the Fund is able to return at least $10.00
per share to stockholders. If payment of any portion of the Deferred Advisory
Fee would otherwise result in a return to stockholders at the termination of the
Fund's existence of less than $10.00 per share (as adjusted for any early return
of capital), that portion of the Deferred Advisory Fee will be waived. The Fund
will not pay the Investment Adviser any interest on the Deferred Advisory Fee.
If this Agreement becomes effective subsequent to the first day of a
calendar quarter or shall terminate before the last day of a calendar quarter,
compensation for that part of the calendar quarter this Agreement is in effect
shall be prorated in a manner consistent with the
6
<PAGE> 7
calculation of the fee as set forth above. Subject to the provisions of
subsection (b) hereof, payment of the Investment Adviser's compensation for the
preceding calendar quarter shall be made as promptly as possible after
completion of the computations contemplated by subsection (b) hereof. During any
period when the determination of net asset value is suspended by the Board of
Directors, the average net asset value of a share for the last week prior to
such suspension shall for this purpose be deemed to be the net asset value at
the close of each succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the
Fund, including amounts payable to the Investment Adviser pursuant to subsection
(a) hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, if any, as such
limitations may be raised or lowered from time to time, the Investment Adviser
shall reduce its management and investment advisory fee by the extent of such
excess and, if required pursuant to any such laws or regulations, will reimburse
the Fund in the amount of such excess; provided, however, to the extent
permitted by law, there shall be excluded from such expenses the amount of any
interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary expenses (including but not limited to legal claims and
liabilities and litigation costs and any indemnification related thereto) paid
or payable by the Fund. Whenever the expenses of the Fund exceed a pro rata
portion of the applicable annual expense limitations, the estimated amount of
reimbursement under such limitations shall be applicable as an offset against
the annual payment of the fee due to the Investment Adviser and the amount of
any such reimbursement will not be added to the Deferred Advisory Fee discussed
in subsection (a) hereof. Should two or more such expense limitations be
applicable as at the end of the last
7
<PAGE> 8
business day of the fiscal year, that expense limitation which results in the
largest reduction in the Investment Adviser's fee shall be applicable.
ARTICLE IV
Sub-Advisory Agreement
The Investment Adviser may enter into a separate sub-advisory agreement
with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") in which the
Investment Adviser may contract for sub-advisory services and pay MLAM U.K.
compensation for its services out of the compensation received hereunder
pursuant to Article III. Such sub-advisory agreement will be coterminous with
this Agreement.
ARTICLE V
Limitation of Liability of the Investment Adviser
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article V, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE VI
Activities of the Investment Adviser
The services of the Investment Adviser to the Fund are not to be deemed
to be exclusive; the Investment Adviser and any person controlled by or under
common control with the
8
<PAGE> 9
Investment Adviser (for purposes of this Article VI referred to as "affiliates")
are free to render services to others. It is understood that Directors,
officers, employees and shareholders of the Fund are or may become interested in
the Investment Adviser and its affiliates, as directors, officers, employees,
partners and stockholders or otherwise, and that directors, officers, employees,
partners and stockholders of the Investment Adviser and of its affiliates are or
may become similarly interested in the Fund, and that the Investment Adviser and
directors, officers, employees, partners and shareholders of its affiliates may
become interested in the Fund as stockholders or otherwise.
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until two years after the date first above
written and thereafter, but only so long as such continuance specifically is
approved at least annually by (i) the Board of Directors of the Fund, or by the
vote of a majority of the outstanding voting securities of the Fund, and (ii) by
the vote of a majority of those Directors who are not parties to this Agreement
or interested persons of any such party cast in person at a meeting called for
the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund, or by the Investment Adviser, on
sixty (60) days' written notice to the other party. This Agreement shall
terminate automatically in the event of its assignment.
To the extent that there is any Deferred Advisory Fee balance at the
termination of this Agreement, pursuant to this Article VII such Deferred
Advisory Fee will be paid pursuant to the provisions of subsection (a) of
Article III.
9
<PAGE> 10
ARTICLE VIII
Amendment of this Agreement
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws of the State of
New York, or any of the provisions herein, conflict with the applicable
provisions of the Investment Company Act, the latter shall control.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
THE S&P 500(R) PROTECTED EQUITY FUND, INC.
By: __________________________________________
Authorized Signatory
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: __________________________________________
Authorized Signatory
11
<PAGE> 1
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the____ day of ________, 1999, by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
WHEREAS, THE S&P 500(R) PROTECTED EQUITY FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as a closed-end management investment
company registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is regulated by the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into an investment advisory agreement (the
"Advisory Agreement") dated ______ ___, 1999, pursuant to which MLAM provides
management and investment and advisory services to the Fund; and
<PAGE> 2
WHEREAS, MLAM U.K. is willing to provide investment advisory services
to MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement. MLAM
U.K. hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Non Private
Customer as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and
shall provide MLAM with such investment research, advice and supervision as the
latter may from time to time consider necessary for the proper supervision of
the assets of the Fund; shall make recommendations from time to time as to which
securities shall be purchased, sold or exchanged and what portion of the assets
of the Fund shall be held in the various securities in which the
2
<PAGE> 3
Fund invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Articles of Incorporation and By-Laws
of the Fund, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in filings made by the Fund under Federal securities
laws. MLAM U.K. shall make recommendations and effect transactions with respect
to foreign currency matters, including foreign exchange contracts, foreign
currency options, foreign currency futures and related options on foreign
currency futures and forward foreign currency transactions. MLAM U.K. shall also
make recommendations or take action as to the manner in which voting rights,
rights to consent to corporate action and any other rights pertaining to the
portfolio securities of the Fund shall be exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
3
<PAGE> 4
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by MLAM and MLAM U.K. but in no event in excess of
the amount that MLAM actually receives for providing services to the Fund
pursuant to the Advisory Agreement.
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory services rendered with respect to the Fund,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates of
MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that Directors, officers,
employees and shareholders of the Fund are or may become interested in MLAM U.K.
and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or
4
<PAGE> 5
may become similarly interested in the Fund, and that MLAM U.K. and directors,
officers, employees, partners and shareholders of its affiliates may become
interested in the Fund as shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K. MLAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO and
the Investment Ombudsman directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
5
<PAGE> 6
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until two years after the date first above
written and thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Directors of the Fund or by the vote of a
majority of the outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Advisory Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
6
<PAGE> 7
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By:
------------------------------------------
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By:
------------------------------------------
Title:
8
<PAGE> 1
THE S&P 500(R) PROTECTED EQUITY FUND, INC.
(A MARYLAND CORPORATION)
____________ SHARES OF COMMON STOCK
PURCHASE AGREEMENT
Dated: _________ __, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. Representations and Warranties.........................................................................2
(a) Representations and Warranties by the Fund and the Adviser.............................2
(b) Additional Representations of the Adviser..............................................6
(c) Officer's Certificates.................................................................7
SECTION 2. Sale and Delivery to the Underwriter; Closing..........................................................7
(a) Purchase Price.........................................................................7
(b) Payment................................................................................7
(c) Denominations; Registration............................................................8
SECTION 3. Covenants of the Fund..................................................................................8
(a) Compliance with Securities Regulations and Commission
Requests...............................................................................8
(b) Filing of Amendments...................................................................8
(c) Delivery of Registration Statements....................................................9
(d) Delivery of Prospectus.................................................................9
(e) Continued Compliance with Securities Laws..............................................9
(f) Blue Sky Qualifications................................................................9
(g) Rule 158..............................................................................10
(h) Use of Proceeds.......................................................................10
(i) Subchapter M..........................................................................10
(j) Listing...............................................................................10
(k) Restrictions on Sale of Shares........................................................10
SECTION 4. Payment of Expenses...................................................................................10
(a) Expenses..............................................................................10
(b) Termination of Agreement..............................................................11
SECTION 5. Conditions of Underwriter's Obligations...............................................................11
(a) Effectiveness of Registration Statement...............................................11
(b) Opinion of Counsel for the Fund and the Underwriter...................................11
(c) Opinion of General Counsel of the Adviser.............................................11
(d) Officers' Certificates................................................................12
(e) Accountant's Comfort Letter...........................................................12
(f) Bring-down Comfort Letter.............................................................12
(g) Approval of Listing...................................................................12
(h) No Objection..........................................................................12
(i) Additional Documents..................................................................12
(j) Termination of Agreement..............................................................13
SECTION 6. Indemnification.......................................................................................13
(a) Indemnification of the Underwriter....................................................13
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
(b) Indemnification of Fund, Adviser, Directors, General Partner and Officers.............14
(c) Actions against Parties, Notification.................................................14
(d) Settlement without Consent if Failure to Reimburse....................................15
SECTION 7. Contribution..........................................................................................15
SECTION 8. Representations, Warranties and Agreements to Survive Delivery........................................16
SECTION 9. Termination of Agreement..............................................................................16
(a) Termination; General..................................................................16
(b) Liabilities...........................................................................17
SECTION 10. Notices..............................................................................................17
SECTION 11. Parties..............................................................................................17
SECTION 12. GOVERNING LAW AND TIME...............................................................................17
SECTION 13. Effect of Headings...................................................................................17
SCHEDULE A ......................................................................................................19
</TABLE>
EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
Exhibit A - Form of Opinion of Fund's Counsel
Exhibit B Form of Opinion of General Counsel of the Investment Adviser
Exhibit C - Form of Accountant's Comfort Letter
</TABLE>
ii
<PAGE> 4
THE S&P 500(R) PROTECTED EQUITY FUND, INC.
(a Maryland corporation)
_________ Shares of Common Stock
(Par Value $.10 Per Share)
PURCHASE AGREEMENT
___________, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1201
Ladies and Gentlemen:
The S&P 500(R) Protected Equity Fund, Inc., a Maryland corporation (the
"Fund"), and Merrill Lynch Asset Management, L.P., a Delaware limited
partnership (the "Adviser"), each confirms its agreement with Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"),
with respect to the issue and sale by the Fund and the purchase by the
Underwriter of ________ shares of common stock, par value $.10 per share (the
"Common Stock"), of the Fund. The aforesaid ____________ shares of Common Stock
to be purchased by the Underwriter are hereinafter called the "Shares."
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after this
Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No.
333-_____), including the related preliminary prospectus, for the registration
of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), the
Investment Company Act, and the rules and regulations of the Commission under
the 1933 Act and the Investment Company Act (together, the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such amended preliminary prospectuses as may have been
required to the date hereof. Promptly after execution and delivery of this
Agreement, the Fund will either (i) prepare and file a prospectus in accordance
with the provisions of paragraph (c) of Rule 497 ("Rule 497(c)") of the rules
and regulations of the Commission under the 1933 Act (the "1933 Act
Regulations") or a certificate
<PAGE> 5
in accordance with the provisions of paragraph (j) of Rule 497 ("Rule 497(j)")
of the 1933 Act Regulations, (ii) prepare and file a prospectus in accordance
with the provisions of Rule 430A ("Rule 430A") of the 1933 Act Regulations and
paragraph (h) of Rule 497 ("Rule 497(h)") of the 1933 Act Regulations, or (iii)
if the Fund has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act
Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with
the provisions of Rule 434 and Rule 497(h). The information included in any such
prospectus or in any such Term Sheet, as the case may be, that was omitted from
such registration statement at the time it became effective but that is deemed
to be part of such registration statement at the time it became effective (a)
pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information"
or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434
Information." Each prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto, if any, at the time it became effective and
including the Rule 430A Information and the Rule 434 Information, as applicable,
is herein called the "Registration Statement." Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the
"Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
The final prospectus in the form first furnished to the Underwriter for use in
connection with the offering of the Shares is herein called the "Prospectus." If
Rule 434 is relied on, the term "Prospectus" shall refer to the preliminary
prospectus dated _____________, 1999, together with the applicable Term Sheet
and all references in this Agreement to the date of such Prospectus shall mean
the date of the applicable Term Sheet. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
Prospectus, or any Term Sheet or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Fund and the Adviser. The
Fund and the Adviser each severally represents and warrants to the Underwriter
as of the date hereof and as of the Closing Time referred to in Section 2(b)
hereof and agrees with the Underwriter, as follows:
(i) Compliance with Registration Requirements. The Fund meets
the requirements for use of Form N-2 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
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<PAGE> 6
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Fund, are contemplated by the Commission, and any
request on the part of the Commission for additional information has
been complied with. If required, the Fund has received any orders
exempting the Fund from any provisions of the Investment Company Act.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time the Registration Statement,
the Rule 462(b) Registration Statement and any amendments or
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act, the Investment Company Act and
the Rules and Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. Neither the Prospectus, nor any amendments or supplements
thereto, at the time the Prospectus or any amendments or supplements
thereto were issued and at the Closing Time included or will include an
untrue statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
furnished to the Fund in writing by the Underwriter expressly for use
in the Registration Statement or in the Prospectus. If Rule 434 is
used, the Fund will comply with the requirements of Rule 434.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 497(c) or Rule 497(h)
under the 1933 Act, complied when so filed in all material respects
with the Rules and Regulations and each preliminary prospectus and the
Prospectus delivered to the Underwriter for use in connection with this
offering was identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules, if any, included in
the Registration Statement are independent public accountants as
required by the 1933 Act and the Rules and Regulations.
(iii) Financial Statements. The financial statements, included
in the Registration Statement and Prospectus, together with the related
schedules and notes, present fairly the financial position of the Fund
at the date indicated and said statements have been prepared in
conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the period involved. The
supporting schedules, if any, included in the Registration Statement
present fairly in accordance with GAAP the information required to be
stated therein.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and in the Prospectus, except as
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<PAGE> 7
otherwise stated therein, (A) there has been no material adverse change
in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Fund, whether or not arising in
the ordinary course of business (a "Material Adverse Effect"), (B)
there have been no transactions entered into by the Fund, other than
those in the ordinary course of business, which are material with
respect to the Fund and (C) there has been no dividend or distribution
of any kind declared, paid or made by the Fund on any class of its
capital stock.
(v) Good Standing of the Fund. The Fund has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Maryland and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Fund is duly qualified as
a foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect.
(vi) Subsidiaries. The Fund has no subsidiaries.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Fund is as set forth in the Prospectus under the
caption "Description of Capital Stock."
(viii) Investment Company Act. The Fund is registered with the
Commission under the Investment Company Act as a closed-end,
non-diversified, management investment company, and no order of
suspension or revocation of such registration has been issued or
proceedings therefor initiated or threatened by the Commission.
(ix) Authorization of Agreement. This Agreement been duly
authorized, executed and delivered by the Fund.
(x) Authorization and Description of Shares. The Shares to be
purchased by the Underwriter from the Fund have been duly authorized
for issuance and sale to the Underwriter pursuant to this Agreement,
and, when issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in this Agreement will
be validly issued, fully paid and non-assessable; the Shares conform to
all statements relating thereto contained in the Prospectus and such
description conforms to the rights set forth in the instruments
defining the same; no holder of the Shares will be subject to personal
liability by reason of being such a holder; and the issuance of the
Shares is not subject to the preemptive or other similar rights of any
securityholder of the Fund.
(xi) Absence of Defaults and Conflicts. The Fund is not in
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument
to which the Fund is a party or by which it or its properties may be
bound, or
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<PAGE> 8
to which any of the property or assets of the Fund is subject
(collectively, "Agreements and Instruments"), except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement, the Investment Advisory
Agreement and the Custody Agreement referred to in the Registration
Statement (as used herein, the "Advisory Agreement" and the "Custody
Agreement," respectively) and the consummation of the transactions
contemplated in this Agreement and in the Registration Statement
(including the issuance and sale of the Shares and the use of the
proceeds from the sale of the Shares as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Fund with
its obligations under this Agreement have been duly authorized by all
necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with
or constitute a breach of, or a default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Fund pursuant
to the Agreements and Instruments (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not result in
a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or the by-laws of the Fund,
or any applicable law, statute, rule, regulation, judgment, order, writ
or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Fund or any of its
assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Fund.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Fund, threatened against or affecting, the Fund,
which is required to be disclosed in the Registration Statement (other
than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets
thereof or the consummation of the transactions contemplated in this
Agreement or the performance by the Fund of its obligations hereunder;
the aggregate of all pending legal or governmental proceedings to which
the Fund is a party or of which any of its respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) Subchapter M Compliance. The Fund intends to, and will,
direct the investment of proceeds of the offering described in the
Registration Statement in such a manner as to comply with the
requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended ("Subchapter M of the Code"), and intends to qualify as a
regulated investment company under Subchapter M of the Code.
(xiv) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which
have not been so described and filed as required.
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<PAGE> 9
(xv) Possession of Intellectual Property. The Fund owns or
possesses, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks, trade names or other intellectual property (collectively,
"Intellectual Property") necessary to carry on the business now
operated by it, and the Fund has not received any notice or is
otherwise aware of any infringement or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Fund therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the
aggregate, would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Fund of its
obligations hereunder, in connection with the offering, issuance or
sale of the Shares under this Agreement or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1940
Act or the Rules and Regulations and foreign or state securities or
blue sky laws.
(xvii) Possession of Licenses and Permits. The Fund possesses
such permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate
federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by it; the Fund is in
compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in
the aggregate, have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect, except when the
invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and the Fund has not received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(b) Additional Representations of the Adviser. The Adviser represents
and warrants to the Underwriter as of the date hereof and as of the
Representation Date as follows:
(i) Organization and Authority of Adviser. The Adviser has
been duly organized as a limited partnership under the laws of the
State of Delaware, with power and authority to conduct its business as
described in the Registration Statement and the Prospectus.
(ii) Investment Advisers Act. The Adviser is duly registered
as an investment adviser under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"), and is not prohibited by the
Investment Advisers Act or the
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<PAGE> 10
Investment Company Act, or the rules and regulations under such acts,
from acting under the Advisory Agreement for the Fund as contemplated
by the Registration Statement and the Prospectus.
(iii) Authorization of Agreements. This Agreement has been
duly authorized, executed and delivered by the Adviser; the Advisory
Agreement has been duly authorized, executed and delivered by the
Adviser and constitutes a valid and binding obligation of the Adviser,
enforceable in accordance with its terms, subject, as to enforcement,
to bankruptcy, insolvency, reorganization or other laws relating to or
affecting creditors' rights and to general equitable principles; and
neither the execution and delivery of this Agreement or the Advisory
Agreement, nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of
any of the terms and provisions of, or constitute, with or without the
giving of notice or the lapse of time or both, a default under, any
agreement or instrument to which the Adviser is a party or by which it
is bound, or any law, order, rule or regulation applicable to it of any
jurisdiction, court, Federal or state regulatory body, administrative
agency or other governmental body, stock exchange or securities
association having jurisdiction over the Adviser or its respective
properties or operations.
(iv) Financial Resources. The Adviser has the financial
resources available to it necessary for the performance of its services
and obligations as contemplated in the Registration Statement and the
Prospectus.
(v) Rule 482 Compliance. Any advertisement approved by the
Adviser for use in the public offering of the Shares pursuant to Rule
482 under the 1933 Act Regulations (an "Omitting Prospectus") complies
with the requirements of such Rule 482.
(c) Officer's Certificates. Any certificate signed by any officer of
the Fund or any officer of the Adviser delivered to the Underwriter or to
counsel for the Fund and the Underwriter shall be deemed a representation and
warranty by the Fund or the Adviser, as the case may be, to the Underwriter as
to the matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) Purchase Price. On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth, the
Fund agrees to sell to the Underwriter and the Underwriter agrees to purchase
from the Fund the Shares at the price per share set forth in Schedule A.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the offices of Brown & Wood LLP,
One World Trade Center, New York, New York 10048-0557, or at such other place as
shall be agreed upon by the Underwriter and the Fund, at 9:00 A.M. (Eastern
time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time)
on any given day) business day following the date hereof, or such other time not
later than ten business days after such date as shall be agreed upon by the
Underwriter and the Fund (such time and date of payment and delivery herein
being referred to as "Closing Time").
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<PAGE> 11
Payment shall be made to the Fund by wire transfer of immediately
available funds to a bank account designated by the Fund, against delivery to
the Underwriter of certificates for the Shares to be purchased by it.
(c) Denominations; Registration. Certificates for the Shares shall be in such
denominations and registered in such names as the Underwriter may request in
writing at least one full business day before the Closing Time. The certificates
for the Shares will be made available by the Fund for examination by the
Underwriter not later than 10:00 A.M. on the last business day prior to Closing
Time.
SECTION 3. Covenants of the Fund. The Fund covenants with the
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Fund, subject to Section 3(b), will comply with the requirements of Rule 430A or
Rule 434, as applicable, and will notify the Underwriter immediately, and
confirm the notice in writing, (i) if any post-effective amendment to the
Registration Statement shall have become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes, and (v) of the issuance by the Commission
of an order of suspension or revocation of the notification on Form N-8A of
registration of the Fund as an investment company under the Investment Company
Act or the initiation of any proceeding for that purpose. The Fund will make
every reasonable effort to prevent the issuance of any stop order described in
subsection (iv) hereunder or any order of suspension or revocation described in
subsection (v) hereunder and, if any such stop order or order of suspension or
revocation is issued, to obtain the lifting thereof at the earliest possible
moment. The Fund will promptly effect the filings necessary pursuant to Rule
497(c), Rule 497(j) or Rule 497(h) and will take such steps as it deems
necessary to ascertain promptly whether the certificate transmitted for filing
under Rule 497(j) or the form of prospectus transmitted for filing under Rule
497(c) or Rule 497(h) was received for filing by the Commission and, in the
event that it was not, it will promptly file such certificate or prospectus.
(b) Filing of Amendments. The Fund will give the Underwriter notice of
its intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment or filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus included
in the Registration Statement at the time it became effective or to the
Prospectus, whether pursuant to the Investment Company Act, the 1933 Act, or
otherwise, and will furnish the Underwriter with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Underwriter or
counsel to the Underwriter and the Fund shall object.
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<PAGE> 12
(c) Delivery of Registration Statements. The Fund has furnished or will
deliver to the Underwriter and counsel to the Underwriter and the Fund, without
charge, signed copies of the notification of registration on Form N-8A and
Registration Statement as originally filed and of each amendment thereto,
(including exhibits filed therewith, or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Underwriter a conformed copy, without charge, of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for the Underwriter. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriter will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(d) Delivery of Prospectus. The Fund has delivered to the Underwriter,
without charge, as many copies of each preliminary prospectus as the Underwriter
reasonably requested, and the Fund hereby consents to the use of such copies for
purposes permitted by the 1933 Act. The Fund will furnish to the Underwriter,
without charge, during the period when the Prospectus is required to be
delivered under the 1933 Act, such number of copies of the Prospectus (as
amended or supplemented) as the Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriter will be identical to the electronically transmitted copies thereof
field with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Fund will comply
with the 1933 Act, the Investment Company Act and the Rules and Regulations so
as to permit the completion of the distribution of the Shares as contemplated in
this Agreement and in the Prospectus. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the Shares,
any event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of counsel to the Underwriter and the Fund, to amend
the Registration Statement or amend or supplement any Prospectus in order that
the Prospectus will not include any untrue statements of material fact or omit
to state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Fund will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Fund will
furnish to the Underwriter such number of copies of such amendment or supplement
as the Underwriter may reasonably request.
(f) Blue Sky Qualifications. The Fund will use its best efforts, in
cooperation with the Underwriter, to qualify the Shares for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Underwriter may designate and to maintain such qualifications in effect for
a period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Fund shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not
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<PAGE> 13
otherwise so subject. In each jurisdiction in which the Shares have been so
qualified, the Fund will file such statements and reports as may be required by
the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Fund will timely file such reports pursuant to the
Investment Company Act as are necessary in order to make generally available to
its securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Fund will use the net proceeds received by it
from the sale of the Shares in the manner specified in the Prospectus under "Use
of Proceeds."
(i) Subchapter M. The Fund will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the Code.
(j) Listing. The Fund will use its best efforts to effect the listing
of the Shares on the ___________ Stock Exchange so that trading on such Exchange
will begin no later than two weeks from the date of the Prospectus.
(k) Restrictions on Sale of Shares. During a period of 180 days from
the date of the Prospectus, the Fund will not, without your prior written
consent, directly or indirectly offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the 1933
Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock of such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder or (B) any shares or Common Stock issued pursuant to any dividend
reinvestment plan.
SECTION 4. Payment of Expenses.
(a) Expenses. The Adviser will pay, or arrange for an affiliate to pay,
all expenses incident to the performance of its and the Fund's obligations under
this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriter of this Agreement and such other documents as
may be required in connection with the offering, purchase, sale issuance or
delivery of the Shares, (iii) the preparation, issuance and delivery of the
certificates for the Shares to the Underwriter, including any stock or other
transfer taxes and any stamp or other duties payable upon the sale, issuance or
delivery of the Shares to the Underwriter, (iv) the fees and disbursements of
the Fund's counsel, accountants and other advisors, (v) the qualification of the
Shares under the securities laws in accordance with the provisions of Section
3(f) hereof, including filing fees and the reasonable fees and disbursements of
counsel to the Underwriter and the Fund in connection therewith and
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<PAGE> 14
in connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriter of copies of each
preliminary prospectus, any Term Sheet and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriter of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Shares and (ix)
the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriter and the Fund in connection with the review by the
National Association of Securities Dealers, Inc. (the "NASD") of the terms of
the sale of the Shares and (x) the fees and expenses incurred in connection with
the listing of the Shares on the ___________ Stock Exchange.
(b) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Adviser shall reimburse, or arrange for an affiliate to reimburse,
the Underwriter for all of its out-of-pocket expenses, including the reasonable
fees and disbursements of counsel to the Fund and the Underwriter. In the event
the transactions contemplated hereunder are not consummated, the Adviser agrees
to pay, or arrange for an affiliate to pay, all of the costs and expenses set
forth in paragraph (a) of this Section 4.
SECTION 5. Conditions of Underwriter's Obligations. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser contained in Section 1 hereof, or in the
certificates of any officer of the Fund and the Adviser delivered pursuant to
the provisions hereof, to the performance by the Fund and the Adviser of their
respective covenants and obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement
including any Rule 462(b) Registration Statement has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriter and the Fund. Either (i) a
certificate has been filed with the Commission in accordance with Rule 497(j) or
a prospectus has been filed with the Commission in accordance with Rule 497(c),
or (ii) a prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 497(h) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Fund has
elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 497(h).
(b) Opinion of Counsel for the Fund and the Underwriter. At Closing
Time, the Underwriter shall have received the favorable opinion, dated as of
Closing Time, of Brown & Wood LLP, counsel to the Fund and the Underwriter, to
the effect set forth in Exhibit A hereto.
(c) Opinion of General Counsel of the Adviser. At Closing Time, the
Underwriter shall have received the favorable opinion, dated as of Closing Time,
of Michael J. Hennewinkel, Esq., General Counsel to the Adviser, or a senior
attorney of the Adviser, in form and substance
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<PAGE> 15
satisfactory to counsel to the Underwriter, to the effect set forth in Exhibit B
hereto and to such further effect as counsel to the Underwriter may reasonably
request.
(d) Officers' Certificates. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Fund, whether or not arising in the ordinary course of business, and the
Underwriter shall have received (A) a certificate of the President or a Vice
President of the Fund, dated as of Closing Time, to the effect that (i) there
has been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time, (iii) the Fund has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission and (B) a certificate of the President or a Vice
President of the Adviser, dated as of Closing Time, to the effect that (i) the
representations and warranties in Sections 1(a) and 1(b) hereof are true and
correct with the same force and effect as though expressly made at and as of
Closing Time, and (ii) the Adviser has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior to
Closing Time.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Underwriter shall have received from ________________ a letter,
dated such date, in form and substance satisfactory to the Underwriter
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus, to the effect set forth in Exhibit C hereto and to
such further effect as counsel to the Underwriter may reasonably request.
(f) Bring-down Comfort Letter. At Closing Time, the Underwriter shall
have received from _______________ a letter, dated as of Closing Time, to the
effect that they reaffirm the statements made in the letter, furnished pursuant
to subsection (e) of this Section, except that the "specified date" referred to
shall be a date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Shares shall have been
approved for listing on the ___________ Stock Exchange, Inc., subject only to
official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Additional Documents. At Closing Time counsel to the Fund and the
Underwriter shall have been furnished with such documents and opinions as it may
require for the purpose of enabling it to pass upon the issuance and sale of the
Shares as herein contemplated, or in order to evidence the accuracy of any of
the representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Fund in connection with the
issuance and sale of the Shares as herein contemplated shall be
12
<PAGE> 16
satisfactory in form and substance to the Underwriter and counsel to the Fund
and the Underwriter.
(j) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Underwriter by notice to the Fund at any time
at or prior to Closing Time, and such termination shall be without liability of
any party to any other party except as provided in Section 4 and except that
Sections 1, 6, 7 and 8 shall survive any such termination and remain in full
force and effect.
SECTION 6. Indemnification.
(a) Indemnification of the Underwriter. (1) The Fund and the Adviser
jointly and severally agree to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter within the meaning of Section
15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus,
any Omitting Prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the indemnifying
party; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by the
Underwriter) reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information
13
<PAGE> 17
furnished to the Fund by the Underwriter expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus, any
Omitting Prospectus or the Prospectus (or any amendment or supplement thereto).
(2) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director or officer of the Fund or
controls the Fund within the meaning of Section 15 of the 1933 Act, such
indemnity agreement is subject to the undertaking of the Fund in the
Registration Statement under Item 29 thereof.
(d) Indemnification of Fund, Adviser, Directors, General Partner and
Officers. The Underwriter agrees to indemnify and hold harmless the Fund, the
Adviser, the directors of the Fund, the general partner of the Adviser, each of
the Fund's officers who signed the Registration Statement, and each person, if
any, who controls the Fund or the Adviser within the meaning of Section 15 of
the 1933 Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto) including the Rule 430A Information and the Rule 434
Information, if applicable, or in any preliminary prospectus, any Omitting
Prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), or any preliminary prospectus, any Omitting Prospectus or
the Prospectus (or any amendment or supplement thereto).
(e) Actions against Parties, Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by the Underwriter, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Fund and the Adviser. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for the
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such
14
<PAGE> 18
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6 (a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the offering
of the Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one
hand and the Underwriter on the other hand in connection with the offering of
the Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Shares
pursuant to this Agreement (before deducting expenses) received by the Fund, and
the total underwriting commission received by the Underwriter, in each case as
set forth or otherwise indicated on the cover of the Prospectus, or, if Rule 434
is used, the corresponding location on the Term Sheet, bear to the sum of the
aggregate initial public offering price of the Shares and the total underwriting
commission received by the Underwriter as set forth or otherwise indicated on
such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation or by any other
15
<PAGE> 19
method of allocation which does not take account of the equitable considerations
referred to above in this Section 7. The aggregate amount of losses,
liabilities, claims, damages and expenses incurred by an indemnified party and
referred to above in this Section 7 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall
not be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which the
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each director of the Fund and the
Adviser, respectively, each officer of the Fund who signed the Registration
Statement and each person, if any, who controls the Fund and the Adviser within
the meaning of Section 15 of the 1933 Act, shall have the same rights to
contribution as the Fund and the Adviser.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Fund or of the Adviser submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of the Underwriter or controlling
person, or by or on behalf of the Fund or the Adviser and shall survive delivery
of the Shares to the Underwriter.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Underwriter may terminate this Agreement
by notice to the Fund, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Fund or the Adviser, whether or not arising
in the ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Underwriter, impracticable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) if trading in any securities of
the Fund has been suspended or materially limited by the Commission or the
____________________ Stock Exchange, Inc., or if trading generally on the
16
<PAGE> 20
American Stock Exchange or the New York Stock Exchange, Inc. or in the Nasdaq
National Market has been suspended or materially limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices for securities
have been required, by any of said exchanges or by such system or by order of
the Commission, the National Association of Securities Dealers, Inc. or any
other governmental authority, or (iv) if a banking moratorium has been declared
by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated at North Tower, World Financial Center, New
York, New York 10281-1201, Attention: Richard Bruce, Vice President; notices to
the Fund or to the Adviser shall be directed to each of them at 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, Attention: Terry K. Glenn, President.
SECTION 11. Parties. This Agreement shall inure to the benefit of and
be binding upon the Underwriter, the Fund, the Adviser and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriter, the Fund, the Adviser and their respective successors and the
controlling persons and officers, directors and general partner referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the Underwriter,
the Fund and the Adviser and their respective successors, and said controlling
persons and officers and directors and their heirs and legal representatives,
and for the benefit of no other person, firm or corporation. No purchaser of
Shares from the Underwriter shall be deemed to be a successor merely by reason
of such purchase.
SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 13. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
17
<PAGE> 21
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Fund a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriter and the Fund and the Adviser in accordance with its
terms.
Very truly yours,
THE S&P 500(R) PROTECTED EQUITY FUND, INC.
By:
--------------------------------
Authorized Officer
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By:
--------------------------------
Authorized Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
----------------------------------
Authorized Signatory
18
<PAGE> 22
SCHEDULE A
THE S&P 500(R) PROTECTED EQUITY FUND, INC.
(a Maryland corporation)
_____________ Shares of Common Stock
(Par Value $.10 Per Share)
1. The initial public offering price per share for the Shares,
determined as provided in Section 2 hereof, and the purchase price per share for
the Shares to be paid by the Underwriter, shall be $10.00.
2. The Adviser will pay, or arrange for an affiliate to pay, a
commission to the Underwriter in the amount of $ per share for the Shares
purchased by the Underwriter.
19
<PAGE> 23
Exhibit A
FORM OF OPINION OF FUND'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
(ii) The Fund has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Fund is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary course of
business (a "Material Adverse Effect").
(iv) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Stock."
(v) The Shares to be purchased by the Underwriter from the Fund have
been duly authorized for issuance and sale to the Underwriter pursuant to the
Purchase Agreement and, when issued and delivered by the Fund pursuant to the
Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Shares is or will be subject to personal liability by reason of
being such a holder.
(vi) The issuance of the Shares is not subject to the preemptive or
other similar rights of any securityholder of the Fund.
(vii) To the best of our knowledge, the Fund does not have any
subsidiaries.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Fund and complies with all applicable provisions of the
Investment Company Act.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the certificate pursuant to Rule 497(j) or the Prospectus pursuant to Rule
497(c) or Rule 497(h), as the case may be, has been made in the manner and
within the time period required by Rule 497(j), Rule 497(c) or Rule 497(h), as
the case may be; and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been
A-1
<PAGE> 24
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or omitted therefrom, as to which we need express no opinion) complied as to
form in all material respects with the requirements of the 1933 Act, the
Investment Company Act and the Rules and Regulations.
(xi) The form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Fund and the
requirements of the ___________ Stock Exchange, Inc.
(xii) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Fund is a
party, or to which the property of the Fund is subject, before or brought by any
court or governmental agency or body, domestic or foreign, which might
reasonably be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in the
Purchase Agreement or the performance by the Fund of its obligations thereunder,
other than those disclosed in the Prospectus.
(xiii) The information in the Prospectus under "Description of Capital
Stock" and "Taxes" and in the Registration Statement under Item 29, to the
extent that it constitutes matters of law, summaries of legal matters, the
Fund's charter and bylaws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects.
(xiv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
(xv) All descriptions in the Prospectus of contracts and other
documents to which the Fund is a party are accurate in all material respects; to
the best of our knowledge, there are no franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments of the Fund
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed or incorporated by reference as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects.
(xvi) To the best of our knowledge, the Fund is not in violation of its
charter or by-laws and no default by the Fund exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by reference
as an exhibit to the Registration Statement.
A-2
<PAGE> 25
(xvii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act, the
Investment Company Act and the Rules and Regulations, which have been obtained,
or as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or required in
connection with the due authorization, execution and delivery of the Purchase
Agreement, the Advisory Agreement and the Custody Agreement or for the offering,
issuance, sale or delivery of the Shares.
(xviii) The Advisory Agreement and the Custody Agreement have each been
duly authorized and approved by the Fund and comply as to form in all material
respects with all applicable provisions of the Investment Company Act, and each
has been duly executed by the Fund.
(xix) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified management investment company, and
all required action has been taken by the Fund under the 1933 Act, the
Investment Company Act and the Rules and Regulations to make the public offering
and consummate the sale of the Shares pursuant to the Purchase Agreement; the
provisions of the charter and the by-laws of the Fund comply as to form in all
material respects with the requirements of the Investment Company Act; and, to
the best of their knowledge and information, no order of suspension or
revocation of such registration under the Investment Company Act, pursuant to
Section 8(e) of the Investment Company Act, has been issued or proceedings
therefor initiated or threatened by the Commission.
(xx) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Shares, and the use of the proceeds from the sale of the Shares as described in
the Prospectus under the caption "Use of Proceeds") and compliance by the Fund
with its obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(xi) of the Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Fund pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known to us,
to which the Fund is a party or by which it may be bound, or to which any of the
property or assets of the Fund is subject (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter or by-laws of the Fund, or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any government,
government instrumentality or court, domestic or foreign, having jurisdiction
over the Fund or any of its properties, assets or operations.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need
A-3
<PAGE> 26
make no statement), at the time such Registration Statement or any such
amendment became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto (except for financial statements and schedules
and other financial data included or incorporated by reference therein or
omitted therefrom, as to which we need make no statement), at the time the
Prospectus was issued, at the time any such amended or supplemented prospectus
was issued or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates and written statements of responsible officers of and accountants
for the Fund and the Adviser and public officials. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject to,
any treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).
A-4
<PAGE> 27
Exhibit B
FORM OF OPINION OF GENERAL COUNSEL TO THE
INVESTMENT ADVISER TO BE DELIVERED
PURSUANT TO SECTION 5(c)
(i) The Adviser has been duly organized as a limited partnership under
the laws of the State of Delaware, with power and authority to conduct its
business as described in the Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers Act or
the Investment Company Act, or the rules and regulations under such Acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the Advisory Agreement
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights and to general equity principles; and, to the best of his knowledge and
information, neither the execution and delivery of this Agreement or the
Advisory Agreement nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of, any of the
terms and provisions of, or constitute, with or without the giving of notice or
the lapse of time or both, a default under, any agreement or instrument to which
the Adviser is a party or by which the Adviser is bound, or any law, order, rule
or regulation applicable to the Adviser of any jurisdiction, court, Federal or
state regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Adviser or its
properties or operations.
(iv) To the best of his knowledge and information, the description of
the Adviser in the Registration Statement and in the Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
B-1
<PAGE> 28
Exhibit C
FORM OF ACCOUNTANTS'
COMFORT LETTER PURSUANT TO SECTION 5(e)
(i) We are independent public accountants with respect to the
Company within the meaning of the 1933 Act and the 1933 Act
Regulations.
(ii) In our opinion the financial statements audited by us and
included in the Registration Statement and the Prospectus comply as to
form in all material respects with the applicable accounting
requirements of the 1933 Act, the Investment Company Act and the Rules
and Regulations.
Such accountants shall also state that they have performed specified
procedures, not constituting an audit, including a reading of the latest
available interim financial statements of the Fund, a reading of the minute
books of the Fund, made inquiries of officials of the Fund responsible for
financial accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that at the date of
the latest available financial statements read by such accountants, or at a
subsequent specified date not more than three days prior to the date of the
Purchase Agreement, there was any change in the capital stock or net assets of
the Fund as compared with amounts shown on the financial statements included in
the Registration Statement and the Prospectus.
C-1
<PAGE> 1
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
Dear Sirs:
In connection with public offerings of securities underwritten by us,
or by a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute
your reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD"). Upon our request, you will advise us
of the identity of any dealer to whom you allow such a discount and any
Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
2. You represent that you are a dealer actually engaged in the
investment banking or securities business and that you are either (i) a member
in good standing of the NASD or (ii) a dealer with its principal place of
business located outside the United States, its territories or possessions and
not registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its
<PAGE> 2
territories or its possessions or to persons who are nationals thereof or
residents therein. Non-member foreign dealers and banks agree, in making any
sales, to comply with the NASD's interpretation with respect to free-riding and
withholding. In accepting a selling concession where we are acting as
Representative of the Underwriters, in accepting a reallowance from us whether
or not we are acting as such Representative, and in allowing a discount to any
other person, you agree to comply with the provisions of Rule 2740 of the
Conduct Rules of the NASD, and, in addition, if you are a non-member foreign
dealer or bank, you agree to comply, as though you were a member of the NASD,
with the provisions of Rules 2730 and 2750 of of such Conduct Rules and to
comply with Rule 2420 thereof as that Rule applies to a non-member foreign
dealer or bank. You represent that you are fully familiar with the above
provisions of the Conduct Rules of the NASD.
3. If the securities have been registered under the Securities Act of
1933 (the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities
of an issuer that is not required to file reports under the Securities Exchange
Act of 1934 (the "1934 Act"), you agree that you will not sell any of the
securities to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such other place as
we may advise), at the offering price less the concession allowed to you, on
such date as we may advise, by certified or official bank check in New York
Clearing House funds (or such other funds as we may advise), payable to our
order, against delivery of the securities to be purchased by you. We shall have
authority to make appropriate arrangements for payment for and/or delivery
through the facility of The Depository Trust Company or any such other
depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of
securities covered by this Agreement you will, upon our request as
Representative of the Underwriters, report to us the amount of securities
purchased by you which then remains unsold and will, upon our request, sell to
us for the account of one or more of the Underwriters such amount of such unsold
2
<PAGE> 3
securities as we may designate, at the offering price less an amount to be
determined by us not in excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered
by this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
11. Any notice from us shall be deemed to have been duly given if
mailed or transmitted by any standard form of written telecommunications to you
at the above address or at such other address as you shall specify to us in
writing.
12. With respect to any offering of securities covered by this
Agreement, the price restrictions contained in Paragraph 1 hereof and the
provisions of Paragraphs 6 and 7 hereof shall terminate as to such offering at
the close of business on the 45th day after the securities are released for sale
or, as to any or all such provisions, at such earlier time as we may advise. All
other provisions of this Agreement shall remain operative and in full force and
effect with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New
York.
3
<PAGE> 4
Please confirm your agreement hereto by signing the enclosed duplicate
copy hereof in the place provided below and returning such signed duplicate copy
to us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-------------------------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
- ----------------------------------
Name of Dealer
- ----------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
4
<PAGE> 1
EXHIBIT K
REGISTRAR,
TRANSFER AGENCY AND SERVICE AGREEMENT
BETWEEN
THE S&P 500 PROTECTED EQUITY FUND, INC.
AND
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK 3
ARTICLE 2 FEES AND EXPENSES 4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK 5
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND 6
ARTICLE 5 DATA ACCESS AND PROPRIETARY INFORMATION 6
ARTICLE 6 INDEMNIFICATION 8
ARTICLE 7 STANDARD OF CARE 9
ARTICLE 8 COVENANTS OF THE FUND AND THE BANK 10
ARTICLE 9 TERMINATION OF AGREEMENT 11
ARTICLE 10 ASSIGNMENT 11
ARTICLE 11 AMENDMENT 11
ARTICLE 12 MASSACHUSETTS LAW TO APPLY 12
ARTICLE 13 FORCE MAJEURE 12
ARTICLE 14 CONSEQUENTIAL DAMAGES 12
ARTICLE 15 MERGER OF AGREEMENT 12
ARTICLE 16 SURVIVAL 12
ARTICLE 17 SEVERABILITY 12
ARTICLE 18 COUNTERPARTS 13
</TABLE>
<PAGE> 3
REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the __________ day of ___________, 1999, by and
between The S&P 500 Protected Equity Fund, Inc. a Maryland corporation, having
its principal office and place of business at 800 Scudders Mill Road,
Plainsboro, NJ 08536 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its registrar,
transfer agent, dividend disbursing agent and agent in connection with certain
other activities and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints the Bank to act as, and the Bank
agrees to act as registrar, transfer agent for the Fund's authorized and issued
shares of its common stock ("Shares"), dividend disbursing agent and agent in
connection with any dividend reinvestment plan as set out in the prospectus of
the Fund, corresponding to the date of this Agreement.
1.02 The Bank agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and the Bank, the Bank shall:
(i) Issue and record the appropriate number of Shares
as authorized and hold such Shares in the appropriate
Shareholder account
(ii) Effect transfers of Shares by the registered
owners thereof upon receipt of appropriate
documentation;
<PAGE> 4
(iii) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(iv) Act as agent for Shareholders pursuant to the
dividend reinvestment and cash purchase plan as
amended from time to time in accordance with the
terms of the agreement to be entered into between the
Shareholders and the Bank in substantially the form
attached as Exhibit A hereto;
(v) Issue replacement certificates for those
certificates alleged to have been lost, stolen or
destroyed upon receipt by the Bank of indemnification
satisfactory to the Bank and protecting the Bank and
the Fund, and the Bank at its option, may issue
replacement certificates in place of mutilated stock
certificates upon presentation thereof and without
such indemnity.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: (i) perform all
of the customary services of a registrar, transfer agent, dividend disbursing
agent and agent of the dividend reinvestment and cash purchase plan as described
in Article 1 consistent with those requirements in effect as of the date of this
Agreement. The detailed definition, frequency, limitations and associated costs
(if any) set out in the attached fee schedule, include but are not limited to:
maintaining all Shareholder accounts, preparing Shareholder meeting lists,
mailing proxies, and mailing Shareholder reports to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts where
applicable, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all registered Shareholders.
(c) The Bank shall provide additional services on behalf of the Fund
(i.e., escheatment services) which may be agreed upon in writing between the
Fund and the Bank.
ARTICLE 2 FEES AND EXPENSES
2.01 For the performance by the Bank pursuant to this
Agreement, the Fund agrees to pay the Bank an annual maintenance fee as set out
in the initial fee schedule attached hereto. Such
<PAGE> 5
fees and out-of-pocket expenses and advances identified under Section 2.02 below
may be changed from time to time subject to mutual written agreement between the
Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the
Fund agrees to reimburse the Bank for out-of-pocket expenses, including but not
limited to confirmation production, postage, forms, telephone, microfilm,
microfiche, tabulating proxies, records storage, or advances incurred by the
Bank for the items set out in the fee schedule attached hereto. In addition, any
other expenses incurred by the Bank at the request or with the consent of the
Fund, will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses
within five days following the receipt of the respective billing notice. Postage
and the cost of materials for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to the Bank by the
Fund at least seven (7) days prior to the mailing date of such materials.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in
good standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter
and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
<PAGE> 6
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Bank that:
4.01 It is a corporation duly organized and existing and in
good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is a closed-end, non-diversified investment company
registered under the Investment Company Act of 1940, as amended.
4.05 To the extent required by federal securities laws a
registration statement under the Securities Act of 1933, as amended is currently
effective and appropriate state securities law filings have been made with
respect to all Shares of the Fund being offered for sale; information to the
contrary will result in immediate notification to the Bank.
4.06 It shall make all required filings under federal and
state securities laws.
ARTICLE 5 DATA ACCESS AND PROPRIETARY INFORMATION
5.01 The Fund acknowledges that the data bases, computer
programs, screen formats, report formats, interactive design techniques, and
other information furnished to the Fund by the Bank are provided solely in
connection with the services rendered under this Agreement and constitute
copyrighted trade secrets or proprietary information of substantial value to the
Bank. Such databases, programs, formats, designs, techniques and other
information are collectively referred to below as "Proprietary Information." The
Fund agrees that it shall treat all Proprietary Information as proprietary to
the Bank and further agrees that it shall not divulge any Proprietary
Information to any person or organization except as expressly permitted
hereunder. The Fund agrees for itself and its employees and agents:
<PAGE> 7
(a) to use such programs and databases (i) solely on the Fund
computers, or (ii) solely from equipment at the locations
agreed to between the Fund and the Bank and (iii) in
accordance with the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way (other
than in the normal course of performing processing on the
Funds' computers) any part of any Proprietary Information;
(c) to refrain from obtaining unauthorized access to any
programs, data or other information not owned by the Fund, and
if such access is accidentally obtained, to respect and
safeguard the same Proprietary Information;
(d) to refrain from causing or allowing information
transmitted from the Bank's computer to the Funds' terminal to
be retransmitted to any other computer terminal or other
device except as expressly permitted by the Bank, (such
permission not to be unreasonably withheld);
(e) that the Fund shall have access only to those authorized
transactions as agreed to between the Fund and the Bank; and
(f) to honor reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law and under applicable
statues.
<PAGE> 8
5.02 If the transactions available to the Fund include the
ability to originate electronic instructions to the Bank in order to (i) effect
the transfer or movement of cash or Shares or (ii) transmit Shareholder
information or other information, then in such event the Bank shall be entitled
to rely on the validity and authenticity of such instruction without undertaking
any further inquiry as long as such instruction is undertaken in conformity with
security procedures established by the Bank from time to time.
ARTICLE 6 INDEMNIFICATION
6.01 The Bank shall not be responsible for, and the Fund shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any representation or warranty of
the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services which (i) are
received by the Bank or its agents or subcontractors, and (ii) have been
prepared, maintained or performed by the Fund or any other person or firm on
behalf of the Fund including but not limited to any previous transfer agent
registrar.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
<PAGE> 9
6.02 At any time the Bank may apply to any officer of the Fund
for instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. The Bank,
its agents and subcontractors shall be protected and indemnified in acting upon
any paper or document furnished by or on behalf of the Fund, reasonably believed
to be genuine and to have been signed by the proper person or persons, or upon
any instruction, information, data, records or documents provided the Bank or
its agents or subcontractors by telephone, in person, machine readable input,
telex, CRT data entry or other similar means authorized by the Fund, and shall
not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or former registrar, or of a
co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained in
this Article 6 shall apply, upon the assertion of a claim for which the Fund may
be required to indemnify the Bank, the Bank shall promptly notify the Fund in
writing of such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option to
participate with the Bank in the defense of such claim or to defend against said
claim in its own name or in the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's prior written consent.
ARTICLE 7 STANDARD OF CARE
7.01 The Bank shall at all times act in good faith and agrees
to use its best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no responsibility and shall
not be liable for loss or damage due to errors unless said errors are caused by
its negligence, bad faith, or willful misconduct of that of its employees.
<PAGE> 10
ARTICLE 8 COVENANTS OF THE FUND AND THE BANK
8.01 The Fund shall promptly furnish to the Bank the
following:
(a) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of the Bank and the execution
and delivery of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
8.03 The Bank shall keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be requested by a governmental entity or as may
be required by law.
8.05 In cases of any requests or demands for the inspection of
the Shareholder records of the Fund, the Bank will endeavor to notify the Fund
and to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
<PAGE> 11
ARTICLE 9 TERMINATION OF AGREEMENT
9.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
9.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Fund. Additionally, the Bank reserves the right to charge for
any other reasonable expenses associated with such termination and/or a charge
equivalent to the average of three (3) month's fees.
ARTICLE 10 ASSIGNMENT
10.01 Except as provided in Section 10.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
10.03 The Bank may, without further consent on the part of the
Fund, subcontract for the performance hereof with (i) Boston EquiServe Limited
Partnership., a Massachusetts limited partnership ("Boston EquiServe"), which is
duly registered as a transfer agent pursuant to Section 17A(c)(2) of the
Securities Exchange Act of 1934 ("Section 17A(c)(2)"), or (ii) a Boston
EquiServe affiliate duly registered as a transfer agent pursuant to Section
17A(c)(2), provided, however, that the Bank shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is for its own acts
and omissions.
ARTICLE 11 AMENDMENT
11.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
<PAGE> 12
ARTICLE 12 MASSACHUSETTS LAW TO APPLY
12.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
ARTICLE 13 FORCE MAJEURE
13.01 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
ARTICLE 14 CONSEQUENTIAL DAMAGES
14.01 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any consequential damages arising out of any act or failure to act
hereunder.
ARTICLE 15 MERGER OF AGREEMENT
15.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written.
ARTICLE 16 SURVIVAL
16.01 All provisions regarding indemnification, warranty,
liability and limits thereon, and confidentiality and/or protection of
proprietary rights and trade secrets shall survive the termination of this
Agreement.
ARTICLE 17 SEVERABILITY
17.01 If any provision or provisions of this Agreement shall
be held to be invalid, unlawful, or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
<PAGE> 13
ARTICLE 18 COUNTERPARTS
18.01 This Agreement may be executed by the parties hereto on
any number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf by and
through their duly authorized officers, as of the day and year first
above written.
The S&P 500 Protected Equity Fund, Inc.
BY:__________________________________________
State Street Bank and Trust Company
BY:___________________________________________
