<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 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. 1
[X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 1 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
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>
<S> <C>
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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<S> <C> <C> <C> <C>
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) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA. $278 was previously paid. $27,522 was
transmitted in connection with this filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT 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 , 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, 2009 (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 26, 1999 to the value of the Index at the
close of the market on October 30, 2009, as reduced by the application of an
annual index adjustment factor of % per year [expected to be between 1.50% and
2.00% 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.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
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.
------------------------
The date of this prospectus is October , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
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>
------------------------
"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, 2009 (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 26, 1999 (the "Starting Value") to the value
of the Index at the close of the market on October 30, 2009, as
reduced by the application of an annual index adjustment factor
of % per year [expected to be between 1.50% and 2.00% 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, less than 100% of the
Fund's initial net assets will at any time 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 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 will lag the S&P 500 in
positive markets by the % annual Index Adjustment Factor
[expected to be 1.5% to 2.0% per year]. Quantifying this lag is
intended to help investors better understand the
3
<PAGE> 5
"costs" of principal protection and the 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% 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 may borrow to
finance repurchases of its common stock, to pay required
distributions, if any, to investors or for extraordinary or
emergency purposes.
4
<PAGE> 6
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, 2009,
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, less than 100% of the Fund's initial net assets will
at any time 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 the Fund's net
asset value on the Maturity Date. As a result, the Fund's return on the Maturity
Date is
6
<PAGE> 8
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.
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 on the Maturity Date. 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, these 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
A or better by Moody's Investors Service, Inc. ("Moody's") or 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
7
<PAGE> 9
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 an A
rating to obligations that are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. Moody's indicates that long-term debt rated A, generally known
as high-grade bonds, has a strong capacity to pay interest and principal
although it is somewhat more susceptible to the effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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 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".
8
<PAGE> 10
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 30, 2009, 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. 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 its shares. 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
9
<PAGE> 11
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.
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 .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 October 30, 2009 (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 26, 1999 (the "Starting Value") to the value of the Index at the
close of the market on October 30, 2009, as reduced by the application of an
annual index adjustment factor of % per annum [expected to be between 1.50%
and 2.00% 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. serves as the Fund's investment adviser ("MLAM" or the
"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 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 will be 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 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 will lag the S&P 500 in positive markets by
the Index Adjustment Factor. Quantifying this lag is intended to help investors
to understand better the "costs" of principal protection and the 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 the 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 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 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 the deferred investment
advisory fee that would reduce the amount payable per share of the Fund to less
than $10.00.
14
<PAGE> 16
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 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.
15
<PAGE> 17
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 or less, and shares of investment
companies which invest exclusively in such money market instruments (subject to
applicable limitations under the 1940 Act).
16
<PAGE> 18
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 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 performance of the S&P 500, the
Fund may use SPDRs as a cash management tool to provide investment results that
would generally correspond to the price and yield performance of the common
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 be able to complete its obligations) and liquidity risk (the risk that the
Fund will not be able to find a buyer at an 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
17
<PAGE> 19
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 successful sale of such options or
assets, result in a delay of sale, or reduce the amount of proceeds that might
otherwise be realized.
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<PAGE> 20
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.
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
19
<PAGE> 21
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 this purpose and under the 1940
Act means the lesser of (i) 67% of the shares of common stock
20
<PAGE> 22
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").
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<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 information concerning economic data and market
forecasts) to the Investment Adviser may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
26
<PAGE> 28
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 manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
27
<PAGE> 29
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 net long-term capital losses
(together referred to hereafter as "ordinary income dividends") are taxable to
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<PAGE> 30
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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<PAGE> 31
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. 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.
30
<PAGE> 32
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
31
<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 October 30, 2009, 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 October 30, 2009 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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<PAGE> 34
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, 2009, 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, 2009
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
.
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 .
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
, 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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<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
The Market Participation Principal Protection Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital of
The Market Participation Principal Protection Fund, Inc. as of ,
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 Market
Participation Principal Protection Fund, Inc. as of , 1999 in
conformity with generally accepted accounting principles.
Princeton, New Jersey
, 1999
38
<PAGE> 40
THE MARKET PARTICIPATION PRINCIPAL PROTECTION FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 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 , 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-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 , 1999
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
(a) -- Articles of Incorporation.(a)
(b) -- By-Laws.
(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.(b)
(2) -- Form of specimen certificate for the shares of common stock
of the Fund.
(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
.*
(k) -- Form of Registrar, Transfer Agency and Service Agreement
between the Fund and .*
(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) 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.
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 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 Merrill Lynch & Co., Inc.
("ML & Co.") is North Tower, World Financial Center, 250 Vesey Street,
C-3
<PAGE> 45
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
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
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 1998 to 1999
</TABLE>
C-4
<PAGE> 46
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- ---- ------------------ ---------------------------------------
<S> <C> <C>
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 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
C-5
<PAGE> 47
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.
(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-6
<PAGE> 48
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 3rd
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 Executive September 3, 1999
- --------------------------------------------------- Officer) and Director
(Terry K. Glenn)
/s/ DONALD C. BURKE Treasurer (Principal Financial September 3, 1999
- --------------------------------------------------- and Accounting Officer)
(Donald C. Burke)
/s/ JACK B. SUNDERLAND Director September 3, 1999
- ---------------------------------------------------
(Jack B. Sunderland)
/s/ STEPHEN B. SWENSRUD Director September 3, 1999
- ---------------------------------------------------
(Stephen B. Swensrud)
/s/ J. THOMAS TOUCHTON Director September 3, 1999
- ---------------------------------------------------
(J. Thomas Touchton)
</TABLE>
C-7
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
(b) By-Laws
(d)(2) Form of specimen certificate for shares of common stock of
the Fund.
(g)(1) Form of Investment Advisory Agreement between the Fund and
Merrill Lynch Asset Management, L.P.
</TABLE>
C-8
<PAGE> 1
BY-LAWS
OF
THE MARKET PARTICIPATION PRINCIPAL PROTECTION FUND, INC.
ARTICLE I.
Offices
Section 1. Principal Office. The principal office of the Corporation
shall be in the City of Baltimore and State of Maryland.
Section 2. Principal Executive Office. The principal executive office
of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices
in such places as the Board of Directors from time to time may determine.
ARTICLE II.
Meetings of Stockholders
Section 1. Annual Meeting. Except as otherwise required by the rules of
any stock exchange on which the Corporation's shares of stock may be listed, the
Corporation shall not be required to hold an annual meeting of its stockholders
in any year in which the election of directors is not required to be acted upon
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). In the event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors under the Investment Company Act,
such meeting shall be held no later than 120 days after the occurrence of the
event requiring the meeting. Any stockholders' meeting held in accordance with
this Section shall for all purposes constitute the annual meeting of
stockholders for the year in which the meeting is held.
In the event an annual meeting is required by the rules of a stock
exchange on which the Corporation's shares of stock are listed, the annual
meeting of the stockholders of the Corporation for the election of directors and
for the transaction of such other business as may properly be brought before the
meeting shall be held on such day and month of each year as shall be designated
annually by the Board of Directors.
Section 2. Special Meetings. Special meetings of the stockholders,
unless otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the written request of
the holders of at least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with Section
2-502(b) or (c) of the Maryland General Corporation Law.
<PAGE> 2
Section 3. Place of Meetings. The annual meeting and any special
meeting of the stockholders shall be held at such place as the Board of
Directors from time to time may determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the place,
date and time of the holding of each annual and special meeting of the
stockholders and the purpose or purposes of each special meeting shall be given
personally or by mail or transmitted to the stockholder by electronic mail to
any electronic mail address of the stockholder or by any other electronic means,
not less than ten nor more than 90 days before the date of such meeting, to each
stockholder entitled to vote at such meeting and to each other stockholder
entitled to notice of the meeting. Notice by mail shall be deemed to be duly
given when deposited in the United States mail addressed to the stockholder at
his or her address as it appears on the records of the Corporation, with postage
thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who, either
before or after the meeting, shall submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or unless the adjournment is for
more than 120 days after the original record date, notice of such adjourned
meeting need not be given if the time and place to which the meeting shall be
adjourned were announced at the meeting at which the adjournment is taken.
Section 5. Quorum. The presence in person or by proxy of the holders of
shares of stock entitled to cast one-third of the votes entitled to be cast
shall constitute a quorum at any meeting of stockholders, except with respect to
any matter which requires approval by a separate vote of one or more classes or
series of stock, in which case the presence in person or by proxy of the holders
of shares entitled to cast one-third of the votes entitled to be cast by each
class or series entitled to vote as a separate class or series shall constitute
a quorum. In the absence of a quorum no business may be transacted, except that
the holders of a majority of the shares of stock present in person or by proxy
and entitled to vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by these By-Laws,
until the holders of the requisite amount of shares of stock shall be so
present. At any such adjourned meeting at which a quorum may be present any
business may be transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by proxy, of
holders of the number of shares of stock of the Corporation in excess of a
majority thereof which may be required by the laws of the State of Maryland, the
Investment Company Act, or other applicable statute, the Charter, or these
By-Laws, for action upon any given matter shall not prevent action at such
meeting upon any other matter or matters which properly may come before the
meeting, if there shall be present thereat, in person or by proxy, holders of
the number of shares of stock of the Corporation required for action in respect
of such other matter or matters.
Section 6. Organization. At each meeting of the stockholders, the
Chairman of the Board (if one has been designated by the Board), or in his or
her absence or inability to act, the President, or in the absence or inability
to act of the Chairman of the Board and the President, a Vice President, shall
act as chairman of the meeting. The Secretary, or in his or her absence or
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inability to act, any person appointed by the chairman of the meeting, shall act
as secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
Section 8. Business at Annual Meeting. No business may be transacted at
any meeting of stockholders, other than business that is either (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors (or any duly authorized committee thereof), (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors (or any duly authorized committee thereof) or (c) otherwise
properly brought before any meeting by any stockholder of the Corporation (i)
who is a stockholder of record on the date of the giving of the notice provided
for in Article II, Section 4 of these By-Laws and on the record date for the
determination of stockholders entitled to vote at any such meeting of
stockholders as determined in accordance with Article II, Section 9 hereof and
(ii) who complies with the notice procedures set forth in this Section 8.
In addition to any other applicable requirements, for business to be
properly brought before a meeting by a stockholder, such stockholder must have
given timely notice thereof in proper written form to the Secretary of the
Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
(a) with respect to the Corporation's first annual meeting of stockholders, not
later than the close of business on the tenth (10th) calendar day following the
day on which public disclosure of the date on which the first annual meeting
shall be held is first made (provided that such annual meeting shall be held
within ninety (90) calendar days of such public disclosure of the date); and (b)
thereafter, not less than sixty (60) calendar days nor more than ninety (90)
calendar days prior to the anniversary date of the immediately preceding annual
meeting of stockholders; provided, however, that in the event that the annual
meeting is called for a date that is not within thirty (30) calendar days before
or sixty (60) calendar days after such anniversary date, notice by the
stockholder in order to be timely must be so received not later than the close
of business on the later of the sixtieth (60th) calendar day prior to such
annual meeting or the fifteenth (15th) calendar day following the day on which
notice of the date of the annual meeting was mailed or public disclosure of the
date of the annual meeting was made, whichever first occurs. For purposes of
this Section 8, the date of a public disclosure shall include, but not be
limited to, the date on which such disclosure is made in a press release
reported by the Dow Jones News Services, the Associated Press or any comparable
national news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) (or
the rules and regulations thereunder) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or pursuant to Section 30 (or the rules and
regulations thereunder) of the Investment Company Act.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned
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beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 8, provided, however, that, once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 8 shall be deemed to preclude discussion by
any stockholder of any such business. If the chairman of a meeting determines
that business was not properly brought before the meeting in accordance with the
foregoing procedures, the chairman shall declare to the meeting that the
business was not properly brought before the meeting and such business shall not
be transacted.
Section 9. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of the Corporation, except as may be otherwise provided in the Charter
with respect to the right, if any, of holders of preferred stock of the
Corporation to nominate and elect a specified number of directors in certain
circumstances. Nominations of persons for election to the Board of Directors may
be made at any annual meeting of stockholders, or at any special meeting of
stockholders called for the purpose of electing directors, (a) by or at the
direction of the Board of Directors (or any duly authorized committee thereof)
or (b) by any stockholder of the Corporation (i) who is a stockholder of record
on the date of the giving of the notice provided for in this Section 9 and on
the record date for the determination of stockholders entitled to vote at such
meeting and (ii) who complies with the notice procedures set forth in this
Section 9.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
(a) with respect to the Corporation's first annual meeting of stockholders, not
later than the close of business on the tenth (10th) calendar day following the
day on which public disclosure of the date on which the first annual meeting
shall be held is first made (provided that such annual meeting shall be held
within ninety (90) calendar days of such public disclosure of the date); (b)
thereafter, in the case of an annual meeting, not less than sixty (60) calendar
days nor more than ninety (90) calendar days prior to the anniversary date of
the immediately preceding annual meeting of stockholders; provided, however,
that in the event that the annual meeting is called for a date that is not
within thirty (30) calendar days before or sixty (60) calendar days after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the later of the sixtieth
(60th) calendar day prior to such annual meeting or the fifteenth (15th)
calendar day following the day on which notice of the date of the annual meeting
was mailed or public disclosure of the date of the annual meeting was made,
whichever first occurs; and (c) in the case of a special meeting of stockholders
called for the purpose of electing directors, not later
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than the close of business on the fifteenth (15th) day following the day on
which notice of the date of the special meeting was mailed or public disclosure
of the date of the special meeting was made, whichever first occurs. For
purposes of this Section 9, the date of a public disclosure shall include, but
not be limited to, the date on which such disclosure is made in a press release
reported by the Dow Jones News Services, the Associated Press or any comparable
national news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) (or
the rules and regulations thereunder) of the Exchange Act or pursuant to Section
30 (or the rules and regulations thereunder) of the Investment Company Act.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder; and (b) as to
the stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Corporation which are owned beneficially or of record by such stockholder,
(iii) a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or persons (including
their names) pursuant to which the nomination(s) are to be made by such
stockholder, (iv) a representation that such stockholder intends to appear in
person or by proxy at the meeting to nominate the persons named in its notice
and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 9. If the chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.
Section 10. Voting. Except as otherwise provided by statute or the
Charter, each holder of record of shares of stock of the Corporation having
voting power shall be entitled at each meeting of the stockholders to one vote
for every share of such stock standing in his or her name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 9 of this Article or, if such record date shall not have been so fixed,
then at the later of (i) the close of business on the day on which notice of the
meeting is mailed or (ii) the thirtieth (30th) day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or her as proxy by signing a
writing authorizing another person
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to act as proxy. Such signing may be accomplished by the stockholder or the
stockholder's authorized agent signing the writing or causing the stockholder's
signature to be affixed to the writing by any reasonable means, including
facsimile signature. A stockholder may authorize another person to act as proxy
by transmitting, or authorizing the transmission of, an authorization for the
person to act as proxy to (i) the person authorized to act as proxy or (ii) any
other person authorized to receive the proxy authorization on behalf of the
person authorized to act as the proxy, including a proxy solicitation firm or
proxy support service organization. The authorization referred to in the
preceding sentences may be transmitted by U.S. mail, courier service, personal
delivery, a telegram, cablegram, datagram, electronic mail, or any other
electronic or telephonic means and a copy, facsimile telecommunication, or other
reliable reproduction of the writing or transmission authorized in this
paragraph may be substituted for the original writing or transmission for any
purpose for which the original writing or transmission could be used.
No proxy shall be valid after the expiration of eleven months from the
date thereof, unless otherwise provided in the proxy. Every proxy shall be
revocable at the pleasure of the stockholder executing it, except in those cases
where such proxy states that it is irrevocable and where an irrevocable proxy is
permitted by law. Except as otherwise provided by statute, the Charter or these
By-Laws, any corporate action to be taken by vote of the stockholders (other
than the election of directors, which shall be by a plurality of votes cast)
shall be authorized by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or represented by proxy
and entitled to vote on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his or her proxy, if there be such
proxy, and shall state the number of shares voted.
Section 11. Fixing of Record Date for a Meeting. The Board of Directors
may set a record date for the purpose of determining stockholders entitled to
vote at any meeting of the stockholders. The record date, which may not be prior
to the close of business on the day the record date is fixed, shall be not more
than 90 nor less than ten days before the date of the meeting of the
stockholders. All persons who were holders of record of shares at such time, and
not others, shall be entitled to vote at such meeting and any adjournment
thereof.
Section 12. Inspectors. The Board, in advance of any meeting of
stockholders, may appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his or her duties, shall
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his or her
ability. The inspectors shall determine the number of shares outstanding and the
voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, and the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and
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do such acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the chairman of the meeting or any stockholder
entitled to vote thereat, the inspectors shall make a report in writing of any
challenge, request or matter determined by them and shall execute a certificate
of any fact found by them. No director or candidate for the office of director
shall act as inspector of an election of directors. Inspectors need not be
stockholders.
Section 13. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute or the Charter, any action required to be taken at
any annual or special meeting of stockholders, or any action which may be taken
at any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if the following are filed
with the records of stockholders' meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder entitled to vote
on the matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III.
Board of Directors
Section 1. General Powers. Except as otherwise provided in the Charter,
the business and affairs of the Corporation shall be managed under the direction
of the Board of Directors. All powers of the Corporation may be exercised by or
under authority of the Board of Directors except as conferred on or reserved to
the stockholders by law or by the Charter or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed
from time to time by resolution of the Board of Directors adopted by a majority
of the entire Board of Directors then in office; provided, however, that in no
event shall the number of directors be less than the minimum permitted by the
Maryland General Corporation Law nor more than 15. Any vacancy created by an
increase in the number of directors may be filled in accordance with Section 6
of this Article III. No reduction in the number of directors shall have the
effect of removing any director from office prior to the expiration of his or
her term unless such director specifically is removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need not be
stockholders. As long as any preferred stock of the Corporation is outstanding,
the number of directors shall be not less than five.
Section 3. Election and Term of Directors. Directors shall be elected
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article II of these By-Laws,
directors shall be elected at the next meeting held. The term of office of each
director shall be from the time of his election and qualification until the
election of directors next succeeding his election and until his successor shall
have been elected and shall have qualified, or until his death, or until he
shall have resigned or until December 31 of the year in which he shall have
reached seventy-two years of age, or until he shall have been removed as
hereinafter provided in these By-Laws, or as otherwise provided by statute or by
the Charter.
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Section 4. Resignation. A director of the Corporation may resign at any
time by giving written notice of his or her resignation to the Board or the
Chairman of the Board or the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may be
removed (with or without cause) by the stockholders by a vote of sixty-six and
two-thirds percent (66 2/3%) of the outstanding shares of capital stock then
entitled to vote in the election of such director.
Section 6. Vacancies. Subject to the provisions of the Investment
Company Act, any vacancies in the Board of Directors, whether arising from
death, resignation, removal, an increase in the number of directors or any other
cause, shall be filled by a vote of a majority of the Board of Directors then in
office, regardless of whether they constitute a quorum.
Section 7. Place of Meetings. Meetings of the Board may be held at such
place as the Board from time to time may determine or as shall be specified in
the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board may be held
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 10. Telephone Meetings. Members of the Board of Directors or of
any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act, participation in a meeting by these means
constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting
of the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least 24 hours before the time at
which such meeting is to be held, or by first-class mail, postage prepaid,
addressed to him or her at his or her residence or usual place of business, at
least three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special meeting
need not be given to any director who, either before or after the meeting, shall
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver of notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two (unless
there is only one director) of the members of the entire Board shall be present
in person at any meeting of the Board in order to constitute a quorum for the
transaction of business at such meeting, and except
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as otherwise expressly required by Maryland General Corporation Law, the
Charter, these By-Laws, the Investment Company Act, or other applicable statute,
the act of a majority of the directors present at any meeting at which a quorum
is present shall be the act of the Board. In the absence of a quorum at any
meeting of the Board, a majority of the directors present thereat may adjourn
such meeting to another time and place until a quorum shall be present thereat.
Notice of the time and place of any such adjourned meeting shall be given to the
directors who were not present at the time of the adjournment and, unless such
time and place were announced at the meeting at which the adjournment was taken,
to the other directors. At any adjourned meeting at which a quorum is present,
any business may be transacted which might have been transacted at the meeting
as originally called.
Section 14. Organization. The Board, by resolution adopted by a
majority of the entire Board, may designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his or her
absence or inability to act, another director chosen by a majority of the
directors present, shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his or her absence or inability to act, any person appointed
by the Chairman) shall act as secretary of the meeting and keep the minutes
thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject
to the provisions of the Investment Company Act, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
the committee, as the case may be, consent thereto in writing, and the writings
or writing are filed with the minutes of the proceedings of the Board or the
committee.
Section 16. Compensation. Directors may receive compensation for
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
Directors to direct that the purchase, sale, retention and disposal of portfolio
securities and other assets and the other investment practices of the
Corporation at all times are consistent with the investment policies and
restrictions with respect to securities investments and otherwise of the
Corporation, as recited in the Prospectus of the Corporation included in the
registration statement of the Corporation relating to the initial public
offering of its capital stock, as filed with the Securities and Exchange
Commission and as required by the Investment Company Act (or as such investment
policies and restrictions may be modified by the Board of Directors, or, if
required, by a majority vote of the stockholders of the Corporation in
accordance with the Investment Company Act). The Board, however, may delegate
the duty of management of the assets and the administration of its day to day
operations to an individual or corporate management company and/or investment
adviser pursuant to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of renewals thereof, of
the Board of Directors and/or the stockholders of the Corporation in accordance
with the provisions of the Investment Company Act.
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ARTICLE IV.
Committees
Section 1. Executive Committee. The Board, by resolution adopted by a
majority of the entire board, may designate an Executive Committee consisting of
two or more of the directors of the Corporation, which committee shall have and
may exercise all of the powers and authority of the Board with respect to all
matters other than:
(i) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Charter;
(ii) the filling of vacancies on the Board of Directors;
(iii) the fixing of compensation of the directors for serving
on the Board or on any committee of the Board, including the Executive
Committee;
(iv) the approval or termination of any contract with an
investment adviser or principal underwriter, as such terms are defined
in the Investment Company Act, or the taking of any other action
required to be taken by the Board of Directors by the Investment
Company Act;
(v) the amendment or repeal of these By-Laws or the adoption
of new By-Laws;
(vi) the amendment or repeal of any resolution of the Board
which by its terms may be amended or repealed only by the Board;
(vii) the declaration of dividends and, except to the extent
permitted by law, the issuance of capital stock of the Corporation; and
(viii) the approval of any merger or share exchange which does
not require stockholder approval.
The Executive Committee shall keep written minutes of its proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors from
time to time, by resolution adopted by a majority of the whole Board, may
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the Board
of Directors, by resolution, may prescribe.
Section 3. General. One-third, but not less than two, of the members of
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or
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any two members of any committee may fix the time and place of its meetings
unless the Board shall otherwise provide. In the absence or disqualification of
any member of any committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. The Board shall have the power at any time to change the membership of
any committee, to fill all vacancies, to designate alternate members to replace
any absent or disqualified member, or to dissolve any such committee. Nothing
herein shall be deemed to prevent the Board from appointing one or more
committees consisting in whole or in part of persons who are not directors of
the Corporation; provided, however, that no such committee shall have or may
exercise any authority or power of the Board in the management of the business
or affairs of the Corporation except as may be prescribed by the Board.
ARTICLE V.
Officers, Agents and Employees
Section 1. Number of Qualifications. The officers of the Corporation
shall be a President, a Secretary and a Treasurer, each of whom shall be elected
by the Board of Directors. The Board of Directors may elect or appoint one or
more Vice Presidents and also may appoint such other officers, agents and
employees as it may deem necessary or proper. Any two or more offices may be
held by the same person, except the offices of President and Vice President, but
no officer shall execute, acknowledge or verify any instrument in more than one
capacity. Such officers shall be elected by the Board of Directors each year at
a meeting of the Board of Directors, each to hold office until the next meeting
of the stockholders and until his or her successor shall have been duly elected
and shall have qualified, or until his or her death, or until he or she shall
have resigned, or have been removed, as hereinafter provided in these By-Laws.
The Board from time to time may elect such officers (including one or more
Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents, as may be necessary or desirable for the
business of the Corporation. The President also shall have the power to appoint
such assistant officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) as may be
necessary or appropriate to facilitate the management of the Corporation's
affairs. Such officers and agents shall have such duties and shall hold their
offices for such terms as may be prescribed by the Board or by the appointing
authority.
Section 2. Resignations. Any officer of the Corporation may resign at
any time by giving written notice of resignation to the Board, the Chairman of
the Board, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors. Such
removal shall be without prejudice to such person's
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contract rights, if any, but the appointment of any person as an officer, agent
or employee of the Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her control.
Section 6. Bonds or Other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his or her duties, in such amount and
with such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), the President shall preside at all meetings of the stockholders
and of the Board of Directors. He or she shall have, subject to the control of
the Board of Directors, general charge of the business and affairs of the
Corporation. He or she may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he or she may
delegate these powers.
Section 8. Vice President. Each Vice President shall have such powers
and perform such duties as the Board of Directors or the President from time to
time may prescribe.
Section 9. Treasurer. The Treasurer shall:
(i) have charge and custody of, and be responsible for, all of
the funds and securities of the Corporation, except those which the
Corporation has placed in the custody of a bank or trust company or
member of a national securities exchange (as that term is defined in
the Exchange Act) pursuant to a written agreement designating such bank
or trust company or member of a national securities exchange as
custodian of the property of the Corporation;
(ii) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(iii) cause all moneys and other valuables to be deposited to
the credit of the Corporation;
(iv) receive, and give receipts for, moneys due and payable to
the Corporation from any source whatsoever;
(v) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking
proper vouchers therefor; and
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(vi) in general, perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be
assigned to him or her by the Board or the President.
Section 10. Secretary. The Secretary shall:
(i) keep or cause to be kept in one or more books provided for
the purpose, the minutes of all meetings of the Board, the committees
of the Board and the stockholders;
(ii) see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law;
(iii) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock certificates of
the Corporation (unless the seal of the Corporation on such
certificates shall be a facsimile, as hereinafter provided) and affix
and attest the seal to all other documents to be executed on behalf of
the Corporation under its seal;
(iv) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and
(v) in general, perform all of the duties incident to the
office of Secretary and such other duties as from time to time may be
assigned to him or her by the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any officer
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI.
Indemnification
Section 1. General Indemnification. Each officer and director of the
Corporation shall be indemnified by the Corporation to the full extent permitted
under the Maryland General Corporation Law, except that such indemnity shall not
protect any such person against any liability to the Corporation or any
stockholder thereof to which such person otherwise would be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office. Absent a court
determination that an officer or director seeking indemnification was not liable
on the merits or guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office,
the decision by the Corporation to indemnify such person must be based upon the
reasonable determination of independent legal counsel or the vote of a majority
of a quorum of the directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to the proceeding
("non-party independent directors"), after review of the facts, that such
officer or director is not guilty of willful misfeasance, bad
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<PAGE> 14
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and to
the full extent permitted under the Maryland General Corporation Law; provided,
however, that the person seeking indemnification shall provide to the
Corporation a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met and a written undertaking to repay any such advance, if it ultimately should
be determined that the standard of conduct has not been met, and provided
further that at least one of the following additional conditions is met:
(i) the person seeking indemnification shall provide a
security in form and amount acceptable to the Corporation for his or
her undertaking;
(ii) the Corporation is insured against losses arising by
reason of the advance; or
(iii) a majority of a quorum of non-party independent
directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the
Corporation at the time the advance is proposed to be made, that there
is reason to believe that the person seeking indemnification will
ultimately be found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under the Maryland
General Corporation Law, from liability arising from his or her activities as an
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any officer or director of the Corporation that
protects or purports to protect such person from liability to the Corporation or
to its stockholders to which such officer or director otherwise would be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
The Corporation may indemnify, make advances or purchase insurance to
the extent provided in this Article VI on behalf of an employee or agent who is
not an officer or director of the Corporation.
Section 2. Other Rights. The indemnification provided by this Article
VI shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of stockholders or
disinterested directors or otherwise, both as to action by a director or officer
of the Corporation in his or her official capacity and as to action by such
person in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such person.
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ARTICLE VII.
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the Corporation
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation owned by him or her, provided, however, that
certificates for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by or in the name of
the Corporation by the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with
the seal of the Corporation. Any or all of the signatures or the seal on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate shall be issued, it may be issued by the Corporation with the same
effect as if such officer, transfer agent or registrar were still in office at
the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall be
kept at the principal executive office of the Corporation correct and complete
books and records of account of all the business and transactions of the
Corporation.
Section 3. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
Section 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
certificates representing shares of stock of the Corporation immediately shall
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board, in its discretion, may require such owner or his or her legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the
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<PAGE> 16
Board in its absolute discretion shall determine, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions. The
Board may fix, in advance, a date not more than 90 days preceding the date fixed
for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of
the Corporation or his or her agent may inspect and copy during usual business
hours the Corporation's By-Laws, minutes of the proceedings of its stockholders,
annual statements of its affairs, and voting trust agreements on file at its
principal office.
ARTICLE VIII.
Seal
The seal of the Corporation shall be circular in form and shall bear,
in addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal" and "Maryland". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX.
Fiscal Year
The Board of Directors shall have the power from time to time to fix
the fiscal year of the Corporation by a duly adopted resolution.
ARTICLE X.
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of Directors of the
Corporation from time to time may determine.
Section 2. Custodians. All securities and other investments shall be
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation from time to time may determine. Every arrangement
entered into with any bank or other company
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<PAGE> 17
for the safekeeping of the securities and investments of the Corporation shall
contain provisions complying with the Investment Company Act, and the general
rules and regulations thereunder.
ARTICLE XI.
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution from time to time shall designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds or
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer or pursuant
to any procedure approved by the Board of Directors, subject to applicable law.
ARTICLE XII.
Independent Public Accountants
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange Commission shall be selected annually by the Board of Directors and
ratified by the stockholders in accordance with the provisions of the Investment
Company Act.
ARTICLE XIII.
Annual Statement
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of the
Corporation and at such other times as may be directed by the Board. A report to
the stockholders based upon each such examination shall be mailed to each
stockholder of record of the Corporation on such date with respect to each
report as may be determined by the Board, at his or her address as the same
appears on the books of the Corporation. Such annual statement also shall be
available at the annual meeting of stockholders and shall be placed on file at
the Corporation's principal office in the State of Maryland, and if no annual
meeting is held pursuant to Article II, Section 1, such annual statement of
affairs shall be placed on file as the Corporation's principal office within 120
days after the end of the Corporation's fiscal year. Each such report shall show
the assets and liabilities of the Corporation as of the close of the period
covered by the report and the securities and other assets in which the funds of
the Corporation then were invested. Such report also shall show the
Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the period covered by the
report and any other information
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<PAGE> 18
required by the Investment Company Act, and shall set forth such other matters
as the Board or such firm of independent public accountants shall determine.
ARTICLE XIV.
Amendments
These By-Laws or any of them may be amended, altered or repealed by the
affirmative vote of a majority of the Board of Directors. The stockholders shall
have no power to make, amend, alter or repeal By-Laws.
18
<PAGE> 1
COMMON STOCK COMMON STOCK
PAR VALUE $.10 PAR VALUE $.10
CUSIP
See Reverse For Certain
Definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THE MARKET PARTICIPATION PRINCIPAL PROTECTION FUND, INC.
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF The
Market Participation Principal Protection Fund, Inc. transferable on the books
of the Corporation by the holder in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be held subject to all of the provisions
of the Articles of Incorporation and of the By-Laws of the Corporation, and of
all the amendments from time to time made thereto. This Certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
Dated:
President Secretary
Countersigned and Registered:
[TRANSFER AGENT AND REGISTRAR TO COME]
Transfer Agent and Registrar
Authorized Signature
<PAGE> 2
THE MARKET PARTICIPATION PRINCIPAL PROTECTION FUND, INC.
The Corporation has the authority to issue stock of more than one
class. A full statement of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of each
class and series of stock which the Corporation is authorized to issue and the
differences in the relative rights and preferences between the shares of each
class and series to the extent that they have been set, and the authority of the
Board of Directors to set the relative rights and preferences of subsequent
classes and series, will be furnished by the Corporation to any stockholder,
without charge, upon request to the Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--________Custodian________
(Cust) (Minor)
TEN ENT--as tenants by the entireties
under Uniform Gifts to Minors Act
Act __________________
(State)
JT TEN --as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received,_________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
_________________________________________________________________________
_________________________________________________________________________
__________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably
constitute and appoint ______________________________________________________
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<PAGE> 3
________________________________________________________________________________
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated:__________________
Signature(s):________________________________________
NOTICE: The signature to this
assignment must correspond with the
name as written upon the face of the
certificate, in every particular,
without alteration or enlargement, or
any change whatever.
Signature(s) Guaranteed:_____________________________
Signatures must be guaranteed by an "eligible guarantor institution" as
such term is defined in Rule 17Ad-15 under the Securities Exchange Act
of 1934.
3
<PAGE> 1
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the ____ day of _______, 1999 by and between THE
MARKET PARTICIPATION PRINCIPAL PROTECTION 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 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
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<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, 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
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<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
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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.
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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.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
THE MARKET PARTICIPATION PRINCIPAL
PROTECTION FUND, INC.
By: _________________________________
Authorized Signatory
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: __________________________________
Authorized Signatory
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