<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1999
SECURITIES ACT FILE NO. 333-88821
INVESTMENT COMPANY ACT FILE NO. 811-89621
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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]
------------------------
INCOME OPPORTUNITIES FUND 2006, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
TERRY K. GLENN
INCOME OPPORTUNITIES FUND 2006, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. HENNEWINKEL, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ---------------
If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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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(2) OFFERING PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par value).......... 11,500,000 $10.00 $115,000,000 $31,970
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(1) Includes 1,500,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA. $278 was previously paid. $31,692 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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
</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 NOVEMBER 18, 1999
PROSPECTUS
10,000,000 SHARES
INCOME OPPORTUNITIES FUND 2006, INC.
COMMON STOCK
------------------------
Income Opportunities Fund 2006, Inc. (the "Fund") is a newly organized,
diversified, fixed term, closed-end management investment company. The
investment objective of the Fund is to provide monthly income and return $10 per
share (the initial public offering price per share) to shareholders on or about
December 31, 2006 (the Fund's termination date). The Fund seeks to achieve its
objective by investing primarily in a portfolio of investment grade mortgage
backed and asset backed debt securities. The Fund may engage in various
portfolio strategies to enhance income and to hedge its portfolio against
investment and interest rate risks, including the use of leverage, options and
futures. There can be no assurance that the investment objective of the Fund
will be realized and that the Fund will be able to return $10 per share on its
termination date.
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. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. The Fund plans to apply to list its shares on the New York
Stock Exchange or another national securities exchange under the symbol "IOP."
Trading of the Fund's common stock on the exchange is expected to begin within
two weeks of the date of this prospectus. Before it begins trading, the
underwriter does not intend to make a market in the Fund's shares. Thus,
investors may not be able to buy and sell shares of the Fund during that time.
------------------------
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 CERTAIN RISKS, WHICH ARE DESCRIBED
IN THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 6 OF
THIS PROSPECTUS.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price........... $10.00 $100,000,000
Sales Load...................... None None
Proceeds, before expenses, 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.
The underwriter may also purchase up to an additional 1,500,000 shares at
the public offering price within 45 days from the date of this prospectus to
cover over-allotments.
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 December , 1999.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this prospectus is December , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors And Special Considerations..................... 6
Fee Table................................................... 9
The Fund.................................................... 10
Use Of Proceeds............................................. 10
Investment Objective and Policies........................... 10
Other Investment Policies................................... 16
Investment Restrictions..................................... 25
Directors And Officers...................................... 27
Investment Advisory and Management Arrangements............. 29
Portfolio Transactions...................................... 31
Dividends and Distributions................................. 32
Taxes....................................................... 33
Automatic Dividend Reinvestment Plan........................ 36
Mutual Fund Investment Option............................... 37
Net Asset Value............................................. 38
Description Of Capital Stock................................ 38
Custodian................................................... 41
Underwriting................................................ 41
Transfer Agent, Dividend Disbursing Agent and Registrar..... 42
Legal Opinions.............................................. 42
Experts..................................................... 42
Additional Information...................................... 43
Report Of Independent Auditors.............................. 44
Statement Of Assets, Liabilities and Capital................ 45
Appendix I.................................................. I-1
Appendix II................................................. II-1
</TABLE>
------------------------
INFORMATION ABOUT THE FUND CAN BE REVIEWED AND COPIED AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. CALL 1-800-SEC-0330 FOR INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM. THIS INFORMATION IS ALSO AVAILABLE ON
THE SEC'S INTERNET SITE AT HTTP://WWW.SEC.GOV AND COPIES MAY BE OBTAINED UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, D.C. 20549-6009.
------------------------
You should rely only on the information contained in this prospectus. 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 Income Opportunities Fund 2006, Inc. is a newly organized,
diversified, fixed term, closed-end management investment
company. The Fund will distribute substantially all of its net
assets on or about December 31, 2006 and will then terminate.
THE OFFERING The Fund is offering 10,000,000 shares of common stock at an
initial offering price of $10 per share. The common stock is
being offered by Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as underwriter. The underwriter may also purchase
up to an additional 1,500,000 shares of common stock within 45
days of the date of this prospectus to cover over-allotments.
INVESTMENT
OBJECTIVE AND
POLICIES The investment objective of the Fund is to provide monthly income
and return $10 per share (the initial public offering price per
share) to investors on or about December 31, 2006 (the
termination date of the Fund).
The Fund intends to invest in securities that, at the time of
investment, are rated at least investment grade by one or more
nationally recognized statistical rating organizations or, if
unrated, are considered by the Fund's investment adviser to be of
equivalent credit quality. The Fund intends to invest primarily
in mortgage backed and asset backed securities, including
mortgage backed securities that are issued or guaranteed by the
U.S. government, its agencies or instrumentalities. The Fund also
may invest in corporate or municipal debt securities and other
types of debt securities, including zero coupon securities.
Over time, the Fund may increasingly invest in short-term
securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or investment grade short-term
securities that are expected to mature on or about the
termination date of the Fund. Such securities may represent over
50% of the Fund's total assets in its later years.
The Fund will seek to return $10 per share to investors on or
about December 31, 2006, through the following:
- preserving capital through active management of its
portfolio; and
- investing in fixed income securities that have a final or
expected maturity on or about the termination date of the
Fund.
The Fund's investment adviser will manage the Fund's assets so as
to cause the dollar-weighted average maturity of the portfolio to
shorten over time in relation to the remaining term of the Fund.
The Fund does not plan to invest in securities that are expected
to mature more than two years beyond the Fund's termination date.
The Fund's investment adviser believes that it will be able to
manage the Fund's assets without realizing capital losses that
are not offset by capital gains realized in the same or a
subsequent taxable year.
There can be no assurance that the investment objective of the
Fund will be realized and that the Fund will be able to return
$10 per share on its termination date.
3
<PAGE> 5
PORTFOLIO
INVESTMENTS Mortgage backed securities are securities representing an
interest in pools of mortgages. These securities are secured by
and payable from the underlying mortgages. Some mortgage backed
securities are issued or guaranteed by government agencies.
However, they are not guaranteed by the full faith and credit of
the U.S. government except in certain instances. The yield and
credit characteristics of mortgage backed securities differ in a
number of respects from traditional debt securities.
Mortgage backed securities may be either pass-through securities
or collateralized mortgage obligations. Pass-through securities
represent a right to receive principal repayments and interest
payments collected on a pool of mortgages, which are passed
through to security holders (less servicing costs).
Collateralized mortgage obligations are debt securities
collateralized by mortgages themselves or pass-through
securities. Collateralized mortgage obligations also include
multi-class pass-through securities, where the different classes
have claims on different revenue streams with varying priority
rights to payment. As part of its overall strategy, the Fund may
invest in derivative instruments whose value is generally linked
to payments of interest or principal on mortgage backed
securities.
Asset backed securities are debt securities issued by a trust or
other legal entity established for the purpose of issuing
securities and holding certain assets, such as credit card
receivables, auto leases, commercial loans and related assets, or
debt obligations, that are paid down over time and generate
sufficient cash to pay holders of the securities. These
securities have yield and credit characteristics similar to
mortgage backed securities.
Other types of investments. The Fund also may invest in various
other types of debt securities including securities issued by the
U.S. government, its agencies or instrumentalities, corporate
bonds and municipal bonds, including zero coupon securities.
Further, the Fund expects to invest from time to time in various
instruments designed to enhance income and to hedge its portfolio
against investment and interest rate risks. The Fund expects to
enter into repurchase and reverse repurchase agreements, and
dollar rolls. The Fund also may use interest rate swaps, caps or
floors. The Fund may purchase or sell futures and listed and
over-the-counter options contracts on securities and indices,
make short sales, lend securities, make forward commitments and
invest in restricted or illiquid securities.
LEVERAGE The Fund is authorized to borrow funds and use leverage
(including through reverse repurchase agreements and dollar
rolls) in amounts not exceeding 33 1/3% of its total assets
(including the amount borrowed), and under current market
conditions, intends to borrow or obtain equivalent leverage
through reverse repurchase agreements and dollar rolls in the
maximum amount permitted.
LISTING Currently, there is no public market for the Fund's common stock.
The Fund plans to apply to list its shares of common stock on the
New York Stock Exchange or another national securities exchange.
Trading of the Fund's common stock is expected to begin within
two weeks of the date of this prospectus. Before it begins
trading, the underwriter does not intend to make a market in the
Fund's shares of common stock. Thus, investors may not be able to
buy and sell shares of the Fund during that period.
4
<PAGE> 6
INVESTMENT
ADVISER Fund Asset Management, L.P. is the Fund's investment adviser and
provides investment advisory and management services to the Fund.
For its services, the Fund pays the investment adviser a monthly
fee at the annual rate of 0.75% of the Fund's average weekly net
assets from the effective date of the investment advisory
agreement through December 31, 2001, 0.65% of the Fund's average
weekly net assets from January 1, 2002 through December 31, 2004,
and 0.55% of the Fund's average weekly net assets from January 1,
2005 through the Fund's termination date.
DIVIDENDS AND
DISTRIBUTIONS The Fund intends to distribute dividends of all or a portion of
its net investment income to common stockholders each month. At
times, in order to maintain a stable level of monthly dividends
to common stockholders, the Fund may pay out less than all of its
net investment income or pay out accumulated undistributed income
in addition to net investment income. The Fund intends to
distribute all or a portion of any net long-term capital gains at
least once annually. The Fund's income and dividends are expected
to decline to some extent over the term of the Fund as the
dollar-weighted average maturity (commonly referred to as
"average life") of the Fund's assets shorten. Various factors
will affect the level of the Fund's income, including the
composition of the Fund's portfolio at a given time, the
scheduled reduction of the investment adviser's fees, the amount
of leverage used by the Fund and the Fund's use of hedging
transactions. The Fund expects to begin paying dividends to
common stockholders within approximately 90 days from the date of
this prospectus.
YIELD
CONSIDERATIONS The yield on the Fund's common stock will vary from period to
period depending on factors including, but not limited to, market
conditions, the timing of the Fund's investment in portfolio
securities, the securities comprising the Fund's portfolio,
changes in interest rates including changes in the relationship
between short-term rates and long-term rates, the rate of
prepayment on mortgage backed and asset backed securities, the
amount and timing of the Fund's use of leverage, the Fund's net
assets and its operating expenses. Consequently, the Fund cannot
guarantee any particular yield on its shares and the yield for
any given period is not an indication or representation of future
yields on Fund shares. The Fund's ability to achieve any
particular yield level after it commences operations depends on
future interest rates and other factors mentioned above and the
initial yield and later yields may be lower. Any statements as to
the estimated yield are as of the date made and no guarantee can
be given that the Fund will achieve or maintain any particular
yield level. As noted above, the Fund's yield is expected to
decline to some extent over the term of the Fund.
AUTOMATIC
DIVIDEND
REINVESTMENT
PLAN Dividend and capital gains distributions generally are used to
purchase additional shares of the Fund's common stock. However,
an investor can choose to receive distributions in cash. Since
not all investors can participate in the automatic dividend
reinvestment plan, you should call your broker or nominee to
confirm that you are eligible to participate in the plan.
MUTUAL FUND
INVESTMENT
OPTION Investors who purchase shares in this offering through the
underwriter and later sell their shares have the option, subject
to certain conditions, to purchase Class D shares of certain
Merrill Lynch funds with the proceeds from the sale.
5
<PAGE> 7
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity and Market Price of Shares. The Fund is newly organized and has
no operating history or history of public trading. Before the Fund's common
stock is listed on the New York Stock Exchange or another national securities
exchange, an investment in the Fund may be illiquid.
Shares of closed-end funds that trade in a secondary market frequently
trade at a market price that is below their net asset value. This is commonly
referred to as "trading at a discount." Investors who sell their shares within a
relatively short period after completion of the public offering are more likely
to be exposed to this risk. Accordingly, the Fund is designed primarily for
long-term investors and should not be considered a vehicle for trading purposes.
Interest Rate and Credit Risk. The Fund invests in debt securities that
are subject to interest rate risk and credit risk. Interest rate risk is the
risk that prices of debt securities generally increase when interest rates
decline and decrease when interest rates increase. Prices of longer term
securities generally change more in response to interest rate changes than
prices of shorter term securities. Zero coupon securities are more sensitive to
interest rate changes than securities that pay interest periodically. Credit
risk is the risk that the issuer will be unable to pay interest or repay
principal when due. The degree of credit risk depends on both the financial
condition of the issuer and the terms of the obligation.
Mortgage Backed Securities. Mortgage backed securities represent the right
to receive a portion of principal repayments and/or interest payments made on a
pool of residential or commercial mortgage loans. When interest rates fall,
borrowers may refinance or otherwise repay principal on their mortgages earlier
than scheduled. When this happens, certain types of mortgage backed securities
may be paid off more quickly than originally anticipated, and the Fund may have
to invest the proceeds in new securities with lower yields. This risk is known
as "prepayment risk." When interest rates rise, certain types of mortgage backed
securities will be paid off more slowly than originally anticipated and the
value of these securities will fall. This risk is known as "extension risk."
Because of prepayment risk and extension risk, mortgage backed securities
react differently to changes in interest rates than other fixed income
securities. Small movements in interest rates (both increases and decreases) may
quickly and significantly reduce the value of certain mortgage backed
securities.
Some mortgage backed securities are issued by U.S. government agencies,
such as the Government National Mortgage Association (Ginnie Mae), the Federal
Home Loan Mortgage Corporation (Freddie Mac) or Federal National Mortgage
Association (Fannie Mae). Principal and interest payments on mortgage backed
securities issued by the U.S. government agencies are guaranteed by either the
Federal government or the government agency. Such securities have very little
credit risk. Other mortgage backed securities are issued by private corporations
rather than U.S. government agencies. These securities have credit risk as well
as prepayment risk and extension risk.
Certain mortgage backed securities, frequently referred to as "mortgage
derivatives," may represent a right to receive interest only (IOs), principal
only (POs) or an amount that remains after other floating-rate classes are paid
(an inverse floater). These securities may be extremely sensitive to changes in
interest rates. If the Fund invests in certain mortgage derivatives (including
those issued by U.S. government agencies) and interest rates move in a manner
not anticipated by Fund management, it is possible that the Fund could lose all
or substantially all of its investments in these securities.
Asset Backed Securities. Like traditional fixed income securities, the
value of asset backed securities typically increases when interest rates fall
and decreases when interest rates rise. A limited number of asset
6
<PAGE> 8
backed securities also may be subject to prepayment risk. In a period of
declining interest rates, borrowers may pay what they owe on the underlying
assets more quickly than anticipated. Prepayment reduces the yield to maturity
and the average life of asset backed securities. In addition, when the Fund
reinvests the proceeds of a prepayment it may receive a lower interest rate than
the rate on the security that was prepaid. In a period of rising interest rates,
prepayment may occur at a slower rate than expected. As a result, the average
maturity of the Fund's portfolio will increase. The value of long-term
securities generally changes more widely in response to changes in interest
rates than shorter term securities.
Concentration in Mortgage Backed and Asset Backed Securities. Since the
Fund may concentrate in mortgage backed and asset backed securities, it is more
susceptible to factors adversely affecting mortgage backed and asset backed
securities than is an investment company that is not concentrated in mortgage
backed and asset backed securities.
Rating Categories. The Fund intends to invest in debt securities that at
the time of investment are rated investment grade by Standard & Poor's or
Moody's Investors Service, Inc. It also may invest in unrated debt securities
that Fund management believes are of comparable quality at the time of
investment. Obligations rated in the lowest investment grade category may have
certain speculative characteristics. Also, if the Fund invests in an investment
grade security and it is subsequently downgraded below investment grade, the
Fund may determine to continue to hold such security in its portfolio.
Return of Initial Investment. The Fund will seek to return $10 per share
to investors on or about December 31, 2006 by preserving capital through, among
other things, active management of its portfolio and investing in securities
that have a final or expected maturity on or about the termination date of the
Fund. If the Fund realizes capital losses on dispositions of securities that are
not offset by capital gains on the disposition of other securities realized in
the same taxable year or a subsequent taxable year, the Fund may be unable to
distribute to its shareholders an amount equal to $10 for each share outstanding
on or about December 31, 2006. The Fund may maintain investment positions to
their maturity dates in order to avoid capital losses and may thereby forego the
opportunity to invest assets at a higher yield. In addition, while the Fund
seeks to invest in securities maturing on or about the Fund's termination date,
it may invest in securities with a final or expected maturity of up to two years
after the Fund's termination date. The Fund could incur a capital loss on the
disposition of such securities upon the Fund's termination date in certain
interest rate environments.
Leverage. The use of leverage by the Fund creates an opportunity for
increased net income, but, at the same time, creates special risks. The Fund
will only borrow or use leverage when the Fund's investment adviser believes
that such activities will benefit the Fund. To the extent the income derived
from securities purchased with borrowed funds exceeds the cost of borrowing, the
Fund's net income will be greater than if borrowing had not been used.
Conversely, if the income from the securities purchased with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing had not been used, and therefore the amount available
for distribution to shareholders as dividends will be reduced. In the latter
case, the Fund may nevertheless determine to maintain its leveraged position in
order to avoid capital losses on securities purchased with the leverage. The
Fund may also borrow up to an additional 5% of its total assets for temporary
purposes without regard to the foregoing limitation. The Fund expects to engage
in investment management techniques such as reverse repurchase agreements and
dollar rolls which provide leverage in much the same manner as borrowings.
7
<PAGE> 9
During times of rising interest rates, the Fund's portfolio securities and
the net asset value of its shares may decline in value. The Fund expects to
leverage its portfolio, which may accentuate the potential decline. The Fund may
also invest in portfolio securities that create investment leverage, which may
further accentuate any decline. Any investor who purchases shares with borrowed
funds may experience an even greater decline.
Illiquid Securities. The Fund may invest in securities that lack an
established secondary trading market or are otherwise considered illiquid.
Liquidity of a security relates to the ability to easily dispose of the security
and the price to be obtained and does not generally relate to the credit risk or
likelihood of receipt of cash at maturity. Illiquid securities may trade at a
discount from comparable, more liquid investments. Illiquid securities in which
the Fund may invest include certain mortgage backed and asset backed securities,
stripped securities, interest rate swaps, certain hedging instruments and
restricted securities of corporate and other issuers.
Interest Rate, Options and Futures Transactions. The Fund may engage in
interest rate hedging transactions, options transactions and transactions in
futures and options on futures. These transactions may involve significant
risks, including the risk that relatively small market movements may result in
large changes in the value of an investment and the risk that the party on the
other side of a transaction will be unable to satisfy its financial obligation
to the Fund. Hedging transactions also bear the risk that there will be
imperfect correlation between movements in the prices of two financial
instruments. Imperfect correlation may result when the Fund's Investment Adviser
incorrectly forecasts any one of a variety of market factors. Imperfect
correlation could diminish returns or result in losses to the Fund that would
not occur if the Fund did not engage in the transaction. Securities purchased in
these transactions also may be difficult to sell at the time the Fund would like
or at the price the Fund believes the security is currently worth. The Fund is
not required to engage in hedging transactions and may not do so.
Short Sales. The Fund may make short sales of securities. In such a
transaction, the Fund will lose money if the price of the security rises during
the period between the time of the sale and the subsequent closing transaction.
Repurchase Agreements. The Fund may invest in Repurchase Agreements. If
the party on the other side of the transaction defaults, the Fund could lose
money.
When-Issued Securities and Forward Commitments. When-issued securities and
forward commitments involve the risk that the security purchased may lose value
prior to its delivery. There is also a risk that the other party to the
transaction will not meet its obligation. If this occurs, the Fund both loses
the investment opportunity for assets it has set aside to make a purchase and
any gain in the security's price.
Securities Lending. The Fund may lend securities to financial institutions
that provide U.S. government securities as collateral. 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.
Anti-takeover 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.
8
<PAGE> 10
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)..................................... 0.75%
Interest Payments on Borrowed Funds(b)................. 2.65%
Other Expenses......................................... 0.27%
----
Total Annual Expenses(b).......................... 3.67%
====
</TABLE>
<TABLE>
<CAPTION>
LIFE OF
1 YEAR 3 YEARS 5 YEARS FUND
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment (assuming leverage of 33 1/3% of the Fund's
total assets) and a 5% annual return throughout the
periods:................................................. $37 $111(a) $187(a) $262(a)
</TABLE>
- ------------
(a) The Management Fees are reduced to 0.65% of the Fund's average weekly net
assets from January 1, 2002 through December 31, 2004, and 0.55% of the
Fund's average weekly net assets from January 1, 2005 through the Fund's
termination date. See "Investment Advisory and Management Arrangements"
-- page 29.
(b) Assumes borrowings or other use of leverage of 33 1/3% of total assets
(including amount borrowed) at an interest rate of 5.30%. The Fund intends
to use leverage only if the Investment Adviser believes that it would result
in higher income to shareholders over time. See "Other Investment
Policies -- Leverage." If the Fund does not use leverage, there would be no
Interest Payments on Borrowed Funds and Total Annual Expenses would be
1.02%.
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 uses 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.
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THE FUND
Income Opportunities Fund 2006, Inc. (the "Fund") is a newly organized,
diversified, fixed term, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on October 7, 1999, and has
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). The Fund's Articles of Incorporation provide that the Fund will
terminate on December 31, 2006, without shareholder approval, at which time the
Fund will distribute substantially all of its net assets to shareholders. See
"Description of Capital Stock." The Fund's principal office is located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of shares or redeem their securities at the
option of the shareholder, whereas open-end companies issue securities
redeemable at net asset value at any time at the option of the shareholder and
typically engage in a continuous offering of their shares. Accordingly, open-end
investment companies are subject to continuous asset in-flows and out-flows that
can complicate portfolio management. Shares of closed-end investment companies,
however, frequently trade at a discount from their net asset value. The risk may
be greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment
option in full) after payment of offering expenses estimated to be approximately
$ .
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months after
completion of the offering of the shares of common stock, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in U.S.
government securities or investment grade short-term securities. See "Investment
Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide monthly income and
return $10 per share (the initial public offering price per share) to
stockholders on or about December 31, 2006 (the Fund's termination date). There
can be no assurance that the investment objective of the Fund will be realized
and that the Fund will be able to return $10 per share on its termination date.
The investment objective of the Fund is a fundamental policy and may not be
changed without shareholder approval.
The Fund seeks to achieve its investment objective by investing primarily
in mortgage backed and asset backed securities, including those issued or
guaranteed by the U.S. government, its agencies or instrumentalities, that are
rated at least investment grade by Standard & Poor's ("S&P") or Moody's
Investors Service, Inc. ("Moody's") (BBB- or higher by S&P or Baa3 or higher by
Moody's) or, if unrated, are determined by Fund Asset Management, L.P., the
Fund's investment adviser (the "Investment Adviser"), to be of equivalent credit
quality. As part of this strategy, the Fund may invest in derivative instruments
whose value is generally linked to payments of interest or principal on mortgage
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<PAGE> 12
backed securities. Over time, the Fund may increasingly invest in short-term
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or investment grade short-term securities (rated in one of
the top three ratings categories by S&P or Moody's) that are expected to mature
on or about the termination date of the Fund. Such securities may represent over
50% of the Fund's total assets in its later years. The Fund also may invest in
corporate bonds, municipal bonds and other types of debt securities, including
zero coupon securities, rated at least investment grade at the time of
investment, or determined by the Investment Adviser to be of comparable quality.
The Fund will seek to return $10 per share to investors on or about December 31,
2006, by preserving capital through active management of its portfolio and
investing in fixed income securities which have a final or expected maturity on
or about the Fund's termination date. The Fund does not anticipate investing in
securities that are expected to mature more than two years beyond the Fund's
termination date.
For temporary or defensive purposes, the Fund may invest up to 100% of its
assets in short-term securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or investment grade short-term securities (see
"-- Other Portfolio Investments and Techniques"). At times, the Fund expects to
use leverage and to invest in various instruments designed to enhance income and
to hedge its portfolio against investment and interest rate risks. Under current
market conditions, the Fund intends to borrow or use leverage in an amount
approximately equal to 33 1/3% of its total assets (including the amount
borrowed), which is the maximum amount permitted.
As a result of the foregoing, the Fund will be considered to be
concentrated in mortgage backed and asset backed securities during most of the
term of the Fund.
The Investment Adviser will manage the Fund's assets so as to cause the
dollar-weighted average maturity of the assets to shorten over time as the
remaining term of the Fund decreases.
If the Fund realizes any capital losses on dispositions of securities that
are not offset by capital gains on the disposition of other securities realized
in the same taxable year or a subsequent taxable year, the Fund may be unable to
distribute to its shareholders at the end of the Fund's term an amount equal to
$10 for each share then outstanding.
MORTGAGE BACKED AND ASSET BACKED SECURITIES
Mortgage backed securities are securities that directly or indirectly
represent an interest in, or are backed by and payable from, mortgage loans
secured by real property. Asset backed securities generally consist of
structures similar to mortgage backed securities, except that the underlying
asset pools are comprised of credit card, automobile loan or other types of
receivables, commercial loans and related assets, or of debt obligations
(receivables, commercial loans and such debt obligations and related assets are
together referred to herein as "financial assets"). Mortgage backed and asset
backed securities are issued in structured financings wherein the sponsor
securitizes the underlying mortgage loans or financial assets in order to
liquify the underlying assets or to achieve certain other financial goals. The
special considerations and risks inherent in investments in mortgage backed and
asset backed securities are discussed more fully below.
Some of the mortgage backed and asset backed securities in which the Fund
will invest will be issued by private issuers. Private issuers include
originators of or investors in mortgage loans and receivables such as savings
and loan associations, savings banks, commercial banks, investment banks,
finance companies and special purpose finance subsidiaries of any of the above.
Other mortgage backed securities in which
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<PAGE> 13
the Fund may invest will be guaranteed by the Government National Mortgage
Association ("GNMA") or issued by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). Other asset
backed securities in which the Fund will invest may be guaranteed by the Small
Business Administration ("SBA") or issued in programs originated by the
Resolution Trust Corporation ("RTC"). GNMA, FNMA, FHLMC and SBA are agencies or
instrumentalities of the United States. The proportion of the Fund's portfolio
invested in mortgage backed and asset backed securities issued by private
issuers or issued or guaranteed by the U.S. government, its agencies or
instrumentalities will vary over the life of the Fund.
Securities issued by private issuers must be rated investment grade (at
least BBB- by S&P or Baa3 by Moody's) or, if unrated, be of comparable quality
as determined by the Investment Adviser. The rating may be based, in part, on
certain types of credit enhancements issued in respect of those securities.
These credit enhancements may offer two types of protection to the Fund: (i)
liquidity protection, and (ii) protection against losses resulting from ultimate
default by an obligor and the underlying assets. Liquidity protection refers to
the advancing of scheduled payments of interest, and in some circumstances
principal, due on the underlying asset, generally by the entity administering
the pool of assets, to ensure that the receipt of payments on the underlying
pool occurs in a timely fashion. Protection against losses resulting from
ultimate default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Fund will not pay any
additional fees for such credit enhancement, although the existence of credit
enhancement may increase the price of a security.
Credit enhancements can come from external providers such as banks or
financial insurance companies. Alternatively, they may come from the structure
of a transaction itself. Examples of credit enhancement arising out of the
structure of the transaction include senior-subordinated securities, creation of
reserve funds and overcollateralization. Senior-subordinated securities are
multiple class securities with one or more classes subordinate to other classes
as to the repayment of principal and interest, with the result that defaults on
the underlying assets are borne first by the holders of the subordinated class.
Reserve funds are cash or investments, sometimes funded from a portion of the
payments on the underlying assets, held in reserve against future losses.
Overcollateralization occurs where the scheduled payments on, or the principal
amount of, the underlying assets exceed that required to make payment of the
securities and pay any servicing or other fees. The degree of credit enhancement
provided for each issue generally is based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses exceeding those anticipated could reduce the return on an investment in
such issue. In addition, the Fund may purchase subordinated securities which, as
noted above, may serve as a form of credit enhancement for senior securities
purchased by other investors. In purchasing securities for the Fund, the
Investment Adviser will take into account not only the creditworthiness of the
issuer of the securities, but also the creditworthiness of the provider of any
external credit enhancement of the securities.
The collateral backing mortgage backed securities is usually held by an
independent bailee, custodian or trustee on behalf of the holders of the related
mortgage backed securities or asset backed securities. In such instances, the
holder of the related mortgage backed securities or asset backed securities
(i.e., the
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<PAGE> 14
Fund) will have either an ownership interest or security interest in the
underlying collateral and can exercise its rights thereto through such bailee,
custodian or trustee.
The Fund will invest in pass-through mortgage backed securities that
represent ownership interests in a pool of commercial mortgages or mortgages on
single-family or multi-family residences. Such securities represent interests in
pools of residential mortgage loans originated by U.S. governmental or private
lenders and guaranteed, to the extent provided in such securities, by the U.S.
government, one of its agencies or instrumentalities or by private guarantors.
Such securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semiannually) and principal repayments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal repayments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of
such securities and the servicer of the underlying mortgage loans.
The Fund also may invest in collateralized mortgage obligations ("CMOs")
which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by pass-through
mortgage backed securities guaranteed by GNMA, or issued by FNMA or FHLMC. They
may, however, also be collateralized by whole loans or by pass-through mortgage
backed securities of private issuers. The collateral for CMOs is hereinafter
referred to as "CMO Collateral." The term CMO as used herein also includes
multi-class pass-through securities, which are equity interests in a trust
composed of CMO Collateral. CMOs may be issued by agencies or instrumentalities
of the United States, including FNMA and FHLMC, or by the types of private
issuers described above.
The yield characteristics of mortgage backed and asset backed securities
differ from traditional corporate debt securities. Among the major differences
are that interest payments and principal repayments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Fund purchases such a security at a premium, a prepayment
rate that is faster than expected will reduce the security's yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing the security's yield to maturity. Conversely, if the Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce the securities'
yield to maturity. The Fund may invest a portion of its assets in derivative
mortgage backed securities, such as stripped mortgage backed securities, which
are highly sensitive to changes in prepayment rates and interest rates. The
Investment Adviser will seek to manage these risks (and potential benefits) by
investing in a variety of such securities and through hedging techniques.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
fixed rate mortgage loans will increase during a period of failing interest
rates and decrease during a period of rising interest rates. Accordingly,
amounts available for reinvestment by the Fund are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Although
asset backed securities generally are less likely to experience substantial
prepayments than are mortgage backed securities, certain of the factors that
affect the rate of prepayments on mortgage backed securities also
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<PAGE> 15
affect the rate of prepayments on asset backed securities. However, during any
particular period, the predominant factors affecting prepayment rates on
mortgage backed and asset backed securities may be different. Mortgage backed
and asset backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
The Fund's yield will also be affected by the yields on instruments in
which the Fund is able to reinvest the proceeds of payments and prepayments.
Accelerated prepayments on securities purchased by the Fund at a premium also
impose a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is repaid in full.
The Fund may also invest in various derivative mortgage backed securities,
which are synthetic securities designed to be highly sensitive to certain types
of interest rate and principal prepayment scenarios. Derivative instruments
primarily consist of some form of stripped mortgage backed securities ("SMBS")
that commonly involve different classes of securities that receive
disproportionate amounts of the interest and principal distributions on a pool
of mortgage assets. SMBS are typically issued by the same types of issuers as
are mortgage backed securities generally. The structure of SMBS, however, is
different. SMBS arrangements commonly involve two classes of securities that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common variety of SMBS is where one class (the
principal-only or PO class) receives some of the interest and most of the
principal from the underlying assets, while the other class (the interest-only
or IO class) receives most of the interest and the remainder of the principal.
In the most extreme case, the IO class receives all of the interest, while the
PO class receives all of the principal. The yield to maturity on an IO class is
extremely sensitive to the rate of principal repayments (including prepayments)
on the related underlying assets, and a rate of principal repayments in excess
of that considered in pricing the securities will have a material adverse effect
on an IO security's yield to maturity. If the underlying mortgage assets
experience greater than anticipated repayments of principal, the Fund may fail
to recoup fully its initial investment in IOs. In addition, there are certain
types of IOs that represent the interest portion of a particular class as
opposed to the interest portion of the entire pool. The sensitivity of these
types of IOs to interest rate fluctuations may be increased because of the
characteristics of the principal portion to which they relate.
The Fund may invest in derivative mortgage backed floating rate securities
the interest rate of which is adjusted up or down inversely to changes in a
specified index ("inverse floaters"). Generally, income on inverse floaters will
decrease when short-term interest rates increase and will increase when
short-term interest rates decrease. Such securities have the effect of providing
a degree of investment leverage, since they may increase or decrease in value in
response to changes in market interest rates at a rate that is a multiple of the
rate at which fixed-rate, long-term securities increase or decrease in response
to such changes. As a result, the market values of such securities generally
will be more volatile than the market values of fixed rate securities.
Under certain interest rate scenarios, the Fund may decide to retain
investments in IOs or inverse floaters yielding less than prevailing interest
rates in order to avoid realizing capital losses on the sale of such
investments.
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<PAGE> 16
OTHER PORTFOLIO INVESTMENTS AND TECHNIQUES
The Fund may invest in interest bearing securities of varying maturities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
The Fund also may invest in interest bearing corporate debt securities and
municipal debt securities rated at least investment grade at the time of
investment. Corporate and municipal debt securities providing for payment of
interest and repayment of principal are issued by corporate or municipal
entities with maturities ranging from one month to thirty years or more. These
securities typically have fixed or variable interest rates and a fixed maturity,
which may be subject to redemption provisions.
The Fund may also invest in zero coupon securities. Zero coupon securities
are debt obligations that do not entitle the holder to any periodic payments
prior to maturity and are issued and traded at a discount from their face
amounts. The discount varies depending on the time remaining until maturity,
prevailing interest rates, liquidity of the security and perceived credit
quality of the issuer. Zero coupon securities may be created by separating the
interest and principal components of U.S. government, agency or instrumentality
securities, municipal securities, or private corporate securities. In addition,
they may be issued directly by private corporate or tax exempt issuers. The
market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do securities
having similar maturities and credit quality that do pay periodic interest.
The short-term securities in which the Fund may invest consist of U.S.
government, agency or instrumentality securities, domestic bank or savings
institution certificates of deposit and bankers' acceptances, short-term debt
securities such as commercial paper and other corporate debt, and repurchase
agreements. These investments must have a maturity not in excess of one year
from the date of purchase.
In addition, as discussed below, the Fund may use certain options, futures
contracts, interest rate swaps and related transactions for hedging purposes and
to enhance income. For purposes of enhancing liquidity and/or preserving
capital, on a temporary defensive basis, the Fund may invest without limit in
securities issued by the U.S. government, its agencies or instrumentalities,
repurchase agreements collateralized by such securities, or certificates of
deposit, time deposits or bankers' acceptances. The Fund also may invest in
other municipal securities, other debt obligations of corporate issuers, such as
commercial paper, and interest bearing savings accounts of banks having assets
greater than $1 billion and which are members of the Federal Deposit Insurance
Corporation (the "FDIC").
New types of mortgage backed and asset backed securities, zero coupon
securities, derivative securities and hedging instruments are developed and
marketed from time to time. Consistent with its investment objective, policies
and restrictions, the Fund expects to invest in such new types of securities and
instruments that the Investment Adviser believes may assist the Fund in
achieving its investment objective. More detailed information as to the types of
securities in which the Fund may invest is set forth in Appendix I.
CREDIT QUALITY OF PORTFOLIO INVESTMENTS
The Fund's assets will be invested primarily in securities that are rated
at the time of investment in the four highest rating categories of S&P or
Moody's or, if unrated, are considered to be of comparable quality by the
Investment Adviser. The Fund will also invest in securities that are issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Securities
issued or guaranteed by the U.S.
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<PAGE> 17
government, its agencies or instrumentalities are generally considered to be of
the same or higher credit quality as privately issued securities rated AAA.
The process of determining ratings for corporate debt securities (which
includes mortgage backed and asset backed securities) by S&P and Moody's
includes consideration of the likelihood of the receipt by security holders of
all distributions, the nature of the underlying securities, the credit quality
of any guarantor, the business sector of the issuer, business and financial
risks of the issuer, management evaluation, capital structure, cash flows,
regulatory considerations, other risks if any, the structural, legal and tax
aspects associated with such securities and other relevant criteria. With
respect to mortgage backed and asset backed securities, such ratings do not
represent an assessment of the likelihood that principal prepayments will be
made by mortgagors or the degree to which such prepayments may differ from that
originally anticipated, nor do they address the possibility that investors may
suffer a lower than anticipated yield or that investors in such securities may
fail to recoup fully their initial investment due to prepayments. A description
of the four highest rating categories of S&P and Moody's for corporate debt
securities is set forth in Appendix II.
The Fund has established the following standards with respect to short-term
securities in which the Fund invests. Commercial paper investments at the time
of purchase must be rated A-3 by S&P or Prime-3 by Moody's or, if not rated, be
issued by companies having such a rating with respect to comparable short-term
debt securities. A description of these rating categories is set forth in
Appendix II. Investments in short-term corporate bonds and debentures (which
would have maturities at the date of purchase of one year or less) will be
limited to securities of issuers which, at the time of purchase, have a rating
with respect to comparable short-term debt of A-3 by S&P or Prime-3 by Moody's.
The Fund may not invest in any security issued by a commercial bank or a savings
institution unless the bank or institution is organized and operating in the
U.S., has total assets of at least one billion dollars and is a member of the
FDIC.
OTHER INVESTMENT POLICIES
LEVERAGE AND BORROWING
The Fund is authorized to borrow money from banks or otherwise in an amount
up to 33 1/3% of the Fund's total assets (including the amount borrowed), less
all liabilities and indebtedness other than the bank or other borrowing, and
under current market conditions, the Fund intends to borrow or obtain equivalent
leverage in an amount equal to approximately 33 1/3% of the Fund's total assets.
The Fund is also authorized to borrow an additional 5% of its total assets
without regard to the foregoing limitation for temporary purposes such as
clearance of portfolio transactions and share repurchases. The Fund will only
borrow when the Investment Adviser believes that such borrowings will benefit
the Fund after taking into account considerations such as interest income and
possible gains or losses upon liquidation. The Fund may at times borrow from an
affiliate of the Investment Adviser, provided that the terms of such borrowings
are no less favorable than those available from comparable sources of funds in
the marketplace. Borrowings from an affiliate of the Investment Adviser will
result in the payment of fees and interest on borrowed funds to the affiliate by
the Fund.
Borrowings by the Fund create an opportunity for greater total return but,
at the same time, increase exposure to capital risk. For example, leveraging may
exaggerate changes in the net asset value of Fund shares and in the yield on the
Fund's portfolio. Although the principal of such borrowings will be fixed, the
16
<PAGE> 18
Fund's assets may change in value during the time the borrowings are
outstanding. Borrowing will create interest expenses for the Fund which can
exceed the income from the assets retained. To the extent the income derived
from securities purchased with borrowed funds exceeds the interest the Fund will
have to pay, the Fund's net income will be greater than if borrowing were not
used. Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced. The Fund may also
borrow for emergency purposes, for the payment of dividends, for share
repurchases or for the clearance of transactions.
Because few or none of its assets will consist of margin securities, the
Fund does not expect to borrow on margin. The Fund also may leverage by entering
into reverse repurchase agreements with the same parties with whom it may enter
into repurchase agreements (as discussed below). Under a reverse repurchase
agreement, the Fund sells securities and agrees to repurchase them at a mutually
agreed date and price. At the time the Fund enters into a reverse repurchase
agreement, it may establish and maintain a segregated account with its custodian
containing cash, cash equivalents or liquid high grade debt securities having a
value not less than the repurchase price (including accrued interest). If the
Fund establishes and maintains such a segregated account, a reverse repurchase
agreement will not be considered a borrowing by the Fund; however, if the Fund
does not establish and maintain such a segregated account, a reverse repurchase
agreement will be considered a borrowing for the purpose of the Fund's
limitation on borrowing. Reverse repurchase agreements involve the risk that the
market value of the securities acquired, or retained in lieu of sale, by the
Fund in connection with the reverse repurchase agreement may decline below the
price of the securities the Fund has sold but is obligated to repurchase. If
such security being held by the Fund as a result of the reverse repurchase
agreement is an inverse floating rate instrument (see the discussion of
derivative mortgage backed securities under "Investment Objective and
Policies -- Mortgage Backed and Asset Backed Securities"), an increase in market
interest rates (e.g., LIBOR) could result in a negative interest rate spread on
the leverage during the term of the reverse repurchase agreement given the fact
that the Fund may be forced to hold such instrument to maturity rather than
incur a capital loss on the sale thereof which could impact the ability of the
Fund to pay $10 per share at its termination date. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Fund's obligation to repurchase the
securities, and the Fund's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
The Fund also may enter into "dollar rolls." A dollar roll is where the
Fund sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund forgoes principal and interest paid on such securities. The Fund is
compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale. A "covered
roll" is a specific type of dollar roll for which there is a segregated account
with cash, cash equivalents or liquid high grade debt securities. Covered rolls
will not be considered to be borrowings for purposes of the Fund's limitation on
borrowing to the extent that they are appropriately collateralized by high grade
liquid assets of the Fund. Dollar rolls which are not so collateralized will be
considered borrowings for the purpose of the Fund's limitation on borrowing.
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<PAGE> 19
The Fund expects that some of its borrowings may be made on a secured
basis. In such situations, either the Fund's custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
(i) the lender to act as a subcustodian if the lender is a bank or otherwise
qualifies as a custodian of investment company assets or (ii) a suitable
subcustodian.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset coverage and
portfolio composition requirements and those restricting the Fund's payment of
dividends and distributions on the common stock in certain circumstances. The
Fund may be subject to certain restrictions on investments imposed by guidelines
of one or more rating agencies that may issue ratings for any debt securities
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the Fund
by the Investment Company Act. It is not anticipated that these covenants or
guidelines will impede the Investment Adviser from managing the Fund's portfolio
in accordance with the Fund's investment objective and policies.
Under the Investment Company Act, the Fund is not permitted to incur
indebtedness unless immediately after such incurrence the Fund has an asset
coverage of at least 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the Fund's total
assets). Additionally, under the Investment Company Act the Fund may not declare
any dividend or other distribution upon its common stock or purchase its common
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 failure to pay dividends and distributions on its common stock
could adversely affect the Fund's qualification as a regulated investment
company under Federal tax law. The Fund intends, however, to take all measures
necessary to continue to make dividend and distribution payments on its common
stock. See " Taxes."
The Fund's willingness to borrow money for investment purposes, and the
amount it will borrow, will depend on many factors, the most important of which
are investment outlook, market conditions and interest rates. Successful use of
a leveraging strategy depends on the Investment Adviser's ability to predict
correctly interest rates and market movements, and there is no assurance that a
leveraging strategy will be successful during any period in which it is
employed.
Assuming the use of leverage by borrowings or otherwise in the amount of
approximately 33 1/3% of the Fund's total assets (including the amount obtained
from leverage), and an estimated annual interest rate of 5.30% payable on such
leverage based on market rates as of the date of this prospectus, the annual
return that the Fund's portfolio must experience (net of expenses) in order to
cover such interest payments would be 1.77%. The Fund's actual cost of leverage
will be based on market rates at the time the Fund undertakes a leveraging
strategy, and such actual cost of leverage may be higher or lower than that
assumed in the previous example.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's common stock of the leverage obtained by borrowings in the
amount of approximately 33 1/3% of the Fund's total assets, assuming
hypothetical annual returns of the Fund's portfolio of minus 10% to plus 10%. As
the table shows, leverage generally increases the return to shareholders when
portfolio return is positive and greater than the cost of leverage and decreases
the return when the portfolio return is negative or less than
18
<PAGE> 20
the cost of leverage. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of -10.00% -5.00% 0.00% 5.00% 10.00%
expenses).................................
Corresponding Common Stock Return......... -17.65% -10.15% -2.65% 4.85% 12.35%
</TABLE>
Until the Fund borrows, the Fund's common stock will not be leveraged, and
the risks and special considerations related to leverage described in this
prospectus will not apply.
PORTFOLIO STRATEGIES INVOLVING INTEREST RATE TRANSACTIONS, OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in interest rates. The Fund has authority to engage
in interest rate transactions in order to hedge against interest rate movements,
purchase call and put options on securities, write (i.e., sell) covered call and
put options on its portfolio securities, and engage in hedging transactions in
financial futures and related options on such futures. Each of these portfolio
strategies is described below.
Although certain risks are involved in interest rate, options and futures
transactions, the Investment Adviser believes that, because the Fund will (i)
write only covered options on portfolio securities and (ii) engage in other
transactions primarily for hedging purposes, these portfolio strategies will not
subject the Fund to the risks frequently associated with the speculative use of
such transactions. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in interest rates occur. The Fund has no
obligation to enter into hedging transactions and may not do so. Reference is
made to Appendix I for further information concerning these strategies.
Interest Rate Transactions. In order to hedge the value of the Fund's
portfolio against interest rate fluctuations or to enhance the Fund's income,
the Fund may enter into various transactions, such as interest rate swaps and
the purchase or sale of interest rate caps and floors. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing at a later date. The Fund
intends to use these transactions primarily as a hedge and not as a speculative
investment. However, the Fund may also invest in interest rate swaps to enhance
income or to increase the Fund's yield during periods of steep interest rate
yield curves (i.e., wide differences between short term and long term interest
rates).
The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor.
In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Fund holds a
mortgage backed security with an interest rate that is reset only once each
year, it may swap the right to receive interest at this fixed rate for the right
to receive interest at a rate that is reset every week. This would enable the
Fund to offset a decline in the value of the mortgage backed security due to
19
<PAGE> 21
rising interest rates but would also limit its ability to benefit from falling
interest rates. Conversely, if the Fund holds a mortgage backed security with an
interest rate that is reset every week and it would like to lock in what it
believes to be a high interest rate for one year, it may swap the right to
receive interest at this variable weekly rate for the right to receive interest
at a rate that is fixed for one year. Such a swap would protect the Fund from a
reduction in yield due to falling interest rates and may permit the Fund to
enhance its income through the positive differential between one week and one
year interest rates, but would preclude it from taking full advantage of rising
interest rates.
Typically, the parties with which the Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. The Fund
will not enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated in one of the two highest rating categories of at least one nationally
recognized statistical rating organization at the time of entering into such
transaction or whose creditworthiness is believed by the Investment Adviser to
be equivalent to such rating. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid in comparison with other similar
instruments traded in the interbank market. Caps and floors, however, are less
liquid than swaps. Certain Federal income tax requirements may limit the Fund's
ability to engage in certain interest rate transactions. Gains from transactions
in interest rate swaps distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to shareholders.
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 may purchase call options on securities held in its portfolio on which
it has written call options or which it intends to purchase. 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 also may purchase and sell call options on indices.
Index options are similar to options on securities except that, rather than
taking or making delivery of securities underlying the option at a specified
price upon exercise, an index option gives the holder the right to receive cash
upon exercise of the option if the level of the index upon which the option is
based is greater than the exercise price of the option.
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<PAGE> 22
Put Options on Portfolio Securities. The Fund is authorized to purchase
put options to hedge against a decline in the value of its securities. By buying
a put option, the Fund has a right to sell the underlying security at the
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. The
Fund also has authority to write (i.e., sell) put options on the types of
securities which may be held by the Fund, provided that such put options are
covered, meaning that such options are secured by segregated, high grade liquid
debt securities. The Fund will receive a premium for writing a put option, which
increases the Fund's return. The Fund will not sell puts if, as a result, more
than 50% of the Fund's assets would be required to cover its potential
obligations under its hedging and other investment transactions. The Fund may
purchase and sell put options on indices. Index options are similar to options
on securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option gives
the holder the right to receive cash upon exercise of the option if the level of
the index upon which the option is based is less than the exercise price of the
option.
Financial Futures and Options Thereon. The Fund is authorized to engage in
transactions in financial futures contracts ("futures contracts") and related
options on such futures contracts as a hedge against adverse changes in the
market value of its portfolio securities and interest rates. A futures contract
is an agreement between two parties which obligates the purchaser of the futures
contract to buy and the seller of a futures contract to sell a security for a
set price on a future date or, in the case of an index futures contract, to make
and accept a cash settlement based upon the difference in value of the index
between the time the contract was entered into and the time of its settlement. A
majority of transactions in futures contracts, however, do not result in the
actual delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction. Futures
contracts have been designed by boards of trade which have been designated
"contract markets" by the Commodities Futures Trading Commission ("CFTC").
Transactions by the Fund in futures contracts and financial futures are subject
to limitations as described below under "Restrictions on the Use of Futures
Transactions."
The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
values of securities which may be held by the Fund will fall, thus reducing the
net asset value of the Fund. However, as interest rates rise, the value of the
Fund's short position in the futures contract will also tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, these commissions are
generally less than the transaction expenses which the Fund would have incurred
had the Fund sold portfolio securities in order to reduce its exposure to
increases in interest rates. The Fund also may purchase financial futures
contracts in anticipation of a decline in interest rates when it is not fully
invested in a particular market in which it intends to make investments to gain
market exposure that may in part or entirely offset an
21
<PAGE> 23
increase in the cost of securities it intends to purchase. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
securities upon termination of the futures contract.
The Fund also has authority to purchase and write call and put options on
futures contracts in connection with its hedging activities. Generally, these
strategies are used under the same market and market sector conditions (i.e.,
conditions relating to specific types of investments) in which the Fund enters
into futures transactions. The Fund may purchase put options or write call
options on futures contracts rather than selling the underlying futures contract
in anticipation of a decrease in the market value of securities or an increase
in interest rates. Similarly, the Fund may purchase call options, or write put
options on futures contracts, as a substitute for the purchase of such futures
to hedge against the increased cost resulting from an increase in the market
value or a decline in interest rates of securities which the Fund intends to
purchase.
The Fund may engage in options and futures transactions on exchanges and
options in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance, of the
parties' obligation is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller. See
"Restrictions on OTC Options" below for information as to restrictions on the
use of OTC options.
Restrictions on the Use of Futures Transactions. Under regulations of the
CFTC, the futures trading activity described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any such
contracts and options. Margin deposits may consist of cash or securities
acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents 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.
Restrictions on OTC Options. The Fund will engage in OTC options only with
member banks of the Federal Reserve System and primary dealers in U.S.
government securities or with affiliates of such banks or broker-dealers which
have capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million.
Risk Factors in Interest Rate Transactions and Options and Futures
Transactions. The use of interest rate transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. Interest rate
transactions involve the risk of an imperfect correlation between the index used
in the hedging transaction and that pertaining to the securities which are the
subject of such transaction. If the Investment Adviser is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these investment techniques were not used. In addition, interest
rate transactions that may be entered into by the Fund do
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<PAGE> 24
not involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the Fund is contractually obligated to
make. If the security underlying an interest rate swap is prepaid and the Fund
continues to be obligated to make payments to the other party to the swap, the
Fund would have to make such payments from another source. If the other party to
an interest rate swap defaults, the Fund's risk of loss consists of the net
amount of interest payments that the Fund contractually is entitled to receive.
In the case of a purchase by the Fund of an interest rate cap or floor, the
amount of loss is limited to the fee paid. Since interest rate transactions arc
individually negotiated, the Investment Adviser expects to achieve an acceptable
degree of correlation between the Fund's rights to receive interest on
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps.
Utilization of options and futures transactions to hedge the portfolio
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the prices of the securities which are the subject
of the hedge. If the price of the options or futures moves more or less than the
price of the subject of the hedge, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. This risk particularly applies to the Fund's use of futures and options
thereon since it will generally use such instruments as a so-called
"cross-hedge," which means that the security that is the subject of the futures
contract is different from the security being hedged by the contract.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures. However, there can be no assurance
that a liquid secondary market will exist at any specific time. Thus, it may not
be possible to close an options or futures position. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge its portfolio. There is also the risk of loss by
the Fund of margin deposits or collateral in the event of bankruptcy of a broker
with whom the Fund has an open position in an option, a futures contract or an
option related to a futures contract.
SHORT SALES
The Fund may make short sales of securities. A short sale is a transaction
in which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. The Fund expects to make short sales
both as a form of hedging to offset potential declines in long positions in
similar securities and in order to maintain portfolio flexibility.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
Fund also will be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal
23
<PAGE> 25
to at least 100% of the current market value of the security sold short.
Depending on arrangements made with the broker-dealer from which it borrowed the
security regarding payment over of any payments received by the Fund on such
security, the Fund may not receive any payments (including interest) on its
collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
total assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund
also may make short sales "against the box" without respect to such limitations.
In this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in securities the disposition of which is subject to
legal or contractual restrictions or the markets for which are illiquid. The
sale of restricted and illiquid securities often requires more time and results
in higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may sell at
a price lower than similar securities that are not subject to restrictions on
resale. These securities include certain stripped mortgage backed, privately
stripped U.S. government, agency or instrumentality securities and municipal
securities, interest rate swaps, certain hedging instruments and certain
restricted securities of corporate and other issuers.
REPURCHASE AGREEMENTS
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or primary dealer in U.S. government securities. Under such
agreements, the bank or primary dealer agrees, upon entering into the contract,
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligations. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the case of a
repurchase agreement, the Fund will require the seller to provide additional
collateral if the market value of the securities falls below the repurchase
price at any time during the term of the repurchase agreement. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed rate
of return, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security
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<PAGE> 26
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to perform.
LENDING OF PORTFOLIO SECURITIES
The Fund may from time to time lend securities from its portfolio, with a
value not exceeding 33 1/3% of its total assets, to banks, brokers and other
financial institutions and receive collateral in cash or securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities which will
be maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The purpose of such loans is to permit
the borrower to use such securities for delivery to purchasers when such
borrower has sold short. If cash collateral is received by the Fund, it is
invested in short-term securities, and a portion of the yield received in
respect of such investment is retained by the Fund. Alternatively, if securities
are delivered to the Fund as collateral, the Fund and the borrower negotiate a
rate for the loan premium to be received by the Fund for lending its portfolio
securities. In either event, the total yield on the Fund's portfolio is
increased by loans of its portfolio securities. The Fund will have the right to
regain record ownership of loaned securities to exercise beneficial rights such
as voting rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis in order to hedge against
anticipated changes in interest rates and prices. When such transactions are
negotiated, the price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. When-issued securities and forward commitments may
be sold prior to the settlement date, but the Fund will enter into when-issued
and forward commitments only with the intention of actually receiving or
delivering the securities, as the case may be. If the Fund disposes of the right
to acquire a when-issued security prior to its acquisition or disposes of its
right to deliver or receive against a forward commitment, it can incur a gain or
loss. At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it will segregate with the custodian cash or liquid securities
with a value not less than the value of the when-issued or forward commitment
securities. The value of these assets will be monitored daily to ensure that
their marked to market value will at all times exceed the corresponding
obligations of the Fund. There is always a risk that the securities may not be
delivered, and the Fund may incur a loss. Settlements in the ordinary course,
which may take substantially more than five business days for mortgage-related
securities, are not treated by the Fund as when-issued or forward commitment
transactions and accordingly are not subject to the foregoing restrictions.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares of common stock (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% or more of the shares of
common stock represented at a meeting at which more than 50% of the outstanding
shares of common
25
<PAGE> 27
stock are represented or (ii) more than 50% of the outstanding shares of common
stock). The Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Make investments for the purpose of exercising control or
management of any company.
3. Purchase or sell real estate; commodities or commodity contracts
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
4. Issue senior securities or borrow money except as permitted by
Section 18 of the Investment Company Act.
5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
6. Make loans to other persons, except that the acquisition of
corporate debt securities and investment in U.S. government, or agency or
instrumentality 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 be made only in accordance with
applicable law and the guidelines set forth in this prospectus.
7. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry
other than mortgage backed and asset backed securities; provided, however,
that the Fund may not be concentrated in mortgage backed and asset backed
securities during the period, commencing not earlier than the final year of
the term of the Fund, when the Fund is liquidating such mortgage backed and
asset backed securities in anticipation of the termination of the Fund.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors, provide that the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings mentioned in investment
restriction (4) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.
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<PAGE> 28
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities except in conformity with applicable
laws, rules and regulations and unless, giving effect to such sale, the
market value of all securities sold short does not exceed 25% of the value
of the Fund's total assets and the Fund's aggregate short sales of a
particular class of securities does not exceed 25% of the then outstanding
securities of that class.
e. Invest in put, call, straddle or spread options, except that the
Fund may write, purchase and sell options and futures on portfolio
securities and related indices or otherwise in connection with bona fide
hedging activities.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation. 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 December 31, 2006, such
shareholders will also be provided the opportunity to vote upon the Fund's
policy with respect to concentration in mortgage backed and asset backed
securities. See "Description of Capital Stock."
The Investment Adviser and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch & Co.,
Inc. ("ML&Co."). Because of the affiliation of Merrill Lynch with the Investment
Adviser, the Fund is prohibited from engaging in certain transactions involving
Merrill Lynch except pursuant to an exemptive order or otherwise in compliance
with the provisions of the Investment Company Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases from
or sales to Merrill Lynch of securities in transactions in which it acts as
principal. See "Portfolio Transactions."
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Director and executive officer is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
TERRY K. GLENN (59) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Merrill Lynch Asset Management, L.P.
("MLAM") (which terms as used herein include their corporate predecessors) since
1983; President of Princeton Funds Distributors, Inc. ("PFD") since 1986 and
Director thereof since 1991; Executive Vice President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; President of Princeton
Administrators, L.P. since 1988.
JOE GRILLS (64) -- Director(2) -- P.O. Box 98, Rapidan, Virginia 22773.
Member of the Committee of Investment of Employee Benefit Assets of the
Financial Executives Institute ("CIEBA") since 1986; Member of CIEBA's Executive
Committee since 1988 and its Chairman from 1991 to 1993; Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment
Advisory Committee of the State of New York Common Retirement Fund and the
Howard Hughes Medical Institute since 1997;
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<PAGE> 29
Director, Duke Management Company since 1992 and Vice Chairman since 1998;
Director, LaSalle Street Fund since 1995; Director, Hotchkis and Wiley Mutual
Funds since 1996; Director, Kimco Realty Corporation since January 1997; Member
of the Investment Advisory Committee of the Virginia Retirement System since
1998; Director, Montpelier Foundation since 1998.
WALTER MINTZ (70) -- Director(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
ROBERT S. SALOMON, JR. (62) -- Director(2) -- 106 Dolphin Cove Quay,
Stamford, Connecticut 06902. Principal of STI Management (investment adviser)
since 1994; Trustee, The Common Fund since 1980; Chairman and CEO of Salomon
Brothers Asset Management from 1992 until 1995; Chairman of Salomon Brothers
equity mutual funds from 1992 until 1995; Monthly columnist with Forbes magazine
since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon
Brothers from 1975 until 1991.
MELVIN R. SEIDEN (69) -- Director(2) -- 780 Third Avenue, Suite 2502, New
York, New York 10017. Director of Silbanc Properties, Ltd. (real estate,
investment and consulting) since 1987; Chairman and President of Seiden & de
Cuevas, Inc. (private investment firm) from 1964 to 1987.
STEPHEN B. SWENSRUD (66) -- Director(2) -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser)
since 1996; Principal, Fernwood Associates (financial consultant) since 1975;
Chairman, Department of Manufacturing, RPP Corporation since 1999; Director,
Department of Telecommunications, International Mobile Communications, Inc.
since 1999.
ARTHUR ZEIKEL (67) -- Director(1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and MLAM from 1997 to 1999 and
President thereof from 1977 to 1997; Chairman of Princeton Services from 1997 to
1999, Director thereof from 1993 to 1999 and President thereof from 1993 to 1999
and President thereof from 1993 to 1997; Executive Vice President of ML&Co. from
1990 to 1999.
JOSEPH T. MONAGLE, JR. (51) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1990; Department Head of
Global Fixed Income Division of the Investment Adviser and MLAM since 1997;
Senior Vice President of Princeton Services since 1993.
JEFFREY B. HEWSON (48) -- Vice President and Portfolio
Manager(1)(2) -- Director (Global Fixed Income) of MLAM since 1998; Vice
President of MLAM from 1989 to 1998 and Portfolio Manager of MLAM since 1985.
GREGORY MARK MAUNZ (46) -- Vice President and Portfolio
Manager(1)(2) -- First Vice President of MLAM since 1997; Vice President of MLAM
from 1985 to 1997; Portfolio Manager of MLAM since 1984.
DONALD C. BURKE (39) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; First Vice
President of MLAM from 1997 to 1999; Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM since 1990; Vice President of PFD since 1999.
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<PAGE> 30
WILLIAM E. ZITELLI (31) -- Secretary(1)(2) -- Attorney associated with MLAM
since 1998; Attorney associated with Pepper Hamilton LLP from 1997 to 1998;
Attorney associated with Reboul, MacMurray, Hewitt, Maynard and Kristol from
1994 to 1997.
- ------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
other investment companies for which the Investment Adviser or MLAM acts as
investment adviser.
COMPENSATION OF DIRECTORS
The Fund pays each non-interested Director an annual fee of $2,000 per year
plus $500 per meeting attended. The Fund also compensates members of its audit
committee, which consists of all of the non-interested Directors, at a rate of
$2,000 per year, plus $500 per audit committee meeting attended. The Fund
reimburses each non-interested Director for his out-of-pocket expenses relating
to attendance at meetings.
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and, for the calendar year ended December 31, 1998, the aggregate
compensation paid by all investment companies advised by the Investment Adviser
and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-affiliated
Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM
COMPENSATION ACCRUED AS PART OF ADVISED FUNDS PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSE TO DIRECTORS(1)
---------------- ------------ ------------------- -------------------
<S> <C> <C> <C>
Joe Grills.................................. $8,000 None $198,333
Walter Mintz................................ $8,000 None $178,583
Robert S. Salomon, Jr....................... $8,000 None $178,583
Melvin R. Seiden............................ $8,000 None $178,583
Stephen B. Swensrud......................... $8,000 None $195,583
</TABLE>
- ------------
(1) In addition to the Fund, the Directors serve on the boards of other FAM/MLAM
Advised Funds as follows: Joe Grills (24 registered investment companies
consisting of 56 portfolios), Walter Mintz (22 registered investment
companies consisting of 43 portfolios), Robert S. Salomon, Jr. (22
registered investment companies consisting of 43 portfolios), Melvin R.
Seiden (22 registered investment companies consisting of 43 portfolios),
Stephen B. Swensrud (25 registered investment companies consisting of 58
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 and offers investment
advisory services to individuals and institutional accounts. As of September
1999, the Asset Management Group had a total of approximately $514 billion in
investment company and other portfolio assets under
29
<PAGE> 31
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 Investment Adviser was
organized in 1977 and offers investment advisory services to more than 50
registered investment companies. 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 supervision
of the Fund's Board of Directors, 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 considers analyses from various sources (including
brokerage firms with which the Fund does business), makes the necessary
investment decisions, and places orders for transactions accordingly. The
Investment Adviser is responsible for the performance of certain administrative
and management services for the Fund. Jeffery B. Hewson and Gregory Mark Maunz
are the portfolio managers of the Fund and are primarily responsible for the
Fund's day-to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at the annual rate of 0.75%
of the Fund's average weekly net assets from the effective date of the
Investment Advisory Agreement through December 31, 2001, 0.65% of the Fund's
average weekly net assets from January 1, 2002 through December 31, 2004, and
0.55% of the Fund's average weekly net assets from January 1, 2005 through
termination of the Fund ("average weekly net assets" means the average weekly
value of the total assets of the Fund minus the sum of accrued liabilities of
the Fund). For purposes of this calculation, average weekly net assets is
determined at the end of each month on the basis of the average net assets of
the Fund for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the last business day of a week with
the net assets at the last business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing fees,
if any, stock certificates and shareholder reports, charges of the custodian and
the transfer and dividend disbursing agent and registrar, Commission fees, fees
and expenses of non-interested Directors, accounting and pricing costs,
insurance, interest, brokerage costs, litigation and other extraordinary or
non-recurring expenses, mailing and other expenses properly payable by the Fund.
Accounting services are provided to the Fund by the Investment Adviser, and the
Fund reimburses the Investment Adviser for its costs in connection with such
services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of its
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Fund's Board of Directors or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contract is not
30
<PAGE> 32
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 other 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.
CODE OF ETHICS
The Fund's Board of Directors has adopted a Code of Ethics pursuant to Rule
17j-1 under the Investment Company Act that incorporates the Code of Ethics of
the Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S. government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading
securities. In addition, no employee may purchase or sell any security that at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" that prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Fund's Board of Directors, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the best
price and execution, securities firms that provide investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for
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<PAGE> 33
transactions by the Fund. Research information provided to the Investment
Adviser by securities firms is supplemental. It does not replace or reduce the
level of services performed by the Investment Adviser and the expenses of the
Investment Adviser will not be reduced because it receives supplemental research
information. Supplemental investment research obtained from such securities
firms 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.
The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with dealers who make markets in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Under the Investment Company Act, except as
permitted by an exemptive order, persons affiliated with the Fund are prohibited
from dealing with the Fund as principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, the Fund does not deal
with Merrill Lynch and its affiliates in connection with such transactions.
Affiliated persons of the Fund may serve as its brokers in certain
over-the-counter transactions conducted on an agency basis.
PORTFOLIO TURNOVER
The Fund may dispose of securities without regard to the time they have
been held when such action, for defensive or other reasons, appears 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, will be less than %. (The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
A higher portfolio turnover rate results in greater transaction costs, which are
borne directly by the Fund, and also has certain tax consequences for
shareholders.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute dividends of all or a portion of its net
investment income monthly. The Fund may at times pay out less than the entire
amount of net investment income earned in any particular period and may at times
pay out such accumulated undistributed income in addition to net investment
income earned in other periods in order to permit the Fund to maintain a more
stable level of distributions. As a result, the distribution paid by the Fund
for any particular period may be more or less than the amount of net investment
income earned by the Fund during such period. The Fund expects that all or a
portion of net capital gains (i.e., the excess of net long-term capital gain
over net short-term capital loss), if any, will be distributed at least once
annually.
The Fund's income and distributions are expected to decline to some extent
over the term of the Fund as the dollar weighted average maturity of the Fund's
portfolio securities shortens. Various factors will affect the level of the
Fund's income, including the asset mix, the scheduled reduction in the
Investment Adviser's fees, the amount of leverage used by the Fund and the
Fund's use of hedging. Shareholders may elect to have all dividends and
distributions reinvested in shares of the Fund purchased in the open market
through the Fund's Automatic Dividend Reinvestment Plan. Shareholders who do not
elect to participate in such Plan will receive their dividends and distributions
in cash. See "Automatic Dividend Reinvestment Plan."
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<PAGE> 34
The Fund expects that it will commence paying dividends within 90 days of
the date of this prospectus. The Fund expects that a final liquidating
distribution to shareholders of the net assets of the Fund will be made on or
about the termination of the Fund.
The yield on the Fund's common stock will vary from period to period
depending on factors including, but not limited to, market conditions, the
timing of the Fund's investment in portfolio securities, the securities
comprising the Fund's portfolio, changes in interest rates including changes in
the relationship between short-term rates and long-term rates, the rate of
prepayment on mortgage backed and asset backed securities, the amount and timing
of the Fund's use of leverage, the Fund's net assets and its operating expenses.
Consequently, the Fund cannot guarantee any particular yield on its shares and
the yield for any given period is not an indication or representation of future
yields on Fund shares. The Fund's ability to achieve any particular yield level
after it commences operations depends on future interest rates and other factors
mentioned above and the initial yield and later yields may be lower. Any
statements as to the estimated yield are as of the date made and no guarantee
can be given that the Fund will achieve or maintain any particular yield level.
As noted above, the Fund's yield is expected to decline to some extent over the
term of the Fund.
The Fund will seek to return $10 per share to investors on or about
December 31, 2006 by preserving capital through, among other things, active
management of its portfolio and investing in securities that have a final or
expected maturity on or about the termination date of the Fund. If the Fund
realizes capital losses on dispositions of securities that are not offset by
capital gains on dispositions of securities realized in the same or a subsequent
taxable year, the Fund may be unable to distribute to its shareholders an amount
equal to $10 for each share outstanding on or about December 31, 2006.
TAXES
The Fund intends to elect and qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, in any taxable year in
which its deduction for dividends paid during the taxable year (without regard
to capital gain dividends) equals or exceeds 90% of the sum of its taxable and
tax exempt income, the Fund (but not its shareholders) will not be subject to
Federal income tax to the extent that it distributes its net investment income
and net realized capital gains. The Fund intends to distribute substantially all
of its income.
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 taxable
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.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Income derived by the Fund from municipal
obligations, while exempt from Federal income taxation at the Fund level, will
be taxed in the same manner as ordinary
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<PAGE> 35
income when distributed to shareholders. Distributions from the excess of net
long-term capital gains over net short-term capital losses (including certain
transactions in futures and options) ("capital gain dividends") are taxable as
long-term capital gains, regardless of the length of time the shareholder has
owned Fund shares. Any loss upon the sale or exchange of Fund shares held for
six months or less will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. Distributions in excess
of the Fund's earnings and profits 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). Certain categories of capital gains are taxable at different
rates. Generally not later than 60 days after the close of its taxable year, the
Fund will provide shareholders with a written notice designating the amounts of
any capital gain dividends as well as any amounts of capital gain dividends in
the different categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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 will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.
Shareholders receiving distributions in the form of additional shares
purchased by the Plan Agent pursuant to the Automatic Dividend Reinvestment Plan
will be treated for Federal income tax purposes as receiving the amount of cash
received by the Plan Agent on their behalf and will have a basis in such shares
equal to the price paid by the Plan Agent for the shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens will be subject to a 30% U.S. 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. Non-resident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
The Federal income tax rules governing the taxation of interest rate swaps
are not entirely clear and may require the Fund to treat payments received under
such arrangements as ordinary income and to amortize such payments under certain
circumstances. Additionally, the Fund will limit its activity with respect to
interest rate swaps in order to meet RIC income source qualification
requirements.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom a certified taxpayer identification
number is not 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.
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<PAGE> 36
The Fund will make investments that produce income that is not matched by a
corresponding receipt of cash or an offsetting loss deduction. Such investments
would include zero coupon securities and other obligations which have original
issue discount or that accrue discount and obligations which are subordinated in
the mortgaged-backed or asset backed securities structure. Such income is
treated as income earned by the Fund and is subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding receipt of cash by the Fund or an offsetting deduction, the Fund
may be required to borrow money or dispose of other securities in order to make
required distributions to shareholders. The Fund intends to make sufficient and
timely distributions to shareholders so as to qualify for treatment as a RIC at
all times.
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
not be a taxable dividend in whole or in part. Holders of common stock may wish
to consult their tax advisers prior to selling stock that will be repurchased by
the Fund.
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 a gain from
the sale of shares. If a shareholder receives a liquidating distribution that 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.
TAX TREATMENT OF OPTIONS, FUTURES AND INTEREST RATE TRANSACTIONS
The Fund may engage in interest rate transactions, write (i.e., sell)
covered call and covered put options on its portfolio securities, purchase call
and put options on securities, and engage in transactions in financial futures
and related options on such futures. In general, unless an exception applies,
such options and financial futures contracts that are "Section 1256 contracts"
will be "marked to market" for Federal income tax purposes at the end of each
taxable year, i.e., each such option or financial futures contract will be
treated as sold for its fair market value on the last day of the taxable year,
and any gain or loss attributable to Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest rates with respect to its investments.
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<PAGE> 37
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
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 or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. government obligations. State law varies
as to whether dividend income attributable to U.S. government obligations is
exempt from state income tax. In general, state law does not consider income
derived from mortgage backed securities to be income attributable to U.S.
government obligations.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a shareholder is ineligible or otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by The Bank of New York, as
agent for shareholders in administering the Plan (the "Plan Agent"), in
additional shares of the Fund. Shareholders whose shares are held in the name of
a broker or nominee should contact such broker or nominee to confirm that they
are eligible to participate in the Fund's dividend reinvestment plan.
Shareholders who are ineligible or elect not to participate in the Plan will
receive all dividends and distributions in cash paid by check mailed directly to
the shareholder of record (or, if the shares are held in street or other nominee
name, then to such nominee) by The Bank of New York, as dividend paying agent.
Such participants may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to The Bank of New York, as dividend paying agent, at the address
set forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if received
by the Plan Agent not less than ten days prior to any dividend record date;
otherwise such termination will be effective with respect to any subsequently
declared dividend or distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively referred to as "dividends") payable either in shares
or in cash, non-participants in the Plan will receive cash, and participants in
the Plan will receive the equivalent in shares. After the Fund declares
dividends, the Plan Agent will, as agent for the participants, receive the cash
payment and use it to buy shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts.
Each participant in the Plan will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends. Prior to the time the shares
commence trading on the New York Stock Exchange, participants in the Plan will
receive any dividends in cash. The Fund will not issue any new shares in
connection with the Plan.
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<PAGE> 38
The Plan Agent will have until the last business day before the next date
on which the shares trade on an "ex-dividend" basis or in no event more than 30
days after the dividend payment date (the "last purchase date") to invest the
dividend amount in shares acquired in open-market purchases. It is contemplated
that the Fund will pay monthly income dividends. Therefore, the period during
which open-market purchases can be made will begin five business days prior to
the payment date on the dividend through the date before the next "ex-dividend"
date which typically will be approximately ten days.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 101 Barclay Street, New York, New York 10286.
MUTUAL FUND INVESTMENT OPTION
Purchasers of the Fund's common stock in this offering will have an
investment option consisting of the right to reinvest the net proceeds from a
sale of such shares (the "Original Shares") in Class D initial sales charge
shares of certain Merrill Lynch-sponsored open-end mutual funds ("Eligible Class
D Shares") at their net asset value, without the imposition of the initial sales
charge, if the conditions set forth below are satisfied. First, the sale of the
Original Shares must be made through Merrill Lynch, and the net proceeds
therefrom must be immediately reinvested in Eligible Class D Shares. Second, the
Original Shares must have been either acquired in this offering or be shares
representing reinvested dividends from shares acquired in this offering. Third,
the Original Shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class D shares of certain of the mutual
funds may be subject to an account maintenance fee at an annual rate of up to
0.25% of the average daily net asset value of such mutual fund. The Eligible
Class D Shares may be redeemed at any time at the next determined net asset
value, subject in certain cases to a redemption fee. Prior to the time the
shares commence trading on the New York Stock Exchange, the distributor for the
mutual funds will advise Merrill Lynch financial consultants as to those mutual
funds which offer the investment option described above.
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<PAGE> 39
NET ASSET VALUE
Net asset value per share of common stock is determined after the close of
business on the New York Stock Exchange (generally, the New York Stock Exchange
closes at 4:00 p.m., New York time), on the last business day in each week. For
purposes of determining the net asset value of a share, 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 outstanding at such time. Expenses,
including the fees payable to the Investment Adviser, are accrued daily.
The Fund values corporate debt securities, mortgage backed securities,
municipal securities, asset backed securities and other debt securities on the
basis of 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. When the Fund writes an option, the amount of the premium received is
recorded in the books of the Fund as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last bid price. The value of swaps, including interest
rate swaps, caps and floors, will be determined by obtaining dealer quotations.
Other investments, including futures contracts and related options, are stated
at market value. Debt securities having a remaining maturity 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.
Securities for which there exist no price quotations or valuations are valued at
fair value as determined in good faith by or on behalf of the Fund's Board of
Directors.
The Fund determines and makes available for publication the net asset value
of its shares weekly. Currently, the net asset values of shares of publicly
traded closed-end investment companies investing in debt securities are
published in Barron's, the Monday edition of The Wall Street Journal and the
Monday and Saturday editions of The New York Times.
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, when issued, 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
38
<PAGE> 40
"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 December 31, 2006, without shareholder approval. In connection with such
termination, the Fund will liquidate all of its assets and distribute to
shareholders the net proceeds therefrom after making appropriate provision for
any liabilities of the Fund. Prior to such termination, however, the Fund's
Board of Directors 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 December 31, 2006, 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 governed by the laws of the State of Maryland and not the
Investment Company 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 December 31, 2006, 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" and on its policy with respect to concentration in
mortgage backed and asset backed securities.
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 Investment Company 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 of the Fund for $100,000. As of the
date of this prospectus, the Investment Adviser owned 100% of the outstanding
shares of common stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director elected by holders of capital
stock may be removed from office with or without cause by
39
<PAGE> 41
vote of the holders of at least 66 2/3% of the Fund's shares of capital stock
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 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 December 31, 2006
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.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares entitled to
be voted on the matter (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). Such a vote also would satisfy
a separate requirement in the Investment Company Act that the change be approved
by the shareholders. Shareholders of an open-end investment company may require
the company to redeem their shares of common stock at any time (except in
certain circumstances as authorized by or under the Investment Company Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions would usually be made in
cash. If the Fund is converted to an open-end investment company, it could be
required to liquidate portfolio securities to meet requests for redemption, and
the shares would no longer be listed on a stock exchange.
Conversion to an open-end investment company also would require changes 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, such as those relating to
the borrowing of money and the purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the Investment Company Act, are in the best interests of shareholders
generally. Reference should be made to the Articles of Incorporation 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
40
<PAGE> 42
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 shareholders about all sides of the particular issue. These
provisions could have the effect of limiting or delaying to some extent the
ability of shareholders to take certain actions at a meeting of shareholders.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
The Bank of New York, 90 Washington Street, New York, New York 10286.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"),
World Financial Center, North Tower, New York, New York 10281-1305, 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 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 this 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 December , 1999.
The Fund has granted Merrill Lynch an option, exercisable for 45 days after
the date hereof, to purchase up to 1,500,000 additional shares to cover
over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
common stock.
If the Underwriter creates a short position in the shares of common stock
in connection with the offering, i.e., if it sells more shares of common stock
than are set forth on the cover page of this prospectus, the Underwriter may
reduce its short position by purchasing shares of common stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter may also impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of common stock in
the open market to reduce the Underwriter's short
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<PAGE> 43
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 representations 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.
Prior to this offering, there has been no public market for the shares of
the Fund. The Fund plans to apply to list the Fund's shares of common stock on
the New York Stock Exchange or another national securities exchange. However,
during an initial period which is not expected to exceed two weeks from the date
of this prospectus, the Fund's shares will not be listed on any securities
exchange. Additionally, before it begins trading, the Underwriter does not
intend to make a market in the Fund's common stock, although a limited market
may develop. Thus, it is anticipated that investors may not be able to buy and
sell shares of the Fund during such period. In order to meet the requirements
for listing, the Underwriter has undertaken to sell lots of 100 or more shares
to a minimum of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of the Fund's portfolio transactions.
The Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-term,
tax-exempt securities subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify Merrill Lynch
against certain liabilities including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of the Fund will be The Bank of New York, 101 Barclay Street, New York, New York
10048.
LEGAL OPINIONS
Certain legal matters in connection with the common stock offered hereby
will be passed upon for the Fund and Merrill Lynch by Brown & Wood LLP, New
York, New York.
EXPERTS
, the independent auditors, have audited the statement of
assets, liabilities and capital of the Fund as of December , 1999, which is
included in this prospectus and Registration Statement as set forth in the
report which appears in this prospectus and Registration Statement. The
statement of assets, liabilities and capital is included in reliance on their
report, given on their authority as experts in
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<PAGE> 44
accounting and auditing. 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 Investment Company 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
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 service 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> 45
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
Income Opportunities Fund 2006, Inc.
We have audited the accompanying statement of assets, liabilities and capital of
Income Opportunities Fund 2006, Inc. as of December , 1999. This statement of
assets, liabilities and capital is the responsibility of the Fund's management.
Our responsibility is to express an opinion on this statement of assets,
liabilities and capital 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 statement of assets, liabilities and capital is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets, liabilities
and capital. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets, liabilities and capital presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
Income Opportunities Fund 2006, Inc. at December , 1999 in conformity with
generally accepted accounting principles.
December , 1999
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<PAGE> 46
INCOME OPPORTUNITIES FUND 2006, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
DECEMBER , 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
October 7, 1999, as a closed-end, diversified management investment company and
has had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 10,000 shares 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 Investment Adviser, on behalf of the Fund, will incur organization
costs estimated at $ . Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
quarterly fee in arrears at the annual rate of 0.75% of the Fund's average
weekly net assets from the effective date of the Investment Advisory Agreement
through December 31, 2001, 0.65% of the Fund's average weekly net assets from
January 1, 2002 through December 31, 2004, and 0.55% of the Fund's average
weekly net assets from January 1, 2005 through termination of the Fund.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.
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<PAGE> 47
APPENDIX I
The following describes in greater detail certain of the types of
securities in which the Fund intends to invest.
MORTGAGE BACKED SECURITIES
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
The guaranteed mortgage pass-through securities in which the Fund will
invest will include those issued or guaranteed by GNMA, FNMA and FHLMC.
GNMA mortgage backed securities are guaranteed by GNMA and consist of
pass-through interests in pools of mortgage loans guaranteed or insured by
agencies or instrumentalities of the U.S. FNMA and FHLMC mortgage backed
securities are issued by FNMA and FHLMC, respectively, and most often represent
pass-through interests in pools of conventional mortgage loans or participations
therein. GNMA, FNMA and FHLMC "pass-through" mortgage backed securities are so
named because they represent undivided interests in the underlying mortgage
pools, and a pro rata share of both regular interest and principal payments (net
of fees assessed by GNMA, FNMA and FHLMC and any applicable loan servicing
fees), as well as prepayments on the underlying mortgage pool, are passed
through monthly to the registered holder of the mortgage backed securities
(i.e., the Fund). As described more fully below, FNMA and FHLMC also may issue
types of mortgage backed securities other than pass-through mortgage backed
securities.
Timely payment of principal and interest on GNMA mortgage backed securities
is guaranteed by GNMA, a wholly-owned corporate instrumentality of the U.S.
within the Department of Housing and Urban Development, which guarantee is
backed by the full faith and credit of the U.S. FNMA, a federally chartered and
privately owned corporation, organized and existing under the Federal National
Mortgage Association Charter Act, guarantees timely payment of principal and
interest on FNMA mortgage backed securities. FHLMC, a corporate instrumentality
of the U.S., guarantees (i) the timely payment of interest on all FHLMC mortgage
backed securities, (ii) the ultimate collection of principal with respect to
some FHLMC mortgage backed securities, and (iii) the timely payment of principal
with respect to other FHLMC mortgage backed securities. Neither the obligations
of FNMA nor those of FHLMC are backed by the full faith and credit of the U.S.
Nevertheless, because of the relationship of each such entity to the U.S., it is
widely believed that mortgage backed securities issued by such entities are high
quality securities with minimal credit risk.
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the U.S. within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and interest
on securities that are based on and backed by a specified pool of mortgage
loans. To qualify such securities for a GNMA guarantee, the underlying mortgages
must be insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or be guaranteed by the
Veterans' Administration under the Servicemen's Readjustment Act of 1944, as
amended ("VA Loans"), or be pools of other eligible mortgage loans. The Housing
Act provides that the full faith and credit of the U.S. government is pledged to
the payment of all amounts that may be required
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<PAGE> 48
to be paid under any guarantee. In order to meet its obligations under such
guarantee, GNMA is authorized to borrow from the U.S. Treasury with no
limitations as to amount.
GNMA pass-through mortgage backed securities may represent a pro rata
interest in one or more pools of the following types of mortgage loans: (i)
fixed rate level payment mortgage loans; (ii) fixed rate graduated payment
mortgage loans; (iii) fixed rate growing equity mortgage loans; (iv) fixed rate
mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on
multifamily residential properties under construction; (vi) mortgage loans on
completed multifamily projects; (vii) fixed rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage loans; and (ix)
mortgage backed serial notes.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation established under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
government agency to add greater liquidity to the mortgage market. FNMA was
transformed into a private sector corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing home mortgage
loans from local lenders, thereby providing them with funds for additional
lending. FNMA acquires funds to purchase such loans from investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
Each FNMA pass-through mortgage backed security represents a pro rata
interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (i.e., mortgage loans that are not insured or guaranteed by any
governmental agency). The loans contained in those pools consist of: (i) fixed
rate level payment mortgage loans; (ii) fixed rate growing equity mortgage
loans; (iii) fixed rate graduated payment mortgage loans; (iv) variable rate
mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate
mortgage loans secured by multifamily projects.
Federal Home Loan Mortgage Corporation. FHLMC is a corporate
instrumentality of the U.S. established by the Emergency Home Finance Act of
1970, as amended (the "FHLMC Act"). FHLMC was organized primarily for the
purpose of increasing the availability of mortgage credit to finance needed
housing. The operations of FHLMC currently consist of the purchase of first
lien, conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage backed securities.
The mortgage loans underlying the FHLMC mortgage backed securities
typically consist of fixed rate or adjustable rate mortgage loans with original
terms to maturity of between ten and thirty years, substantially all of which
are secured by first liens on one- to four-family residential properties or
multifamily projects. Each mortgage loan must meet the applicable standards set
forth in the FHLMC Act. Mortgage loans underlying FHLMC mortgage backed
securities may include whole loans, participation interests in whole loans and
undivided interests in whole loans and participations in another FHLMC mortgage
backed security.
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<PAGE> 49
PRIVATE MORTGAGE PASS-THROUGH SECURITIES
Private mortgage pass-through securities ("Private pass-throughs") are
structured similarly to the GNMA, FNMA and FHLMC mortgage pass-through
securities described above and are issued by originators of and investors in
mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. Private pass-throughs are usually backed by a pool of conventional
fixed rate or adjustable rate mortgage loans. Since Private pass-throughs
typically are not guaranteed by an entity having the credit status of GNMA, FNMA
or FHLMC, such securities generally are structured with one or more types of
credit enhancements. See "Types of Credit Enhancements" below.
COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations ("CMOs") are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by pass-through mortgage backed securities guaranteed by
GNMA, or issued by FNMA or FHLMC. They may, however, also be collateralized by
whole loans or Private pass-throughs. The collateral for CMOs is hereinafter
referred to as "CMO Collateral." The term CMO as used herein also includes
multi-class pass-through securities, which are equity interests in a trust
composed of CMO Collateral. CMOs may be issued by agencies or instrumentalities
of the U.S. government, including FNMA and FHLMC, or by the types of private
issuers described above. The issuer of a series of CMOs may elect to be treated
as a Real Estate Mortgage Investment Conduit (a "REMIC") under the Federal
income tax laws.
The funds for payment on the CMOs are derived from payments of principal
and interest on the underlying CMO Collateral and, to the extent provided in a
particular transaction, reinvestment income therefrom. Most CMOs are structured
with multiple classes. Each class is issued at a fixed or floating coupon rate
and has a specified maturity or final distribution date. Principal prepayments
on the CMO Collateral may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates. Interest is paid or
accrues on all classes of the CMOs on a monthly, quarterly or semiannual basis.
The principal of and interest on the CMO Collateral may be allocated among the
several classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the CMO Collateral are applied to the
classes of the CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
The Fund may invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date so long as payments on the
underlying pool of mortgage loans remain within a certain range. PAC Bonds are
always parallel pay CMOs with the required principal payment on such securities
having the highest priority after interest has been paid to all classes.
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ASSET BACKED SECURITIES
The securitization techniques used to develop mortgage backed securities
are applied to a broad range of assets. Through the use of trusts and special
purpose corporations, various types of assets, including automobile and credit
card receivables, commercial loans and related assets, and debt obligations, are
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a pay-through structure similar to the CMO
structure. Asset backed securities are typically bought or sold from or to the
same entities that act as primary dealers in U.S. government securities. The
Fund may invest in these and other types of asset backed securities that may be
developed in the future. Although under current market conditions the Fund will
not purchase asset backed securities initially, if cost and yield considerations
become favorable in the future, the Fund will consider purchasing such
securities, and such securities may represent more than 5% of the Fund's assets
in the later years of the Fund.
In general, the collateral supporting asset backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. As with mortgage backed securities, asset backed securities are
often backed by a pool of assets representing the obligations of a number of
different parties. Investments in asset backed securities that cannot be
disposed promptly within seven days and in the usual course of business without
taking a reduced price will be considered illiquid and limited to an amount
which, together with other illiquid investments, does not exceed 10% of the
value of the Fund's total assets.
Asset backed securities present certain risks that are not presented by
mortgage backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured, and debtors are entitled to the protection of various
state and Federal consumer protection laws. Some of those laws give a right of
set off, which may reduce the balance due. Most issuers of asset backed
securities backed by automobile receivables permit the servicers of such
receivables to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related asset backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Commercial loans and related assets may be secured or unsecured and are
subject to credit, liquidity and interest rate risks. In addition, various laws
enacted for the protection of creditors may apply to obligors under the
commercial loans or related assets. Such laws may adversely affect asset backed
securities secured by commercial loans and related assets in the event of the
bankruptcy or insolvency of obligors of such assets.
Certain of the asset backed securities purchased by the Fund may be backed
by the guarantee of the SBA or issued in programs originated by the RTC. The SBA
is an independent agency of the U.S. established by the Small Business Act of
1953. The SBA was organized primarily to assist independently owned and operated
businesses that are not dominant in their respective markets. The SBA provides
financial assistance, management counseling and training for small businesses,
as well as acting generally
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as an advocate of small businesses. The RTC is an agency of the U.S. government
created in 1989 to merge or close certain insolvent savings and loan
associations.
The SBA guarantees the payment of principal and interest on portions of
loans made by private lenders to certain small businesses. The loans are
generally commercial loans such as working capital loans and equipment loans.
The SBA is authorized to issue from time to time, through its fiscal and
transfer agent, SBA-guaranteed participation certificates evidencing fractional
undivided interests in pools of these SBA guaranteed portions of loans made by
private lenders. The SBA's guarantee of such certificates, and its guarantee of
a portion of the underlying loan, are backed by the full faith and credit of the
U.S.
TYPES OF CREDIT ENHANCEMENTS
Mortgage backed securities and asset backed securities are often backed by
a pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit enhancements. These
credit enhancements may offer two types of protection: (i) liquidity protection
and (ii) protection against losses resulting from ultimate default by an obligor
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The Fund will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.
Credit enhancements can come from external providers such as banks or
financial insurance companies. Alternatively, they may come from the structure
of a transaction itself. Examples of credit support arising out of the structure
of the transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that defaults
on the underlying assets are borne first by the holders of the subordinated
class), creation of "reserve funds" (where cash or investments, sometimes funded
from a portion of the payments on the underlying assets, are held in reserve
against future losses) and "overcollateralization" (where the scheduled payments
on, or the principal amount of, the underlying assets exceeds that required to
make payment of the securities and pay any servicing or other fees). The degree
of credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue. In addition, the Fund may
purchase subordinated securities which, as noted above, may serve as a form of
credit support for senior securities purchased by other investors. In purchasing
securities for the Fund, the Investment Adviser will take into account not only
the creditworthiness of the issuer of the securities, but also the
creditworthiness of the provider of any external credit enhancement of the
securities.
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CORPORATE DEBT SECURITIES
Corporations issue debt securities of various types, including bonds and
debentures (which are long term), notes (which may be short-term or long-term),
certificates of deposit (unsecured borrowings by banks), bankers' acceptances
(indirectly secured borrowings to facilitate commercial transactions) and
commercial paper (short-term unsecured notes). These securities typically
provide for periodic payments of interest, which may be adjustable or fixed rate
with payment of principal upon maturity and are generally not secured by assets
of the issuer or otherwise guaranteed. Adjustable rate corporate debt securities
may have interest rate caps and floors as well as other features similar to
those of mortgage backed securities, but such corporate debt securities are not
subject to prepayment risk other than through contractual redemption provisions
which generally impose a penalty on the issuer for prepayment. Fixed rate debt
securities also may be subject to redemption provisions. The Fund expects to
purchase corporate debt securities rated at the time of investment no lower than
BBB- by S&P or Baa3 by Moody's that have final maturities approximately equal to
the termination date of the Fund. The rating of a corporate debt security may
change over time, as S&P and Moody's monitor and evaluate the ratings assigned
to corporate debt securities on an ongoing basis. As a result, corporate debt
securities held by the Fund could receive a higher rating (which would tend to
increase their value) or a lower rating (which would tend to decrease their
value) during the time that they are owned by the Fund. If a security owned by
the Fund is downgraded below either BBB- by S&P or Baa3 by Moody's, the
Investment Adviser will monitor such security and determine whether to sell it
based on the factors it considers relevant such as the remaining term of the
Fund, size of the investment, whether a loss or gain will result, relative risk
to the Fund, depth of the trading market or any other relevant factors.
The Fund also may invest in zero coupon securities of corporate issuers,
which are debt obligations that do not entitle the holder to any periodic
payments prior to maturity and therefore are issued and traded at a discount
from their face amounts. The market prices of zero coupon securities are more
volatile than the market prices of securities of comparable quality and similar
maturity that pay interest periodically and may respond to a greater degree to
fluctuations in interest rates than do such non-zero coupon securities.
MUNICIPAL SECURITIES
Municipal securities include debt obligations issued to obtain funds for
various public purposes, including construction and equipping of a wide range of
public facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public or private institutions for
the construction of facilities. In addition, certain types of private activity
bonds ("PABs") are issued by or on behalf of public authorities to finance
various privately operated facilities including airports, public ports, mass
commuting facilities, multifamily housing projects, as well as facilities for
water supply, gas, electricity, sewage or solid waste disposal.
The two principal classifications of the debt obligations of municipal
issuers are "general obligation" and "revenue" bonds which latter category
includes PABs and, for bonds issued on or before August 15, 1986, industrial
development bonds or "IDBs." General obligation bonds are typically secured by
the issuer's pledge of faith, credit and taxing power for the payment of
principal and interest. Revenue or special obligation bonds typically are
payable only from the revenues derived from a particular facility or
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class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source such as from the users of the facility being
financed. PABs are in most cases revenue bonds and do not generally constitute
the pledge of the credit or taxing power of the issuer of such bonds. The
repayment of principal and the payment of interest on revenue bonds depends
solely on the ability of the user of the facility financed by the bonds to meet
its financial obligations and the pledge, if any, of real and personal property
so financed as security for such payment. Municipal bonds may also include
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state of municipality in question. There are variations
in the security and credit quality of municipal obligations, both within a
particular classification and between classifications, depending on numerous
factors. The yields and market values of municipal obligations are dependent on
a variety of factors, including general economic and monetary conditions, money
market factors, conditions of the municipal obligation market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The income from municipal securities is generally exempt from Federal taxation
which generally causes such securities to have lower yields than taxable
securities of comparable quality and maturity.
The Fund also may invest in zero coupon securities of municipal issuers,
which are debt obligations that do not entitle the holder to any periodic
payments prior to maturity and therefore are issued and traded at a discount
from their face amounts. The market prices of zero coupon municipal securities
are more volatile than the market prices of municipal securities of comparable
quality and similar maturity that pay interest periodically and may respond to a
greater degree to fluctuations in interest rates than do such non-zero coupon
municipal securities. Because accrued income on zero coupon securities of
municipal issuers is generally not taxable to holders, zero coupon securities of
municipal issuers have lower yields than other zero coupon securities.
The Fund currently does not expect that it will invest more than 5% of its
total assets in municipal securities, including zero coupon municipal
securities, at any time during the term of the Fund.
OTHER INVESTMENT POLICIES
Reference is made to the discussion under the caption "Other Investment
Policies -- Portfolio Strategies Involving Interest Rate Transactions, Options
and Futures" above for additional information with respect to such portfolio
strategies.
INTEREST RATE TRANSACTIONS
In order to hedge the value of the Fund's portfolio against interest rate
fluctuations or to enhance the Fund's income the Fund may enter into various
interest rate transactions, such as interest rate swaps and the purchase or sale
of interest rate caps and floors. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions primarily as a hedge and not as a speculative investment.
However, the Fund may also invest in interest rate swaps to enhance income or
increase the Fund's yield, for example,
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during periods of steep interest rate yield curves (i.e., wide differences
between short term and long term interest rates).
In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Fund holds a debt
instrument with an interest rate that is reset only once each year, it may swap
the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset every week. This would enable the Fund to
offset a decline in the value of the debt instrument due to rising interest
rates but would also limit its ability to benefit from falling interest rates.
Conversely, if the Fund holds a debt instrument with an interest rate that is
reset every week and it would like to lock in what it believes to be a high
interest rate for one year, it may swap the right to receive interest at this
variable weekly rate for the right to receive interest at a rate that is fixed
for one year. Such a swap would protect the Fund from a reduction in yield due
to falling interest rates and may permit the Fund to enhance its income through
the positive differential between one week and one year interest rates, but
would preclude it from taking full advantage of rising interest rates.
The Fund usually will enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and an amount of cash
or liquid instruments having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If the interest rate swap transaction is entered into on other than a
net basis, the full amount of the Fund's obligations will be accrued on a daily
basis, and the full amount of the Fund's obligations will be maintained in a
segregated account by the Fund's custodian.
The Fund may also engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (the reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index
and the predetermined rate on a notional principal amount from the party selling
such interest rate floor. The Fund will not enter into caps or floors if, on a
net basis, the aggregate notional principal amount with respect to such
agreements exceeds the net assets of the Fund.
Typically, the parties with which the Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. The Fund
will not enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated investment grade quality by at least one nationally recognized statistical
rating organization at the time of entering into such transaction or whose
creditworthiness is believed by the Investment Adviser to be equivalent to such
rating. If there is a default by the other party to such a transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has
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become relatively liquid in comparison with other similar instruments traded in
the interbank market. Caps and floors, however, are more recent innovations and
are less liquid than swaps. Certain Federal income tax requirements may limit
the Fund's ability to engage in certain interest rate transactions. Gains from
transactions in interest rate swaps distributed to shareholders will be taxable
as ordinary income or, in certain circumstances, as long-term capital gains to
shareholders. See "Taxes."
OPTIONS ON PORTFOLIO SECURITIES
Call Option 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 underlying security declining. The
Fund may also purchase and sell call options on indices. Index options are
similar to options on securities except that, rather than taking or making
delivery of securities underlying the option at a specified price upon exercise,
an index option gives the holder the right to receive cash upon exercise of the
option if the level of the index upon which the option is based is greater than
the exercise price of the option.
Put Options on Portfolio Securities. The Fund is authorized to purchase
put options to hedge against a decline in the value of its securities. By buying
a put option, the Fund has a right to sell the underlying security at the
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. The
Fund also has authority to write (i.e., sell) put options on the types of
securities which may be held by the Fund, provided that such put options are
covered, meaning that such options are secured by segregated, liquid
instruments. The Fund will receive a premium for writing a put option, which
increases the Fund's return. The Fund will not sell puts if, as a result, more
than 50% of the Fund's assets would be required to cover its potential
obligations under its hedging and other investment transactions. The Fund may
purchase and sell put options on indices. Index options are similar to options
on securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option gives
the holder the right to receive cash upon exercise of
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the option if the level of the index upon which the option is based is less than
the exercise price of the option.
FINANCIAL FUTURES AND OPTIONS THEREON
The Fund is authorized to engage in transactions in financial futures
contracts ("futures contracts") and related options on such futures contracts
either as a hedge against adverse changes in the market value of its portfolio
securities and interest rates or to enhance the Fund's income. A futures
contract is an agreement between two parties which obligates the purchaser of
the futures contract to buy and the seller of a futures contract to sell a
security for a set price on a future date or, in the case of an index futures
contract to make and accept a cash settlement based upon the difference in value
of the index between the time the contract was entered into and the time of its
settlement. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which have
been designated "contract markets" by the Commodities Futures Trading Commission
("CFTC"). Transactions by the Fund in futures contracts and financial futures
are subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell financial futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market values of securities which may be held by the Fund will fall,
thus reducing the net asset value of the Fund. However, as interest rates rise,
the value of the Fund's short position in the futures contract will also tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of the Fund's investments which are being hedged. While the Fund will
incur commission expenses in selling and closing out futures positions, these
commissions are generally less than the transaction expenses which the Fund
would have incurred had the Fund sold portfolio securities in order to reduce
its exposure to increases in interest rates. The Fund also may purchase
financial futures contracts in anticipation of a decline in interest rates when
it is not fully invested in a particular market in which it intends to make
investments to gain market exposure that may in part or entirely offset an
increase in the cost of securities it intends to purchase. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
securities upon termination of the futures contract.
The Fund also has authority to purchase and write call and put options on
futures contracts. Generally, these strategies are used under the same market
and market sector conditions (i.e., conditions relating to specific types of
investments) in which the Fund enters into futures transactions. The Fund may
purchase put options or write call options on futures contracts rather than
selling the underlying futures contract in anticipation of a decrease in the
market value of securities or an increase in interest rates. Similarly, the Fund
may purchase call options, or write put options on futures contracts, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value or a decline in interest rates of
securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on exchanges and
options in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligation is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price
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and terms negotiated by the buyer and seller. See "Restrictions on OTC Options"
below for information as to restrictions on the use of OTC options.
Restrictions on the Use of Futures Transactions. Under regulations of the
CFTC, the futures trading activity described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any such
contracts and options. Margin deposits may consist of cash or securities
acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash or liquid instruments will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of variation margin held in the account of its
broker, equals the market value of the futures contract, thereby ensuring that
the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers which have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million. OTC options and assets used to cover OTC options written by the Fund
are considered by the staff of the Commission to be illiquid. The illiquidity of
such options or assets may prevent a successful sale of such options or assets,
result in a delay of sale, or reduce the amount of proceeds that might otherwise
be realized.
RISK FACTORS IN INTEREST RATE TRANSACTIONS AND OPTIONS AND FUTURES TRANSACTIONS
The use of interest rate transactions is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Interest rate transactions
involve the risk of an imperfect correlation between the index used in the
hedging transaction and that pertaining to the securities which are the subject
of such transaction. If the Investment Adviser is incorrect in its forecasts of
market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it would have been if
these investment techniques were not used. In addition, interest rate
transactions that may be entered into by the Fund do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the
security underlying an interest rate swap is prepaid and the Fund continues to
be obligated to make payments to the other party to the swap, the Fund would
have to make such payments from another source. If the other party to an
interest rate swap defaults, the Fund's risk of loss consists of the net amount
of interest payments that the Fund contractually is entitled to receive. In the
case of a purchase by the Fund of an interest rate cap or floor, the amount of
loss is limited to the fee paid. Since interest rate transactions are
individually negotiated, the Investment Adviser expects to achieve an acceptable
degree of correlation between the Fund's rights to receive interest on
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps.
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Utilization of options and futures transactions to hedge the portfolio
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the prices of the securities which are the subject
of the hedge. If the price of the options or futures moves more or less than the
price of the subject of the hedge, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. This risk particularly applies to the Fund's use of futures and options
thereon since it will generally use such instruments as a so-called
"cross-hedge," which means that the security that is the subject of the futures
contract is different from the security being hedged by the contract.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if them appears to be a liquid
secondary market for such options or futures. However, there can be no assurance
that a liquid secondary market will exist at any specific time. Thus, it may not
be possible to close an options or futures position. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge its portfolio. There is also the risk of loss by
the Fund of margin deposits or collateral in the event of bankruptcy of a broker
with whom the Fund has an open position in an option, a futures contract or an
option related to a futures contract.
I-12
<PAGE> 59
APPENDIX II
ISSUE CREDIT RATINGS OF CORPORATE DEBT SECURITIES
(INCLUDING MORTGAGE BACKED AND ASSET BACKED SECURITIES)
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation.
It takes into consideration the creditworthiness of guarantors, insurers or
other forms of credit enhancement on the obligation. The issue credit rating is
not a recommendation to purchase, sell or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
Issue credit ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended or withdrawn as a result of changes in,
or unavailability of, such information, or based on other circumstances.
Long-term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations: (1) likelihood of payment -- capacity and willingness of the
obligor to meet its financial commitment on an obligation in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA An obligation rated AAA has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the highest rated issues only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. The obligor's capacity to
meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.
Short-term Issue Credit Ratings
A-1 A short-term obligation rated A-1 is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within this
category, certain obligations are designated with a plus sign
(+).
II-1
<PAGE> 60
This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") RATINGS
Long-term Ratings
AAA Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Baa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
II-2
<PAGE> 61
Short-term ratings
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
II-3
<PAGE> 62
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<PAGE> 63
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<PAGE> 64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including March , 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
INCOME OPPORTUNITIES FUND 2006, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
DECEMBER , 1999
CODE -19075-1199
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 65
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets, Liabilities and Capital as of , 1999
Notes to Statement of Assets, Liabilities and Capital as of ,
1999
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
(a) -- Articles of Incorporation of the Fund(a)
(b) -- By-Laws of the Fund(a)
(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 common
stock of the Fund(b)
(d)(2) -- Form of specimen certificate for shares of common stock of
the Fund*
(e) -- Form of Dividend Reinvestment Plan
(f) -- Not applicable
(g) -- Form of Investment Advisory Agreement between the Fund and
Fund Asset Management, L.P. (the "Investment Adviser")
(h)(1) -- Form of Purchase Agreement between the Fund and Merrill
Lynch, Pierce, Fenner & Smith Incorporated
(h)(2) -- Merrill Lynch Standard Dealer Agreement
(i) -- Not applicable
(j) -- Form of Custodian Contract between the Fund and The Bank of
New York
(k) -- Form of Registrar, Transfer Agency and Service Agreement
between the Fund and The Bank of New York
(1) -- Opinion and Consent of Brown & Wood LLP*
(m) -- Not applicable
(n) -- Consent of , independent auditors for the Fund*
(o) -- Not applicable
(p) -- Certificate of Fund Asset Management, L.P.*
(q) -- Not applicable
(r) -- Not applicable
</TABLE>
- ------------
(a) Filed on October 12, 1999 as an Exhibit to the Registrant's Registration
Statement on Form N-2 (File No. 333-88821).
(b) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit (a) to
this Registration Statement; and to Article II, Article III (sections 1, 2,
3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and Article
XIV of the Registrant's By-Laws, filed as Exhibit (b) to this Registration
Statement.
* To be provided by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibits (h)(1) and (2).
C-1
<PAGE> 66
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement
<TABLE>
<S> <C>
Registration fees........................................... $ *
New York Stock Exchange listing fee......................... *
Printing (other than stock certificates).................... *
Engraving and printing stock certificates................... *
Legal fees and expenses..................................... *
NASD fees................................................... *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ------------
* To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Stock" and in Note I 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)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment Advisory
Agreement, a form of which is filed as Exhibit (g)(1) to this Registration
Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Reference also 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 THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of
MLAM, acts as investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust,
C-2
<PAGE> 67
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., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, 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
Insured Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Insured
Fund III, Inc., MuniHoldings Insured Fund IV, Inc., MuniHoldings Michigan
Insured Fund, Inc., MuniHoldings Michigan Insured Fund II, Inc., MuniHoldings
New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc.,
MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings New Jersey Insured
Fund IV, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York Insured
Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York
Insured Fund III, Inc., MuniHoldings New York Insured Fund IV, Inc.,
MuniHoldings Pennsylvania Insured Fund, MuniInsured Fund, Inc., MuniVest Florida
Fund, MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., and
Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, 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 Index Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLAM); and for the
C-3
<PAGE> 68
following closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc.,
Merrill Lynch Senior Floating Rate Fund II, Inc. and The S&P 500(R) Protected
Equity Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Equity Portfolio, two investment portfolios of
EQ Advisors Trust.
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 02111-2665. The
address of the Investment Adviser, MLAM, 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, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1201.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged for
the past two years for his or her or its own account or in the capacity of
director, officer, employee, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Treasurer of all or substantially all of the
investment companies described in the first two paragraphs of this Item 30 and
also hold the same positions with all or substantially all of the investment
companies advised by MLAM as they do with those advised by the Investment
Adviser. Messrs. Giordano, Kirstein and Monagle are officers of one or more of
such companies.
<TABLE>
<CAPTION>
POSITIONS 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 MLAM
Jeffrey M. Peek................... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML & Co.;
Managing Director and Co-Head of the
Investment Banking Division of Merrill
Lynch in 1997; Senior Vice President and
Director of the Global Securities and
Economics Division of Merrill Lynch from
1995 to 1997.
Terry K. Glenn.................... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director of
Princeton Services; President and
Director of PFD; Director of Financial
Data Services, Inc.; President of
Princeton Administrators, L.P.
Gregory A. Bundy.................. Chief Operating Officer Chief Operating Officer Managing
and Managing Director Director of MLAM; Chief Operating
Officer and Managing Director of
Princeton Services; G-CEO of Merrill
Lynch Australia from 1997 to 1999
</TABLE>
C-4
<PAGE> 69
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<S> <C> <C>
Donald C. Burke................... Senior Vice President, Senior Vice President, Treasurer and
Treasurer and Director Director of Taxation of MLAM; Senior
of Taxation 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
Michael G. Clark.................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Director and Treasurer of PFD; First
Vice President of MLAM from 1997 to
1999; Vice President of MLAM from
1996-1997
Robert C. Doll.................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999
Linda L. Federici................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano............... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel............ Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President of Princeton Services
Philip L. Kirstein................ Senior Vice President Senior Vice President of MLAM; Senior
Vice President, General Counsel,
Director and Secretary of Princeton
Services
Debra W. Landsman-Yaros........... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of PFD
Stephen M. M. Miller.............. Senior Vice President Executive Vice President of Princeton
Administrators, L.P., Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. ........... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Brian A. Murdock.................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gregory D. Upah................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
C-5
<PAGE> 70
ITEM 33. UNDERTAKINGS.
1. 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% 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.
2. Registrant undertakes that
a) 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.
b) 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> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Plainsboro, and State of New Jersey, on the 17th
day of November, 1999.
INCOME OPPORTUNITIES FUND 2006, 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 and Joseph T. Monagle, Jr., 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 person in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ TERRY K. GLENN President (Principal Executive November 17, 1999
- ------------------------------------------------ Officer) and Director
(Terry K. Glenn)
/s/ DONALD C. BURKE Treasurer (Principal Financial November 17, 1999
- ------------------------------------------------ and Accounting Officer)
(Donald C. Burke)
/s/ JOE GRILLS Director November 17, 1999
- ------------------------------------------------
(Joe Grills)
/s/ WALTER MINTZ Director November 17, 1999
- ------------------------------------------------
(Walter Mintz)
/s/ ROBERT S. SALOMON, JR. Director November 17, 1999
- ------------------------------------------------
(Robert S. Salomon, Jr.)
/s/ MELVIN R. SEIDEN Director November 17, 1999
- ------------------------------------------------
(Melvin R. Seiden)
/s/ STEPHEN B. SWENSRUD Director November 17, 1999
- ------------------------------------------------
(Stephen B. Swensrud)
/s/ ARTHUR ZEIKEL Director November 17, 1999
- ------------------------------------------------
(Arthur Zeikel)
</TABLE>
C-7
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
(e) -- Form of Dividend Reinvestment Plan
(g) -- Form of Investment Advisory Agreement between the Fund and
Fund Asset Management, L.P. (the "Investment Adviser")
(h)(1) -- Form of Purchase Agreement between the Fund and Merrill
Lynch, Pierce, Fenner & Smith Incorporated
(h)(2) -- Merrill Lynch Standard Dealer Agreement
(j) -- Form of Custodian Contract between the Fund and The Bank of
New York
(k) -- Form of Registrar, Transfer Agency and Service Agreement
between the Fund and The Bank of New York
</TABLE>
C-8
<PAGE> 1
EXHIBIT (e)
INCOME OPPORTUNITIES FUND 2006, INC.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, _______, will act as Agent for me, and
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present shares of common stock, par value $.10 per share
("Common Stock"), of INCOME OPPORTUNITIES FUND 2006, INC. (the "Fund") are
registered and will automatically put into effect for me the dividend
reinvestment option of the Plan as of the first record date for a dividend or
capital gains distribution (collectively referred to herein as a "dividend"),
payable at the election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan
constitutes an election by me to receive dividends in shares of Common Stock
whenever the Fund declares a dividend. In such event, the dividend amount shall
automatically be made payable to me entirely in shares of Common Stock which
shall be acquired by the Agent for my account by purchase of outstanding shares
of Common Stock on the open market ("open-market purchases") as described in
paragraph 4.
3. Purchase Period for Open-Market Purchases. The Agent shall have
until the last business day before the next ex-dividend date with respect to the
shares of Common Stock or in no event more than 30 days after the valuation date
(the "last purchase date") to invest the dividend amount in shares acquired in
open-market purchases except where temporary curtailment or suspension of
purchases is necessary to comply with applicable provisions of Federal
securities laws.
4. Manner of Making Open-Market Purchases. You shall apply the dividend
amount on my shares (less my pro rata share of brokerage commissions incurred
with respect to your open-market purchases) to the purchase on the open-market
of shares of the Common Stock for my account. Open-market purchases may be made
on any securities exchange where the Common Stock is traded, in the
over-the-counter market or in negotiated transactions and may be on such terms
as to price, delivery and otherwise as you shall determine. My funds held by you
uninvested will not bear interest, and it is understood that, in any event, you
shall have no liability in connection with any inability to purchase shares
within 30 days after the initial date of such purchase as herein provided or
with the timing of any purchases affected. You shall have no responsibility as
to the value of the Common Stock acquired for my account. For the purposes of
cash investments you may commingle my funds with those of other shareholders of
the Fund for whom you similarly act as Agent, and the average price (including
brokerage commissions) of all shares purchased by you as Agent in the open
market shall be the price per share allocable to me in connection with
open-market purchases.
5. Registration of Shares Acquired Pursuant to the Plan. You may hold
my shares of Common Stock acquired pursuant to the Plan, together with the
shares of other shareholders of the Fund acquired pursuant to the Plan, in
noncertificated form in your name or that of your
1
<PAGE> 2
nominee. You will forward to me any proxy solicitation material and will vote
any shares so held for me only in accordance with the proxy returned by me to
the Fund. Upon my written request, you will deliver to me, without charge, a
certificate or certificates for the full shares held by you for my account.
6. Confirmations. You will confirm to me each acquisition made for my
account as soon as practicable but not later than 60 days after the date
thereof.
7. Fractional Interests. Although I may from time to time have an
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
8. Stock Dividends or Share Purchase Rights. Any stock dividends or
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
9. Service Fee. Your service fee for handling capital gains
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open-market purchases.
10. Termination of Account. I may terminate my account under the Plan
by notifying you in writing. Such termination will be effective immediately if
my notice is received by you not less than ten days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first trading day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be terminated
by you or the Fund upon notice in writing mailed to me at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any termination you will cause a certificate or certificates for the full
shares held for me under the Plan and cash adjustment for any fraction to be
delivered to me without charge. If I elect by notice to you in writing in
advance of such termination to have you sell part or all of my shares and remit
the proceeds to me, you are authorized to deduct brokerage commissions for this
transaction from the proceeds.
11. Amendment of Plan. These terms and conditions may be amended or
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions,
2
<PAGE> 3
the Fund will be authorized to pay to such successor Agent, for my account, all
dividends and distributions payable on Common Stock of the Fund held in my name
or under the Plan for retention or application by such successor Agent as
provided in these terms and conditions.
12. Extent of Responsibility of Agent. You shall at all times act in
good faith and agree to use your best efforts within reasonable limits to ensure
the accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall not be liable for loss or
damage due to errors unless such error is caused by your negligence, bad faith,
or will willful misconduct or that of your employees.
13. Governing Law. These terms and conditions shall be governed by the
laws of the State of New York without regard to its conflicts of laws
provisions.
3
<PAGE> 1
EXHIBIT (g)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the day of , 1999, by and between
INCOME OPPORTUNITIES FUND 2006, INC., a Maryland corporation (the "Fund"), and
FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (the "Investment
Adviser").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as a closed-end, diversified,
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE> 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 shareholder accounts and handling shareholder 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 shareholder 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
2
<PAGE> 3
shall monitor the Fund's compliance with investment policies and restrictions as
set forth in 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
3
<PAGE> 4
above, and in particular to place all orders for the purchase or sale of
portfolio securities for the Fund's account with brokers or dealers selected by
it, and to that end, the Investment Adviser is authorized as the agent of the
Fund to give instructions to the custodian of the Fund as to deliveries of
securities and payments of cash for the account of the Fund. In connection with
the selection of such brokers or dealers and the placing of such orders with
respect to assets of the Fund, the Investment Adviser is directed at all times
to seek to obtain execution and prices within the policy guidelines determined
by the Board of Directors and set forth in filings made by the Fund under the
Federal securities laws. Subject to this requirement and the provisions of the
Investment Company Act, the Securities Exchange Act of 1934, as amended, and
other applicable provisions of law, the Investment Adviser may select brokers or
dealers with which it or the Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
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
4
<PAGE> 5
compensation of officers of the Fund and all Directors of the Fund who are
affiliated persons of the Investment Adviser.
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
other expenses of the Fund including, without limitation: taxes, expenses for
legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses, charges of the custodian, any
sub-custodian and transfer agent, expenses of portfolio transactions, Securities
and Exchange Commission fees, expenses of registering the shares of the Fund
under Federal, state and foreign laws, fees and actual out-of-pocket expenses of
Directors who are not affiliated persons of the Investment Adviser, accounting
and pricing costs (including the calculation of the net asset value), insurance,
interest, brokerage costs, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Fund. It also is understood
that the Fund will reimburse the Investment Adviser for its costs incurred in
providing accounting services to the Fund.
ARTICLE III
Compensation of the Investment Adviser
(a) Investment Advisory Fee. For the services rendered, the facilities
furnished and the expenses assumed by the Investment Adviser, the Fund shall pay
to the Investment Adviser at the end of each calendar month a fee based upon the
average weekly value of the net assets of the Fund at the annual rate of 0.75 of
1.0% (0.75%) of the average weekly net assets of the Fund from the effective
date of this Agreement through December 31, 2001, 0.65 of 1.0% (0.65%) of the
average weekly net assets of the Fund from January 1, 2002 through December 31,
2004, and 0.55 of 1.0% (0.55%) of the average weekly net assets of the Fund from
January 1, 2005 through termination of the Fund. (The "average weekly net
assets" of the Fund means the average
5
<PAGE> 6
weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund.) For purposes of this calculation, average weekly net
assets are determined at the end of each month on the basis of the average net
assets of the Fund for each week during the month. The assets for each weekly
period are determined by averaging the net assets at the last business day of a
week with the net assets at the last business day of the prior week. If this
Agreement becomes effective subsequent to the first day of a month or shall
terminate before the last day of a month, compensation for that part of the
month this Agreement is in effect shall be prorated in a manner consistent with
the calculation of the fee as set forth above. Subject to the provisions of
subsection (b) hereof, payment of the Investment Adviser's compensation for the
preceding month shall be made as promptly as possible after completion of the
computations contemplated by subsection (b) hereof. During any period when the
determination of net asset value is suspended by the Board of Directors, the
average net asset value of a share for the last week prior to such suspension
shall for this purpose shall be deemed to be the net asset value at the close of
each succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the
Fund, including amounts payable to the Investment Adviser pursuant to subsection
(a) hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its 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
6
<PAGE> 7
expenses (including but not limited to legal claims and liabilities and
litigation costs and any indemnification related thereto) paid or payable by the
Fund. Whenever the expenses of the Fund exceed a pro rata portion of the
applicable annual expense limitations, the estimated amount of reimbursement
under such limitations shall be applicable as an offset against the monthly
payment of the fee due to the Investment Adviser. Should two or more such
expense limitations be applicable as at the end of the last business day of the
month, that expense limitation which results in the largest reduction in the
Investment Adviser's fee shall be applicable.
ARTICLE IV
Limitation of Liability of the Investment Adviser
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
Activities of the Investment Adviser
The services of the Investment Adviser to the Fund are not to be deemed
to be exclusive; the Investment Adviser and any person controlled by or under
common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") are free to render services to others. It is
understood that Directors, officers, employees and shareholders of the
7
<PAGE> 8
Fund are or may become interested in the Investment Adviser and its affiliates,
as directors, officers, employees, partners and shareholders or otherwise, and
that directors, officers, employees, partners and shareholders of the Investment
Adviser and of its affiliates are or may become similarly interested in the
Fund, and that the Investment Adviser and directors, officers, employees,
partners and shareholders of its affiliates may become interested in the Fund as
shareholders or otherwise.
ARTICLE VI
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until two years after the date first above
written, and thereafter until termination of the Fund, but only so long as such
continuance specifically is approved at least annually by (i) the Board of
Directors of the Fund, or by the vote of a majority of the outstanding voting
securities of the Fund, and (ii) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund, or by the Investment Adviser, on
sixty (60) days' written notice to the other party. This Agreement shall
terminate automatically in the event of its assignment.
ARTICLE VII
Amendment of this Agreement
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a
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<PAGE> 9
majority of those Directors who are not parties to this Agreement or interested
persons of any such party cast in person at a meeting called for the purpose of
voting on such approval.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws of the State of
New York, or any of the provisions herein, conflict with the applicable
provisions of the Investment Company Act, the latter shall control.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
INCOME OPPORTUNITIES FUND 2006, INC.
By: ______________________________
Authorized Signatory
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
10
<PAGE> 1
EXHIBIT (h)(1)
INCOME OPPORTUNITIES FUND 2006, INC.
(A MARYLAND CORPORATION)
SHARES OF COMMON STOCK
PURCHASE AGREEMENT
Dated:
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1. Representations and Warranties............................................................... 2
(a) Representations and Warranties by the Fund and the Adviser............................ 2
(b) Additional Representations of the Adviser............................................. 7
(c) Officer's Certificates................................................................ 7
SECTION 2. Sale and Delivery to the Underwriter; Closing................................................ 7
(a) Initial Shares........................................................................ 7
(b) Option Shares......................................................................... 8
(c) Payment............................................................................... 8
(d) Denominations; Registration........................................................... 8
SECTION 3. Covenants of the Fund........................................................................ 9
(a) Compliance with Securities Regulations and Commission Requests........................ 9
(b) Filing of Amendments.................................................................. 9
(c) Delivery of Registration Statements................................................... 9
(d) Delivery of Prospectus................................................................ 10
(e) Continued Compliance with Securities Laws............................................. 10
(f) Blue Sky Qualifications............................................................... 10
(g) Rule 158.............................................................................. 10
(h) Use of Proceeds....................................................................... 11
(i) Subchapter M.......................................................................... 11
(j) Listing............................................................................... 11
(k) Restrictions on Sale of Shares........................................................ 11
SECTION 4. Payment of Expenses.......................................................................... 11
(a) Expenses.............................................................................. 11
(b) Termination of Agreement.............................................................. 12
SECTION 5. Conditions of Underwriter's Obligations...................................................... 12
(a) Effectiveness of Registration Statement............................................... 12
(b) Opinion of Counsel for the Fund and the Underwriter................................... 12
(c) Opinion of General Counsel of the Adviser............................................. 12
(d) Officers' Certificates................................................................ 12
(e) Accountant's Comfort Letter........................................................... 13
(f) Bring-down Comfort Letter............................................................. 13
(g) Approval of Listing................................................................... 13
(h) No Objection.......................................................................... 13
(i) Conditions to Purchase Option Shares.................................................. 13
(j) Additional Documents.................................................................. 14
(k) Termination of Agreement.............................................................. 14
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 6. Indemnification.............................................................................. 14
(a) Indemnification of the Underwriter.................................................... 14
(b) Indemnification of Fund, Adviser, Directors, General Partner and Officers............. 15
(c) Actions against Parties, Notification................................................. 15
(d) Settlement without Consent if Failure to Reimburse.................................... 16
SECTION 7. Contribution................................................................................. 16
SECTION 8. Representations, Warranties and Agreements to Survive Delivery............................... 17
SECTION 9. Termination of Agreement..................................................................... 18
(a) Termination; General.................................................................. 18
(b) Liabilities........................................................................... 18
SECTION 10. Notices..................................................................................... 18
SECTION 11. Parties..................................................................................... 18
SECTION 12. Governing Law and Time...................................................................... 19
SECTION 13. Effect of Headings.......................................................................... 19
SCHEDULE A. ............................................................................................ 21
</TABLE>
EXHIBITS
Exhibit A - Form of Opinion of Fund's Counsel
Exhibit B - Form of Opinion of General Counsel of the Investment Adviser
Exhibit C - Form of Accountant's Comfort Letter
ii
<PAGE> 4
INCOME OPPORTUNITIES FUND 2006, INC.
(a Maryland corporation)
Shares of Common Stock
(Par Value $.10 Per Share)
PURCHASE AGREEMENT
, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1201
Ladies and Gentlemen:
Income Opportunities Fund 2006, Inc., a Maryland corporation (the
"Fund"), and Fund Asset Management, L.P., a Delaware limited partnership (the
"Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the
issue and sale by the Fund and the purchase by the Underwriter of shares
of common stock, par value $.10 per share, of the Fund (the "Common Stock"),
and, with respect to the grant by the Fund to the Underwriter of the option
described in Section 2(b) hereof to purchase all or any part of
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid shares of Common Stock (the "Initial Shares") to be purchased
by the Underwriter and all or any part of the shares of Common Stock subject to
the option described in Section 2(b) hereof (the "Option Shares"), are
hereinafter called, collectively, the "Shares."
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after this
Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No.
333- ), including the related preliminary prospectus, for the registration
of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), the
Investment Company Act, and the rules and regulations of the Commission under
the 1933 Act and the Investment Company Act (together, the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such
<PAGE> 5
amended preliminary prospectuses as may have been required to the date hereof.
Promptly after execution and delivery of this Agreement, the Fund will either
(i) prepare and file a prospectus in accordance with the provisions of paragraph
(c) of Rule 497 ("Rule 497(c)") of the rules and regulations of the Commission
under the 1933 Act (the "1933 Act Regulations") or a certificate in accordance
with the provisions of paragraph (j) of Rule 497 ("Rule 497(j)") of the 1933 Act
Regulations, (ii) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the 1933 Act Regulations and paragraph
(h) of Rule 497 ("Rule 497(h)") of the 1933 Act Regulations, or (iii) if the
Fund has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations,
prepare and file a term sheet (a "Term Sheet") in accordance with the provisions
of Rule 434 and Rule 497(h). The information included in any such prospectus or
in any such Term Sheet, as the case may be, that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective (a) pursuant
to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information."
Each prospectus used before such registration statement became effective, and
any prospectus that omitted, as applicable, the Rule 430A Information or the
Rule 434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto, if any, at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus in the form first furnished to the Underwriter for use in connection
with the offering of the Shares is herein called the "Prospectus." If Rule 434
is relied on, the term "Prospectus" shall refer to the preliminary prospectus
dated August 19, 1999, together with the applicable Term Sheet and all
references in this Agreement to the date of such Prospectus shall mean the date
of the applicable Term Sheet. For purposes of this Agreement, all references to
the Registration Statement, any preliminary prospectus, the Prospectus, or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Fund and the Adviser. The
Fund and the Adviser each severally represents and warrants to the Underwriter
as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof
and as of the Date of Delivery (if any) referred to in Section 2(b) hereof, and
agrees with the Underwriter, as follows:
2
<PAGE> 6
(i) Compliance with Registration Requirements. The Fund meets
the requirements for use of Form N-2 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Fund, are contemplated by the Commission, and any
request on the part of the Commission for additional information has
been complied with. If required, the Fund has received any orders
exempting the Fund from any provisions of the Investment Company Act.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Shares are
purchased, at the Date of Delivery) the Registration Statement, the
Rule 462(b) Registration Statement and any amendments or supplements
thereto complied and will comply in all material respects with the
requirements of the 1933 Act, the Investment Company Act and the Rules
and Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
Neither the Prospectus, nor any amendments or supplements thereto, at
the time the Prospectus or any amendments or supplements thereto were
issued and at the Closing Time (and, if any Option Shares are
purchased, at the Date of Delivery) included or will include an untrue
statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
furnished to the Fund in writing by the Underwriter expressly for use
in the Registration Statement or in the Prospectus. If Rule 434 is
used, the Fund will comply with the requirements of Rule 434.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 497(c) or Rule 497(h)
under the 1933 Act, complied when so filed in all material respects
with the Rules and Regulations and each preliminary prospectus and the
Prospectus delivered to the Underwriter for use in connection with this
offering was identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules, if any, included in
the Registration Statement are independent public accountants as
required by the 1933 Act and the Rules and Regulations.
(iii) Financial Statements. The financial statements, included
in the Registration Statement and Prospectus, together with the related
schedules and notes, present fairly the financial position of the Fund
at the date indicated and said statements
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<PAGE> 7
have been prepared in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the period
involved. The supporting schedules, if any, included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and in the Prospectus, except as otherwise stated therein,
(A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary
course of business (a "Material Adverse Effect"), (B) there have been
no transactions entered into by the Fund, other than those in the
ordinary course of business, which are material with respect to the
Fund and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Fund on any class of its capital stock.
(v) Good Standing of the Fund. The Fund has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Maryland and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Fund is duly qualified as
a foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect.
(vi) Subsidiaries. The Fund has no subsidiaries.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Fund is as set forth in the Prospectus under the
caption "Description of Capital Stock."
(viii) Investment Company Act. The Fund is registered with the
Commission under the Investment Company Act as a closed-end,
diversified, management investment company, and no order of suspension
or revocation of such registration has been issued or proceedings
therefor initiated or threatened by the Commission.
(ix) Authorization of Agreement. This Agreement been duly
authorized, executed and delivered by the Fund.
(x) Authorization and Description of Shares. The Shares to be
purchased by the Underwriter from the Fund have been duly authorized
for issuance and sale to the Underwriter pursuant to this Agreement,
and, when issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in this Agreement will
be validly issued, fully paid and non-assessable; the Shares conform to
all statements relating thereto contained in the Prospectus and such
description conforms to the rights set forth in the instruments
defining the same; no holder of the Shares will be subject to personal
liability by reason of being such a holder; and the issuance of the
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<PAGE> 8
Shares is not subject to the preemptive or other similar rights of any
securityholder of the Fund.
(xi) Absence of Defaults and Conflicts. The Fund is not in
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument
to which the Fund is a party or by which it or its properties may be
bound, or to which any of the property or assets of the Fund is subject
(collectively, "Agreements and Instruments"), except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement, the Investment Advisory
Agreement and the Custody Agreement referred to in the Registration
Statement (as used herein, the "Advisory Agreement" and the "Custody
Agreement," respectively) and the consummation of the transactions
contemplated in this Agreement and in the Registration Statement
(including the issuance and sale of the Shares and the use of the
proceeds from the sale of the Shares as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Fund with
its obligations under this Agreement have been duly authorized by all
necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with
or constitute a breach of, or a default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Fund pursuant
to the Agreements and Instruments (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not result in
a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or the by-laws of the Fund,
or any applicable law, statute, rule, regulation, judgment, order, writ
or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Fund or any of its
assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Fund.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Fund, threatened against or affecting, the Fund,
which is required to be disclosed in the Registration Statement (other
than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets
thereof or the consummation of the transactions contemplated in this
Agreement or the performance by the Fund of its obligations hereunder;
the aggregate of all pending legal or governmental proceedings to which
the Fund is a party or of which any of its respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
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<PAGE> 9
(xiii) Subchapter M Compliance. The Fund intends to, and will,
direct the investment of proceeds of the offering described in the
Registration Statement in such a manner as to comply with the
requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended ("Subchapter M of the Code"), and intends to qualify as a
regulated investment company under Subchapter M of the Code.
(xiv) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which
have not been so described and filed as required.
(xv) Possession of Intellectual Property. The Fund owns or
possesses, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks, trade names or other intellectual property (collectively,
"Intellectual Property") necessary to carry on the business now
operated by it, and the Fund has not received any notice or is
otherwise aware of any infringement or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Fund therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the
aggregate, would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Fund of its
obligations hereunder, in connection with the offering, issuance or
sale of the Shares under this Agreement or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1940
Act or the Rules and Regulations and foreign or state securities or
blue sky laws.
(xvii) Possession of Licenses and Permits. The Fund possesses
such permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate
federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by it; the Fund is in
compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in
the aggregate, have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect, except when the
invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and the Fund has not received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
6
<PAGE> 10
(b) Additional Representations of the Adviser. The Adviser represents
and warrants to the Underwriter as of the date hereof and as of the
Representation Date as follows:
(i) Organization and Authority of Adviser. The Adviser has
been duly organized as a limited partnership under the laws of the
State of Delaware, with power and authority to conduct its business as
described in the Registration Statement and the Prospectus.
(ii) Investment Advisers Act. The Adviser is duly registered
as an investment adviser under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"), and is not prohibited by the
Investment Advisers Act or the Investment Company Act, or the rules and
regulations under such acts, from acting under the Advisory Agreement
for the Fund as contemplated by the Registration Statement and the
Prospectus.
(iii) Authorization of Agreements. This Agreement has been
duly authorized, executed and delivered by the Adviser; the Advisory
Agreement has been duly authorized, executed and delivered by the
Adviser and constitutes a valid and binding obligation of the Adviser,
enforceable in accordance with its terms, subject, as to enforcement,
to bankruptcy, insolvency, reorganization or other laws relating to or
affecting creditors' rights and to general equitable principles; and
neither the execution and delivery of this Agreement or the Advisory
Agreement, nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of
any of the terms and provisions of, or constitute, with or without the
giving of notice or the lapse of time or both, a default under, any
agreement or instrument to which the Adviser is a party or by which it
is bound, or any law, order, rule or regulation applicable to it of any
jurisdiction, court, Federal or state regulatory body, administrative
agency or other governmental body, stock exchange or securities
association having jurisdiction over the Adviser or its respective
properties or operations.
(iv) Financial Resources. The Adviser has the financial
resources available to it necessary for the performance of its services
and obligations as contemplated in the Registration Statement and the
Prospectus.
(v) Rule 482 Compliance. Any advertisement approved by the
Adviser for use in the public offering of the Shares pursuant to Rule
482 under the 1933 Act Regulations (an "Omitting Prospectus") complies
with the requirements of such Rule 482.
(c) Officer's Certificates. Any certificate signed by any officer of
the Fund or any officer of the Adviser delivered to the Underwriter or to
counsel for the Fund and the Underwriter shall be deemed a representation and
warranty by the Fund or the Adviser, as the case may be, to the Underwriter as
to the matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) Initial Shares. On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth, the
Fund agrees to sell to the
7
<PAGE> 11
Underwriter and the Underwriter agrees to purchase from the Fund the Initial
Shares at the price per share set forth in Schedule A.
(b) Option Shares. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Fund hereby grants an option to the Underwriter to purchase up to an
additional shares of Common Stock at the price per share set forth in
Schedule A, less an amount per share equal to any dividends or distributions
declared by the Fund and payable on the Initial Shares but not payable on the
Option Shares. The option hereby granted will expire 45 days after the date
hereof and may be exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial Shares upon notice by the Underwriter
to the Fund setting forth the number of Option Shares as to which the
Underwriter is then exercising the option and the time, date and place of
payment and delivery for such Option Shares. Any such time and date of delivery
for the Option Shares (a "Date of Delivery") shall be determined by the
Underwriter, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to Closing Time, as hereinafter
defined.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Shares shall be made at the offices of Brown &
Wood LLP, One World Trade Center, New York, New York 10048-0557, or at such
other place as shall be agreed upon by the Underwriter and the Fund, at 9:00
A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day following the date hereof, or such
other time not later than ten business days after such date as shall be agreed
upon by the Underwriter and the Fund (such time and date of payment and delivery
herein being referred to as "Closing Time").
In addition, in the event that any or all of the Option Shares are
purchased by the Underwriter, payment of the purchase price for, and delivery of
certificates for, such Option Shares shall be made at the above-mentioned
offices of Brown & Wood LLP, or at such other place as shall be agreed upon by
the Underwriter and the Fund, on each Date of Delivery as specified in the
notice from the Underwriter to the Fund.
Payment shall be made to the Fund by wire transfer of immediately
available funds to a bank account designated by the Fund, against delivery to
the Underwriter of certificates for the Shares to be purchased by it.
(d) Denominations; Registration. Certificates for the Initial Shares
and the Option Shares, if any, shall be in such denominations and registered in
such names as the Underwriter may request in writing at least one full business
day before the Closing Time or the relevant Date of Delivery, as the case may
be. The certificates for the Initial Shares and the Option Shares will be made
available by the Fund for examination by the Underwriter not later than 10:00
A.M. on the last business day prior to Closing Time or the Date of Delivery, as
the case may be.
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<PAGE> 12
SECTION 3. Covenants of the Fund. The Fund covenants with the
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Fund, subject to Section 3(b), will comply with the requirements of Rule 430A or
Rule 434, as applicable, and will notify the Underwriter immediately, and
confirm the notice in writing, (i) if any post-effective amendment to the
Registration Statement shall have become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes, and (v) of the issuance by the Commission
of an order of suspension or revocation of the notification on Form N-8A of
registration of the Fund as an investment company under the Investment Company
Act or the initiation of any proceeding for that purpose. The Fund will make
every reasonable effort to prevent the issuance of any stop order described in
subsection (iv) hereunder or any order of suspension or revocation described in
subsection (v) hereunder and, if any such stop order or order of suspension or
revocation is issued, to obtain the lifting thereof at the earliest possible
moment. The Fund will promptly effect the filings necessary pursuant to Rule
497(c), Rule 497(j) or Rule 497(h) and will take such steps as it deems
necessary to ascertain promptly whether the certificate transmitted for filing
under Rule 497(j) or the form of prospectus transmitted for filing under Rule
497(c) or Rule 497(h) was received for filing by the Commission and, in the
event that it was not, it will promptly file such certificate or prospectus.
(b) Filing of Amendments. The Fund will give the Underwriter notice of
its intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment or filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus included
in the Registration Statement at the time it became effective or to the
Prospectus, whether pursuant to the Investment Company Act, the 1933 Act, or
otherwise, and will furnish the Underwriter with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Underwriter or
counsel to the Underwriter and the Fund shall object.
(c) Delivery of Registration Statements. The Fund has furnished or will
deliver to the Underwriter and counsel to the Underwriter and the Fund, without
charge, signed copies of the notification of registration on Form N-8A and
Registration Statement as originally filed and of each amendment thereto,
(including exhibits filed therewith, or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Underwriter a conformed copy, without charge, of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for the Underwriter. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriter will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
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<PAGE> 13
(d) Delivery of Prospectus. The Fund has delivered to the Underwriter,
without charge, as many copies of each preliminary prospectus as the Underwriter
reasonably requested, and the Fund hereby consents to the use of such copies for
purposes permitted by the 1933 Act. The Fund will furnish to the Underwriter,
without charge, during the period when the Prospectus is required to be
delivered under the 1933 Act, such number of copies of the Prospectus (as
amended or supplemented) as the Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriter will be identical to the electronically transmitted copies thereof
field with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Fund will comply
with the 1933 Act, the Investment Company Act and the Rules and Regulations so
as to permit the completion of the distribution of the Shares as contemplated in
this Agreement and in the Prospectus. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the Shares,
any event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of counsel to the Underwriter and the Fund, to amend
the Registration Statement or amend or supplement any Prospectus in order that
the Prospectus will not include any untrue statements of material fact or omit
to state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Fund will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Fund will
furnish to the Underwriter such number of copies of such amendment or supplement
as the Underwriter may reasonably request.
(f) Blue Sky Qualifications. The Fund will use its best efforts, in
cooperation with the Underwriter, to qualify the Shares for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Underwriter may designate and to maintain such qualifications in effect for
a period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Fund shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the Shares have been
so qualified, the Fund will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Fund will timely file such reports pursuant to the
Investment Company Act as are necessary in order to make generally available to
its securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
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<PAGE> 14
(h) Use of Proceeds. The Fund will use the net proceeds received by it
from the sale of the Shares in the manner specified in the Prospectus under "Use
of Proceeds."
(i) Subchapter M. The Fund will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the Code.
(j) Listing. The Fund will use its best efforts to effect the listing
of the Shares on the New York Stock Exchange or another national securities
exchange so that trading on such Exchange will begin no later than two weeks
from the date of the Prospectus.
(k) Restrictions on Sale of Shares. During a period of 180 days from
the date of the Prospectus, the Fund will not, without your prior written
consent, directly or indirectly offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the 1933
Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock of such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder or (B) any shares or Common Stock issued pursuant to any dividend
reinvestment plan.
SECTION 4. Payment of Expenses.
(a) Expenses. The Fund will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriter of this
Agreement and such other documents as may be required in connection with the
offering, purchase, sale issuance or delivery of the Shares, (iii) the
preparation, issuance and delivery of the certificates for the Shares to the
Underwriter, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Shares to the
Underwriter, (iv) the fees and disbursements of the Fund's counsel, accountants
and other advisors, (v) the qualification of the Shares under the securities
laws in accordance with the provisions of Section 3(f) hereof, including filing
fees and the reasonable fees and disbursements of counsel to the Underwriter and
the Fund in connection therewith and in connection with the preparation of the
Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to
the Underwriter of copies of each preliminary prospectus, any Term Sheets and of
the Prospectus and any amendments or supplements thereto, (vii) the preparation,
printing and delivery to the Underwriter of copies of the Blue Sky Survey and
any supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the Shares and (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriter and the Fund in
connection with the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Shares and (x) the fees and
expenses incurred in connection with the listing of the Shares on the New York
Stock Exchange or another national securities exchange.
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<PAGE> 15
(b) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Fund or the Adviser shall reimburse the Underwriter for all of its
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel to the Fund and the Underwriter. In the event the transactions
contemplated hereunder are not consummated, the Adviser agrees to pay all of the
costs and expenses set forth in paragraph (a) of this Section 4 which the Fund
would have paid if such transactions had been consummated.
SECTION 5. Conditions of Underwriter's Obligations. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser contained in Section 1 hereof, or in the
certificates of any officer of the Fund and the Adviser delivered pursuant to
the provisions hereof, to the performance by the Fund and the Adviser of their
respective covenants and obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement
including any Rule 462(b) Registration Statement has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriter and the Fund. Either (i) a
certificate has been filed with the Commission in accordance with Rule 497(j) or
a prospectus has been filed with the Commission in accordance with Rule 497(c),
or (ii) a prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 497(h) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Fund has
elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 497(h).
(b) Opinion of Counsel for the Fund and the Underwriter. At Closing
Time, the Underwriter shall have received the favorable opinion, dated as of
Closing Time, of Brown & Wood LLP, counsel to the Fund and the Underwriter, to
the effect set forth in Exhibit A hereto.
(c) Opinion of General Counsel of the Adviser. At Closing Time, the
Underwriter shall have received the favorable opinion, dated as of Closing Time,
of Michael J. Hennewinkel, Esq., General Counsel to the Adviser, or a senior
attorney of the Adviser, in form and substance satisfactory to counsel to the
Underwriter, to the effect set forth in Exhibit B hereto and to such further
effect as counsel to the Underwriter may reasonably request.
(d) Officers' Certificates. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Fund, whether or not arising in the ordinary course of business, and the
Underwriter shall have received (A) a certificate of the President or a Vice
President of the Fund, dated as of Closing Time, to the effect that (i) there
has been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time,
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<PAGE> 16
(iii) the Fund has complied with all agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are pending
or are contemplated by the Commission and (B) a certificate of the President or
a Vice President of the Adviser, dated as of Closing Time, to the effect that
(i) the representations and warranties in Sections 1(a) and 1(b) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, and (ii) the Adviser has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior to
Closing Time.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Underwriter shall have received from , a letter,
dated such date, in form and substance satisfactory to the Underwriter
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus, to the effect set forth in Exhibit C hereto and to
such further effect as counsel to the Underwriter may reasonably request.
(f) Bring-down Comfort Letter. At Closing Time, the Underwriter shall
have received from , a letter, dated as of Closing Time, to the
effect that they reaffirm the statements made in the letter, furnished pursuant
to subsection (e) of this Section, except that the "specified date" referred to
shall be a date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Shares shall have been
approved for listing on the New York Stock Exchange or another national
securities exchange, subject only to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Conditions to Purchase Option Shares. In the event that the
Underwriter exercises its option provided in Section 2(b) hereof to purchase all
or any portion of the Option Shares, the representations and warranties of the
Fund and the Adviser contained herein and the statements in any certificates
furnished by the Fund and the Adviser hereunder shall be true and correct as of
each Date of Delivery and, at the relevant Date of Delivery, the Underwriter
shall have received:
(i) Officers' Certificates. Certificates, dated such Date of
Delivery, of the President or a Vice President of the Fund and of the
President or a Vice President of the Adviser confirming that the
respective certificates delivered at the Closing Time pursuant to
Section 5(d) hereof remains true and correct as of such Date of
Delivery.
(ii) Opinions of Counsel. The favorable opinions of Brown &
Wood LLP, counsel to the Fund and the Underwriter, and of Michael J.
Hennewinkel, Esq., General Counsel of the Adviser, or a senior
attorney of the Adviser, each in form and substance satisfactory to
the counsel for the Underwriter, dated such Date of Delivery, relating
to
13
<PAGE> 17
the Option Shares to be purchased on such Date of Delivery and
otherwise to the same effect as the opinions required by Sections 5(b)
and 5(c) hereof, respectively.
(iii) Bring-down Comfort Letter. A letter from in
form and substance satisfactory to the Underwriter and dated such Date
of Delivery, substantially the same in form and substance as the letter
furnished to the Underwriter pursuant to Section 5(e), except that the
"specified date" in the letter furnished pursuant to this paragraph
shall be a date not more than five days prior to such Date of Delivery.
(j) Additional Documents. At Closing Time and at each Date of Delivery,
counsel to the Fund and the Underwriter shall have been furnished with such
documents and opinions as it may require for the purpose of enabling it to pass
upon the issuance and sale of the Shares as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Fund in connection with the issuance and sale of the Shares as
herein contemplated shall be satisfactory in form and substance to the
Underwriter and counsel to the Fund and the Underwriter.
(k) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Shares on
a Date of Delivery which is after the Closing Time, the obligations of the
Underwriter to purchase the relevant Option Shares, may be terminated by the
Underwriter by notice to the Fund at any time at or prior to Closing Time or
such Date of Delivery, as the case may be, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 6, 7 and 8 shall survive any such termination and remain
in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of the Underwriter. (1) The Fund and the Adviser
jointly and severally agree to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter within the meaning of Section
15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus,
any Omitting Prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
14
<PAGE> 18
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the indemnifying
party; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by the
Underwriter) reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus, any Omitting Prospectus or the
Prospectus (or any amendment or supplement thereto).
(2) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director or officer of the Fund or
controls the Fund within the meaning of Section 15 of the 1933 Act, such
indemnity agreement is subject to the undertaking of the Fund in the
Registration Statement under Item 29 thereof.
(b) Indemnification of Fund, Adviser, Directors, General Partner and
Officers. The Underwriter agrees to indemnify and hold harmless the Fund, the
Adviser, the directors of the Fund, the general partner of the Adviser, each of
the Fund's officers who signed the Registration Statement, and each person, if
any, who controls the Fund or the Adviser within the meaning of Section 15 of
the 1933 Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto) including the Rule 430A Information and the Rule 434
Information, if applicable, or in any preliminary prospectus, any Omitting
Prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), or any preliminary prospectus, any Omitting Prospectus or
the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties, Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an
15
<PAGE> 19
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. In the case of parties indemnified
pursuant to Section 6(a) above, counsel to the indemnified parties shall be
selected by the Underwriter, and, in the case of parties indemnified pursuant to
Section 6(b) above, counsel to the indemnified parties shall be selected by the
Fund and the Adviser. An indemnifying party may participate at its own expense
in the defense of any such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to the indemnified party. In no event shall the indemnifying
parties be liable for the fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6 (a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the offering
of the Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
16
<PAGE> 20
The relative benefits received by the Fund and the Adviser on the one
hand and the Underwriter on the other hand in connection with the offering of
the Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Shares
pursuant to this Agreement (before deducting expenses) received by the Fund, and
the total underwriting commission received by the Underwriter, in each case as
set forth or otherwise indicated on the cover of the Prospectus, or, if Rule 434
is used, the corresponding location on the Term Sheet, bear to the sum of the
aggregate initial public offering price of the Shares and the total underwriting
commission received by the Underwriter as set forth or otherwise indicated on
such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall
not be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which the
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each director of the Fund and the
Adviser, respectively, each officer of the Fund who signed the Registration
Statement and each person, if any, who controls the Fund and the Adviser within
the meaning of Section 15 of the 1933 Act, shall have the same rights to
contribution as the Fund and the Adviser.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Fund or of the Adviser submitted
pursuant hereto, shall remain operative and in
17
<PAGE> 21
full force and effect, regardless of any investigation made by or on behalf of
the Underwriter or controlling person, or by or on behalf of the Fund or the
Adviser and shall survive delivery of the Shares to the Underwriter.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Underwriter may terminate this Agreement
by notice to the Fund, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Fund or the Adviser, whether or not arising
in the ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Underwriter, impracticable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) if trading in any securities of
the Fund has been suspended or materially limited by the Commission or the New
York Stock Exchange or such other national securities exchange upon which the
Fund's securities trade, or if trading generally on the New York Stock Exchange
or the American Stock Exchange or in the Nasdaq National Market has been
suspended or materially limited, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices for securities have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated at North Tower, World Financial Center, New
York, New York 10281-1201, Attention: Richard Bruce, Vice President; notices to
the Fund or to the Adviser shall be directed to each of them at 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, Attention: Terry K. Glenn, President.
SECTION 11. Parties. This Agreement shall inure to the benefit of and
be binding upon the Underwriter, the Fund, the Adviser and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriter, the Fund, the Adviser and their respective successors and the
controlling persons and officers, directors and general partner referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all
18
<PAGE> 22
conditions and provisions hereof are intended to be for the sole and exclusive
benefit of the Underwriter, the Fund and the Adviser and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Shares from the Underwriter shall be deemed to be a
successor merely by reason of such purchase.
SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 13. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
19
<PAGE> 23
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Fund a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriter and the Fund and the Adviser in accordance with its
terms.
Very truly yours,
INCOME OPPORTUNITIES FUND 2006, INC.
By: _______________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: _______________________________
Authorized Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: _______________________________
Authorized Signatory
20
<PAGE> 24
SCHEDULE A
INCOME OPPORTUNITIES FUND 2006, INC.
(a Maryland corporation)
Shares of Common Stock
(Par Value $.10 Per Share)
1. The initial public offering price per share for the Shares,
determined as provided in Section 2 hereof, and the purchase price per share for
the Shares to be paid by the Underwriter, shall be $10.00.
2. The Adviser will pay, or arrange for an affiliate to pay, a
commission to the Underwriter in the amount of $ per share for the Shares
purchased by the Underwriter.
21
<PAGE> 25
Exhibit A
FORM OF OPINION OF FUND'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
(ii) The Fund has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Fund is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary course of
business (a "Material Adverse Effect").
(iv) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Stock."
(v) The Shares to be purchased by the Underwriter from the Fund have
been duly authorized for issuance and sale to the Underwriter pursuant to the
Purchase Agreement and, when issued and delivered by the Fund pursuant to the
Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Shares is or will be subject to personal liability by reason of
being such a holder.
(vi) The issuance of the Shares is not subject to the preemptive or
other similar rights of any securityholder of the Fund.
(vii) To the best of our knowledge, the Fund does not have any
subsidiaries.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Fund and complies with all applicable provisions of the
Investment Company Act.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the certificate pursuant to Rule 497(j) or the Prospectus pursuant to Rule
497(c) or Rule 497(h), as the case may be, has been made in the manner and
within the time period required by Rule 497(j), Rule 497(c) or Rule 497(h), as
the case may be; and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been
A-1
<PAGE> 26
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or omitted therefrom, as to which we need express no opinion) complied as to
form in all material respects with the requirements of the 1933 Act, the
Investment Company Act and the Rules and Regulations.
(xi) The form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Fund and the
requirements of the New York Stock Exchange.
(xii) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Fund is a
party, or to which the property of the Fund is subject, before or brought by any
court or governmental agency or body, domestic or foreign, which might
reasonably be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in the
Purchase Agreement or the performance by the Fund of its obligations thereunder,
other than those disclosed in the Prospectus.
(xiii) The information in the Prospectus under "Description of Capital
Stock" and "Taxes" and in the Registration Statement under Item 29, to the
extent that it constitutes matters of law, summaries of legal matters, the
Fund's charter and bylaws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects.
(xiv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
(xv) All descriptions in the Prospectus of contracts and other
documents to which the Fund is a party are accurate in all material respects; to
the best of our knowledge, there are no franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments of the Fund
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed or incorporated by reference as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects.
(xvi) To the best of our knowledge, the Fund is not in violation of its
charter or by-laws and no default by the Fund exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by reference
as an exhibit to the Registration Statement.
A-2
<PAGE> 27
(xvii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act, the
Investment Company Act and the Rules and Regulations, which have been obtained,
or as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or required in
connection with the due authorization, execution and delivery of the Purchase
Agreement, the Advisory Agreement and the Custody Agreement or for the offering,
issuance, sale or delivery of the Shares.
(xviii) The Advisory Agreement and the Custody Agreement have each been
duly authorized and approved by the Fund and comply as to form in all material
respects with all applicable provisions of the Investment Company Act, and each
has been duly executed by the Fund.
(xix) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, diversified management investment company, and all
required action has been taken by the Fund under the 1933 Act, the Investment
Company Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares pursuant to the Purchase Agreement; the
provisions of the charter and the by-laws of the Fund comply as to form in all
material respects with the requirements of the Investment Company Act; and, to
the best of their knowledge and information, no order of suspension or
revocation of such registration under the Investment Company Act, pursuant to
Section 8(e) of the Investment Company Act, has been issued or proceedings
therefor initiated or threatened by the Commission.
(xx) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Shares, and the use of the proceeds from the sale of the Shares as described in
the Prospectus under the caption "Use of Proceeds") and compliance by the Fund
with its obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(xi) of the Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Fund pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known to us,
to which the Fund is a party or by which it may be bound, or to which any of the
property or assets of the Fund is subject (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter or by-laws of the Fund, or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any government,
government instrumentality or court, domestic or foreign, having jurisdiction
over the Fund or any of its properties, assets or operations.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need
A-3
<PAGE> 28
make no statement), at the time such Registration Statement or any such
amendment became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto (except for financial statements and schedules
and other financial data included or incorporated by reference therein or
omitted therefrom, as to which we need make no statement), at the time the
Prospectus was issued, at the time any such amended or supplemented prospectus
was issued or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates and written statements of responsible officers of and accountants
for the Fund and the Adviser and public officials. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject to,
any treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).
A-4
<PAGE> 29
Exhibit B
FORM OF OPINION OF GENERAL COUNSEL TO THE
INVESTMENT ADVISER TO BE DELIVERED
PURSUANT TO SECTION 5(c)
(i) The Adviser has been duly organized as a limited partnership under
the laws of the State of Delaware, with power and authority to conduct its
business as described in the Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers Act or
the Investment Company Act, or the rules and regulations under such Acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the Advisory Agreement
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights and to general equity principles; and, to the best of his knowledge and
information, neither the execution and delivery of this Agreement or the
Advisory Agreement nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of, any of the
terms and provisions of, or constitute, with or without the giving of notice or
the lapse of time or both, a default under, any agreement or instrument to which
the Adviser is a party or by which the Adviser is bound, or any law, order, rule
or regulation applicable to the Adviser of any jurisdiction, court, Federal or
state regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Adviser or its
properties or operations.
(iv) To the best of his knowledge and information, the description of
the Adviser in the Registration Statement and in the Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
B-1
<PAGE> 30
Exhibit C
FORM OF ACCOUNTANTS'
COMFORT LETTER PURSUANT TO SECTION 5(e)
(i) We are independent public accountants with respect to the Company
within the meaning of the 1933 Act and the 1933 Act Regulations.
(ii) In our opinion the financial statements audited by us and included
in the Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
the Investment Company Act and the Rules and Regulations.
Such accountants shall also state that they have performed specified
procedures, not constituting an audit, including a reading of the latest
available interim financial statements of the Fund, a reading of the minute
books of the Fund, made inquiries of officials of the Fund responsible for
financial accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that at the date of
the latest available financial statements read by such accountants, or at a
subsequent specified date not more than three days prior to the date of the
Purchase Agreement, there was any change in the capital stock or net assets of
the Fund as compared with amounts shown on the financial statements included in
the Registration Statement and the Prospectus.
C-1
<PAGE> 1
EXHIBIT (h)(2)
Revised October 29, 1990
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
Dear Sirs:
In connection with public offerings of securities underwritten by us,
or by a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute
your reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"). Upon our request, you will
advise us of the identity of any dealer to whom you allow such a discount and
any Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
2. You represent that you are a dealer actually engaged in the
investment banking or securities business and that you are either (i) a member
in good standing of the NASD or (ii) a dealer with its principal place of
business located outside the United States, its territories or possessions and
not registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its
<PAGE> 2
territories or its possessions or to persons who are nationals thereof or
residents therein. Non-member foreign dealers and banks agree, in making any
sales, to comply with the NASD's interpretation with respect to free-riding and
withholding. In accepting a selling concession where we are acting as
Representative of the Underwriters, in accepting a reallowance from us whether
or not we are acting as such Representative, and in allowing a discount to any
other person, you agree to comply with the provisions of Section 24 of Article
III of the Rules of Fair Practice of the NASD, and, in addition, if you are a
non-member foreign dealer or bank, you agree to comply, as though you were a
member of the NASD, with the provisions of Sections 8 and 36 of Article III of
such Rules of Fair Practice and to comply with Section 25 of Article III thereof
as that Section applies to a non-member foreign dealer or bank. You represent
that you are fully familiar with the above provisions of the Rules of Fair
Practice of the NASD.
3. If the securities have been registered under the Securities Act of
1933 (the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities
of an issuer that is not required to file reports under the Securities Exchange
Act of 1934 (the "1934 Act"), you agree that you will not sell any of the
securities to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
Merrill Lynch World Headquarters North Tower World Financial Center New York,
N.Y. 10281-1305 (or at such other place as we may advise), at the offering price
less the concession allowed to you, on such date as we may advise, by certified
or official bank check in New York Clearing House funds (or such other funds as
we may advise), payable to our order, against delivery of the securities to be
purchased by you. We shall have authority to make appropriate arrangements for
payment for and/or delivery through the facility of The Depository Trust Company
or any such other depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of
securities covered by this Agreement you will, upon our request as
Representative of the Underwriters, report to us the amount of securities
purchased by you which then remains unsold and will, upon our request, sell to
us for the account of one or more of the Underwriters such amount of such unsold
2
<PAGE> 3
securities as we may designate, at the offering price less an amount to be
determined by us not in excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered
by this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
11. Any notice from us shall be deemed to have been duly given if
mailed or transmitted by any standard form of written telecommunications to you
at the above address or at such other address as you shall specify to us in
writing.
12. With respect to any offering of securities covered by this
Agreement, the price restrictions contained in Paragraph 1 hereof and the
provisions of Paragraphs 6 and 7 hereof shall terminate as to such offering at
the close of business on the 45th day after the securities are released for sale
or, as to any or all such provisions, at such earlier time as we may advise. All
other provisions of this Agreement shall remain operative and in full force and
effect with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New
York.
3
<PAGE> 4
Please confirm your agreement hereto by signing the enclosed duplicate
copy hereof in the place provided below and returning such signed duplicate copy
to us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Fred F. Hessinger
--------------------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
- ---------------------------------------------
Name of Dealer
- ---------------------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
4
<PAGE> 1
EXHIBIT (J)
CUSTODY AGREEMENT
Agreement made as of this day of , 1999 between INCOME
OPPORTUNITIES FUND 2006, INC., a Maryland corporation organized and existing
under the laws of the State of Maryland, having its principal office and place
of business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (hereinafter
called the "Fund"), and THE BANK OF NEW YORK, a New York corporation authorized
to do a banking business, having its principal office and place of business at
48 Wall Street, New York, New York 10286 (hereinafter called the "Custodian").
WITNESSETH:
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "Book-Entry System" shall mean the Federal Reserve/Treasury
book-entry system for United States and federal agency securities, its successor
or successors and its nominee or nominees.
2. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually received by the Custodian and signed on behalf
of the Fund by any two Officers, and the term Certificate shall also include
Instructions.
<PAGE> 2
4. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such a clearing member.
5. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.
6. "Covered Call Option" shall mean an exchange traded option entitling
the holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.
7. "Composite Currency Unit" shall mean the European Currency Unit or
any other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
8. "Currency" shall mean money denominated in a lawful currency of any
country or the European Currency Unit.
9. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository" shall
further mean and include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Directors specifically approving deposits therein by the
Custodian.
10. "Financial Futures Contract" shall mean the firm commitment to buy
or sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at an
agreed upon price.
11. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
12. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
-2-
<PAGE> 3
13. "FX Transaction" shall mean any transaction for the purchase by one
party of an agreed amount in one Currency against the sale by it to the other
party of an agreed amount in another Currency.
14. "Instructions" shall mean instructions communications transmitted
by electronic or telecommunications media including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission line, facsimile
transmission (which may be signed by an Officer or unsigned) and tested telex.
15. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting
an appropriate entry in its books and records.
16. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentalities thereof, any tax, bond or revenue anticipation
note issued by any state or municipal government or public authority, commercial
paper, certificates of deposit and bankers' acceptances, repurchase agreements
with respect to the same and bank time deposits, where the purchase and sale of
such securities normally requires settlement in federal funds on the same day as
such purchase or sale.
17. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
18. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Treasurer, the Controller, any Assistant
Secretary, any Assistant Treasurer, and any other person or persons, whether or
not any such other person is an officer of the Fund, duly authorized by the
Board of Directors of the Fund to execute any Certificate, instruction, notice
or other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
-3-
<PAGE> 4
19. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
20. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Officer or from a person reasonably believed
by the Custodian to be an Officer.
21. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
23. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or representing
any other rights or interest therein, or any property or assets.
24. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
25. "Series" shall mean the various portfolios, if any, of the Fund
listed on Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of capital stock of the Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.
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<PAGE> 5
27. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
28. "Stock Index Option" shall mean an exchange traded option entitling
the holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian
of the Securities and moneys at any time owned by the Fund during the period of
this Agreement.
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all moneys owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of
-5-
<PAGE> 6
Securities and deliveries and returns of Securities collateral. Prior to a
deposit of Securities specifically allocated to a Series in the Depository, the
Fund shall deliver to the Custodian a certified resolution of the Board of
Directors of the Fund, substantially in the form of Exhibit B hereto, approving,
authorizing and instructing the Custodian on a continuous and ongoing basis
until instructed to the contrary by a Certificate actually received by the
Custodian to deposit in the Depository all Securities specifically allocated to
such Series eligible for deposit therein, and to utilize the Depository to the
extent possible with respect to such Securities in connection with its
performance hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of Securities, and
deliveries and returns of Securities collateral. Securities and moneys deposited
in either the Book-Entry System or the Depository will be represented in
accounts which include only assets held by the Custodian for customers,
including, but not limited to, accounts in which the Custodian acts in a
fiduciary or representative capacity and will be specifically allocated on the
Custodian's books to the separate account for the applicable Series. Prior to
the Custodian's accepting, utilizing and acting with respect to Clearing Member
confirmations for Options and transactions in Options for a Series as provided
in this Agreement, the Custodian shall have received a certified resolution of
the Fund's Board of Directors, substantially in the form of Exhibit C hereto,
approving, authorizing and instructing the Custodian on a continuous and
on-going basis, until instructed to the contrary by a Certificate actually
received by the Custodian, to accept, utilize and act in accordance with such
confirmations as provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all moneys received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) as hereinafter provided;
(b) pursuant to Certificates setting forth the name and
address of the person to whom the payment is to be made, the Series account from
which payment is to be made and the purpose for which payment is to be made; or
(c) in payment of the fees and in reimbursement of the
expenses and liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmations and a summary, on a per Series basis,
of all transfers to or from
-6-
<PAGE> 7
the account of the Fund for a Series, either hereunder or with any co-custodian
or sub-custodian appointed in accordance with this Agreement during said day.
Where Securities are transferred to the account of the Fund for a Series, the
Custodian shall also by book-entry or otherwise identify as belonging to such
Series a quantity of Securities in a fungible bulk of Securities registered in
the name of the Custodian (or its nominee) or shown on the Custodian's account
on the books of the Book-Entry System or the Depository. At least monthly and
from time to time, the Custodian shall furnish the Fund with a detailed
statement, on a per Series basis, of the Securities and moneys held by the
Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the name
of any duly appointed registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or the
Depository any Securities which it may hold hereunder and which may from time to
time be registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in the
Book-Entry System or in the Depository in a separate account in the name of such
Series physically segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
(a) collect all income, dividends and distributions due or
payable;
(b) give notice to the Fund and present payment and collect
the amount payable upon such Securities which are called, but only if either (i)
the Custodian receives a written notice of such call, or (ii) notice of such
call appears in one or more of the publications listed in Appendix C annexed
hereto, which may be amended at any time by the
-7-
<PAGE> 8
Custodian without the prior notification or consent of the Fund;
(c) present for payment and collect the amount payable upon
all Securities which mature;
(d) surrender Securities in temporary form for definitive
Securities;
(e) execute, as custodian, any necessary declarations or
certificates of ownership under the Federal Income Tax Laws or the laws or
regulations of any other taxing authority now or hereafter in effect;
(f) hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the account of a
Series, all rights and similar securities issued with respect to any Securities
held by the Custodian for such Series hereunder; and
(g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agreement which are actually received by the Custodian, such
proxies and other similar materials to be executed by the registered owner (if
Securities are registered otherwise than in the name of the Fund), but without
indicating the manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) execute and deliver to such persons as may be designated
in such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate in exchange for other Securities or
cash issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation or recapitalization of any corporation, or
the exercise of any conversion privilege and receive and hold hereunder
specifically allocated to such Series any cash or other Securities received in
exchange;
(c) deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate to any protective committee,
reorganization committee or other person
-8-
<PAGE> 9
in connection with the reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any corporation, and receive and hold
hereunder specifically allocated to such Series such certificates of deposit,
interim receipts or other instruments or documents as may be issued to it to
evidence such delivery;
(d) make such transfers or exchanges of the assets of the
Series specified in such Certificate, and take such other steps as shall be
stated in such Certificate to be for the purpose of effectuating any duly
authorized plan of liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
(e) present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article which may
be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates are
available. The Fund shall deliver to the Custodian such a Certificate no later
than the business day preceding the availability of any such instrument or
certificate. Prior to such availability, the Custodian shall comply with Section
17(f) of the Investment Company Act of 1940, as amended, in connection with the
purchase, sale, settlement, closing out or writing of Futures Contracts,
Options, or Futures Contract Options by making payments or deliveries specified
in Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing out upon its receipt from a broker, dealer,
or futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by brokers,
dealers, or future commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be, confirming that such
Security is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or any nominee of
the Custodian) as custodian for the Fund, provided, however, that
notwithstanding the foregoing, payments to or deliveries from the Margin
Account, and payments with respect to Securities to which a Margin Account
relates, shall be made in accordance with the terms and conditions of the Margin
Account Agreement. Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this Agreement to the
contrary, make payment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are available only
against
-9-
<PAGE> 10
the delivery to the Custodian of such instrument or such certificate, and
deliver any Futures Contract, Option or Futures Contract Option for which such
instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if any;
and (h) the name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund, pay to the
broker specified in the Certificate out of the moneys held for the account of
such Series the total amount payable upon such purchase, provided that the same
conforms to the total amount payable as set forth in such Certificate or Oral
Instructions.
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a Certificate,
and (ii) with respect to each sale of Money Market Securities, a Certificate or
Oral Instructions, specifying with respect to each such sale: (a) the Series to
which such Securities were specifically allocated; (b) the name of the issuer
and the title of the Security; (c) the number of shares or principal amount
sold, and accrued interest, if any; (d) the date of sale; (e) the sale price per
unit; (f) the total amount payable to the Fund upon such sale; (g) the name of
the broker through whom or the person to whom the sale was made, and the name of
the clearing broker, if
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<PAGE> 11
any; and (h) the name of the broker to whom the Securities are to be delivered.
The Custodian shall deliver the Securities specifically allocated to such Series
to the broker specified in the Certificate against payment of the total amount
payable to the Fund upon such sale, provided that the same conforms to the total
amount payable as set forth in such Certificate or Oral Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund
shall deliver to the Custodian a Certificate specifying with respect to each
Option purchased: (a) the Series to which such Option is specifically allocated;
(b) the type of Option (put or call); (c) the name of the issuer and the title
and number of shares subject to such Option or, in the case of a Stock Index
Option, the stock index to which such Option relates and the number of Stock
Index Options purchased; (d) the expiration date; (e) the exercise price; (f)
the dates of purchase and settlement; (g) the total amount payable by the Fund
in connection with such purchase; (h) the name of the Clearing Member through
whom such Option was purchased; and (i) the name of the broker to whom payment
is to be made. The Custodian shall pay, upon receipt of a Clearing Member's
statement confirming the purchase of such Option held by such Clearing Member
for the account of the Custodian (or any duly appointed and registered nominee
of the Custodian) as custodian for the Fund, out of moneys held for the account
of the Series to which such Option is to be specifically allocated, the total
amount payable upon such purchase to the Clearing Member through whom the
purchase was made, provided that the same conforms to the total amount payable
as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant
to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the Clearing Member through whom the sale was
made. The Custodian shall consent to the delivery of the Option sold by the
Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same
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<PAGE> 12
conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall, upon receipt of the Securities underlying the Call Option
which was exercised, pay out of the moneys held for the account of the Series to
which such Call Option was specifically allocated the total amount payable to
the Clearing Member through whom the Call Option was exercised, provided that
the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Put Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid to the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Put Option was exercised.
The Custodian shall, upon receipt of the amount payable upon the exercise of the
Put Option, deliver or direct the Depository to deliver the Securities
specifically allocated to such Series, provided the same conforms to the amount
payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund in
connection with such exercise; and (h) the Clearing Member from whom such
payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares for
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<PAGE> 13
which the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received. The Custodian shall
deliver or cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as may be
required by such receipts. Notwithstanding the foregoing, the Custodian has the
right, upon prior written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (e) the premium to be received by the Fund; (f) the date such Put Option
is written; (g) the name of the Clearing-Member through whom the premium is to
be received and to whom a Put Option guarantee letter is to be delivered; (h)
the amount of cash, and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series; and (i) the amount of cash and/or the amount and kind
of Securities specifically allocated to such Series to be deposited into the
Collateral Account for such Series. The Custodian shall, after making the
deposits into the Collateral Account
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<PAGE> 14
specified in the Certificate, issue a Put Option guarantee letter substantially
in the form utilized by the Custodian on the date hereof, and deliver the same
to the Clearing Member specified in the Certificate against receipt of the
premium specified in said Certificate. Notwithstanding the foregoing, the
Custodian shall be under no obligation to issue any Put Option guarantee letter
or similar document if it is unable to make any of the representations contained
therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of shares subject to
the Put Option; (c) the Clearing Member from whom the underlying Securities are
to be received; (d) the total amount payable by the Fund upon such delivery; (e)
the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be withdrawn from the Collateral Account for such
Series; and (f) the amount of cash and/or the amount and kind of Securities,
specifically allocated to such Series, if any, to be withdrawn from the Senior
Security Account. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian in connection with
such Put Option, the Custodian shall pay out of the moneys held for the account
of the Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as set forth
in such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the number
of options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Security Account for such
Series; (j) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Collateral Account
for such Series; and (k) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in a
Margin Account, and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium specified in the
Certificate, make the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such receipts if any, which
the Custodian
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<PAGE> 15
has specifically agreed to issue, which are in accordance with the customs
prevailing among Clearing Members in Stock Index Options and make the deposits
into the Collateral Account specified in the Certificate, or (2) make the
deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
such information as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the moneys held for the account of the Series to
which such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to the Option being
purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the issuer and the
title and number of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and the number of
Options held; (d) the exercise price; (e) the premium to be paid by the Fund;
(f) the expiration date; (g) the type of Option (put or call); (h) the date of
such purchase; (i) the name of the Clearing Member to whom the premium is to be
paid; and (j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin Account, or
the Senior Security Account for such Series. Upon the Custodian's payment of the
premium and the return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Option being
liquidated through the Closing Purchase Transaction, the Custodian shall remove,
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<PAGE> 16
or direct the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 Article III herein, and
upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with such expiration, exercise, or consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect to such
Futures Contract, (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index or
financial instrument); (c) the number of identical Futures Contracts entered
into; (d) the delivery or settlement date of the Futures Contract(s); (e) the
date the Futures Contract(s) was (were) entered into and the maturity date; (f)
whether the Fund is buying (going long) or selling (going short) on such Futures
Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if
any, to be deposited in the Senior Security Account for such Series; (h) the
name of the broker, dealer, or futures commission merchant through whom the
Futures Contract was entered into; and (i) the amount of fee or commission, if
any, to be paid and the name of the broker, dealer, or futures commission
merchant to whom such amount is to be paid. The Custodian shall make the
deposits, if any, to the Margin Account in accordance with the terms and
conditions of the Margin Account Agreement. The Custodian shall make payment out
of the moneys specifically allocated to such Series of the fee or commission, if
any, specified in the Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
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<PAGE> 17
(b) Any variation margin payment or similar payment from a
broker, dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying: (a)
the Futures Contract and the Series to which the same relates; (b) with respect
to a Stock Index Futures Contract, the total cash settlement amount to be paid
or received, and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the broker, dealer, or
futures commission merchant to or from whom payment or delivery is to be made or
received; and (d) the amount of cash and/or Securities to be withdrawn from the
Senior Security Account for such Series. The Custodian shall make the payment or
delivery specified in the Certificate, and delete such Futures Contract from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying
with respect to such Futures Contract Option: (a) the Series to which such
Option is specifically allocated; (b) the type of Futures Contract Option (put
or call); (c) the type of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the Futures Contract
Option purchased; (d) the expiration date; (e) the exercise price;
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<PAGE> 18
(f) the dates of purchase and settlement; (g) the amount of premium to be paid
by the Fund upon such purchase; (h) the name of the broker or futures commission
merchant through whom such option was purchased; and (i) the name of the broker,
or futures commission merchant, to whom payment is to be made. The Custodian
shall pay out of the moneys specifically allocated to such Series, the total
amount to be paid upon such purchase to the broker or futures commissions
merchant through whom the purchase was made, provided that the same conforms to
the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) the
Series to which such Futures Contract Option was specifically allocated; (b) the
type of Future Contract Option (put or call); (c) the type of Futures Contract
and such other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker of futures commission merchant through
whom the sale was made. The Custodian shall consent to the cancellation of the
Futures Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e)the name of
the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall make, out of the moneys and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures Contract Option
was written;
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<PAGE> 19
(b) the type of Futures Contract Option (put or call); (c) the type of Futures
Contract and such other information as may be necessary to identify the Futures
Contract underlying the Futures Contract Option; (d) the expiration date; (e)
the exercise price; (f) the premium to be received by the Fund; (g) the name of
the broker or futures commission merchant through whom the premium is to be
received; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon receipt of the premium specified in the Certificate, make
out of the moneys and Securities specifically allocated to such Series the
deposits into the Senior Security Account, if any, as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract underlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures Contract Option
is exercised; (e) the net total amount, if any, payable to the Fund upon such
exercise; (f) the net total amount, if any, payable by the Fund upon such
exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such Series, if any. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the moneys and Securities
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<PAGE> 20
specifically allocated to such Series, the payments, if any, and the deposits,
if any, into the Senior Security Account as specified in the Certificate. The
deposits to and/or withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to
a previously written Futures Contract Option described in this Article in order
to liquidate its position as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
the Futures Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing transaction;
(c) the type of Future Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Option Contract; (d) the
exercise price; (e) the premium to be paid by the Fund; (f) the expiration date;
(g) the name of the broker or futures commission merchant to whom the premium is
to be paid; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior Security Account
specified in the Certificate. The withdrawals, if any, to be made from the
Margin Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased by
the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in
the case of an exercise such deposits into the Senior Security Account as may be
specified in a Certificate. The deposits to and/or withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to Article VI
hereof.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund
shall promptly deliver to the Custodian a Certificate specifying: (a) the Series
for which such short
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<PAGE> 21
sale was made; (b) the name of the issuer and the title of the Security; (c) the
number of shares or principal amount sold, and accrued interest or dividends, if
any; (d) the dates of the sale and settlement; (e) the sale price per unit; (f)
the total amount credited to the Fund upon such sale, if any; (g) the amount of
cash and/or the amount and kind of Securities, if any, which are to be deposited
in a Margin Account and the name in which such Margin Account has been or is to
be established; (h) the amount of cash and/or the amount and kind of Securities,
if any, to be deposited in a Senior Security Account, and (i) the name of the
broker through whom such short sale was made. The Custodian shall upon its
receipt of a statement from such broker confirming such sale and that the total
amount credited to the Fund upon such sale, if any, as specified in the
Certificate is held by such broker for the account of the Custodian (or any
nominee of the Custodian) as custodian of the Fund, issue a receipt or make the
deposits into the Margin Account and the Senior Security Account specified in
the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net total amount
payable to the broker upon such closing-out; (h) the amount of cash and the
amount and kind of Securities to be withdrawn, if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such closing-out, and
the return and/or cancellation of the receipts, if any, issued by the Custodian
with respect to the short sale being closed-out, pay out of the moneys held for
the account of the Fund to the broker the net total amount payable to the
broker, and make the withdrawals from the Margin Account and the Senior Security
Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters into a Reverse Repurchase Agreement
with respect to Securities and money held by the Custodian hereunder, the Fund
shall deliver to the
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Custodian a Certificate, or in the event such Reverse Repurchase Agreement is a
Money Market Security, a Certificate or Oral Instructions specifying: (a) the
Series for which the Reverse Repurchase Agreement is entered; (b) the total
amount payable to the Fund in connection with such Reverse Repurchase Agreement
and specifically allocated to such Series; (c) the broker or dealer through or
with whom the Reverse Repurchase Agreement is entered; (d) the amount and kind
of Securities to be delivered by the Fund to such broker or dealer; (e) the date
of such Reverse Repurchase Agreement; and (f) the amount of cash and/or the
amount and kind of Securities, if any, specifically allocated to such Series to
be deposited in a Senior Security Account for such Series in connection with
such Reverse Repurchase Agreement. The Custodian shall, upon receipt of the
total amount payable to the Fund specified in the Certificate or Oral
Instructions make the delivery to the broker or dealer, and the deposits, if
any, to the Senior Security Account, specified in such Certificate or Oral
Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions to the Custodian specifying: (a)
the Reverse Repurchase Agreement being terminated and the Series for which same
was entered; (b) the total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be received by the Fund
and specifically allocated to such Series in connection with such termination;
(d) the date of termination; (e) the name of the broker or dealer with or
through whom the Reverse Repurchase Agreement is to be terminated; and (f) the
amount of cash and/or the amount and kind of Securities to be withdrawn from the
Senior Securities Account for such Series. The Custodian shall, upon receipt of
the amount and kind of Securities to be received by the Fund specified in the
Certificate or Oral Instructions, make the payment to the broker or dealer, and
the withdrawals, if any, from the Senior Security Account, specified in such
Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall deliver or
cause to be delivered to the Custodian a Certificate specifying with respect to
each such loan: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities, (c) the
number of shares or the
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principal amount loaned, (d) the date of loan and delivery, (e) the total amount
to be delivered to the Custodian against the loan of the Securities, including
the amount of cash collateral and the premium, if any, separately identified,
and (f) the name of the broker, dealer, or financial institution to which the
loan was made. The Custodian shall deliver the Securities thus designated to the
broker, dealer or financial institution to which the loan was made upon receipt
of the total amount designated as to be delivered against the loan of
Securities. The Custodian may accept payment in connection with a delivery
otherwise than through the Book-Entry System or Depository only in the form of a
certified or bank cashier's check payable to the order of the Fund or the
Custodian drawn on New York Clearing House funds and may deliver Securities in
accordance with the customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by the
Fund, the Fund shall deliver or cause to be delivered to the Custodian a
Certificate specifying with respect to each such loan termination and return of
Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be returned, (d)
the date of termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any offsetting credits
as described in said Certificate); and (f) the name of the broker, dealer, or
financial institution from which the Securities will be returned. The Custodian
shall receive all Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon receipt thereof shall
pay, out of the moneys held for the account of the Fund, the total amount
payable upon such return of Securities as set forth in the Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the
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Custodian into, or withdrawn from, a Senior Securities Account, the Custodian
shall be under no obligation to make any such deposit or withdrawal and shall so
notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member in
whose name, or for whose benefit, the account was established as specified in
the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in
and to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which
cash and/or Securities are maintained in a Collateral Account for any Series,
the Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding the
delivery to the Fund of such statement, the Fund shall furnish to the Custodian
a Certificate specifying the then market value of the Securities described in
such statement. In the event such then market value is indicated to be less than
the Custodian's obligation with respect to any outstanding Put Option guarantee
letter or similar document, the Fund shall promptly specify in a Certificate the
additional cash and/or Securities to be
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deposited in such Collateral Account to eliminate such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, either (i) setting forth with respect to the Series specified therein
the date of the declaration of a dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent on the payment
date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall pay out of
the moneys held for the account of each Series the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund with
respect to such Series.
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade date, and
price; and
(b) the amount of money to be received by the Custodian for
the sale of such Shares and specifically allocated to the separate account in
the name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian
shall credit such money to the separate account in the name of the Series for
which such money was received.
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3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Whenever the Fund desires the Custodian to make payment out of the
money held by the Custodian hereunder in connection with a redemption of any
Shares, it shall furnish to the Custodian:
(a) a resolution by the Board of Directors of the Fund
directing the Transfer Agent to redeem the Shares;
and
(b) a Certificate specifying the number and Series of
Shares redeemed; and
(c) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the moneys held in the separate account in
the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on
behalf of any Series which results in an overdraft because the moneys held by
the Custodian in the separate account for such Series shall be insufficient to
pay the total amount payable upon a purchase of Securities specifically
allocated to such Series, as set forth in a Certificate or Oral Instructions, or
which results in an overdraft in the separate account of such Series for some
other reason, or if the Fund is for any other reason indebted to the Custodian
with respect to a Series, including any indebtedness to The Bank of New York
under the Fund's Cash Management and Related Services Agreement, (except a
borrowing for investment or for temporary or emergency purposes using Securities
as collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a
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rate per annum (based on a 360-day year for the actual number of days involved)
equal to 1/2% over Custodian's prime commercial lending rate in effect from time
to time, such rate to be adjusted on the effective date of any change in such
prime commercial lending rate but in no event to be less than 6% per annum. In
addition, the Fund hereby agrees that the Custodian shall have a continuing lien
and security interest in and to any property specifically allocated to such
Series at any time held by it for the benefit of such Series or in which the
Fund may have an interest which is then in the Custodian's possession or control
or in possession or control of any third party acting in the Custodian's behalf.
The Fund authorizes the Custodian, in its sole discretion, at any time to charge
any such overdraft or indebtedness together with interest due thereon against
any balance of account standing to such Series' credit on the Custodian's books.
In addition, the Fund hereby covenants that on each Business Day on which either
it intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from
a third party, or which next succeeds a Business Day on which at the close of
business the Fund had outstanding a Reverse Repurchase Agreement or such a
borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian,
in writing, of each such borrowing, shall specify the Series to which the same
relates, and shall not incur any indebtedness not so specified other than from
the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by any such
bank setting forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such borrowing: (a)
the Series to which such borrowing relates; (b) the name of the bank, (c) the
amount and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Fund, or other loan
agreement, (d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the total
amount payable to the Fund on the borrowing date, (g) the market value of
Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities, and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan is
in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of
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the loan payable, provided that the same conforms to the total amount payable as
set forth in the Certificate. The Custodian may, at the option of the lending
bank, keep such collateral in its possession, but such collateral shall be
subject to all rights therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such Securities as
additional collateral as may be specified in a Certificate to collateralize
further any transaction described in this paragraph. The Fund shall cause all
Securities released from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time such return of
collateral as may be tendered to it. In the event that the Fund fails to specify
in a Certificate the Series, the name of the issuer, the title and number of
shares or the principal amount of any particular Securities to be delivered as
collateral by the Custodian, the Custodian shall not be under any obligation to
deliver any Securities.
ARTICLE XV.
INSTRUCTIONS
1. with respect to any software provided by the Custodian to a Fund in
order for the Fund to transmit Instructions to the Custodian (the "Software"),
the Custodian grants to such Fund a personal, nontransferable and nonexclusive
license to use the Software solely for the purpose of transmitting Instructions
to, and receiving communications from, the Custodian in connection with its
account(s). The Fund agrees not to sell, reproduce, lease or otherwise provide,
directly or indirectly, the Software or any portion thereof to any third party
without the prior written consent of the Custodian.
2. The Fund shall obtain and maintain at its own cost and expense all
equipment and services, including but not limited to communications services,
necessary for it to utilize the Software and transmit Instructions to the
Custodian. The Custodian shall not be responsible for the reliability,
compatibility with the Software or availability of any such equipment or
services or the performance or nonperformance by any nonparty to this Custody
Agreement.
3. The Fund acknowledges that the Software, all data bases made
available to the Fund by utilizing the Software (other than data bases relating
solely to the assets of the Fund and transactions with respect thereto), and any
proprietary data, processes, information and documentation (other than which are
or become part of the public domain or are legally required to be made available
to the public) (collectively, the "Information"), are the exclusive and
confidential property of the Custodian. The Fund shall keep
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the Information confidential by using the same care and discretion that the Fund
uses with respect to its own confidential property and trade secrets and shall
neither make nor permit any disclosure without the prior written consent of the
Custodian. Upon termination of this Agreement or the Software license granted
hereunder for any reason, the Fund shall return to the Custodian all copies of
the Information which are in its possession or under its control or which the
Fund distributed to third parties.
4. The Custodian reserves the right to modify the Software from time to
time upon reasonable prior notice and the Fund shall install new releases of the
Software as the Custodian may direct. The Fund agrees not to modify or attempt
to modify the Software without the Custodian's prior written consent. The Fund
acknowledges that any modifications to the Software, whether by the Fund or the
Custodian and whether with or without the Custodian's consent, shall become the
property of the Custodian.
5. The Custodian makes no warranties or representations of any kind
with regard to the Software or the method(s) by which the Fund may transmit
Instructions to the Custodian, express or implied, including but not limited to
any implied warranties or merchantability or fitness for a particular purpose.
6. Where the method for transmitting Instructions by the Fund involves
an automatic systems acknowledgment by the Custodian of its receipt of such
Instructions, then in the absence of such acknowledgment the Custodian shall not
be liable for any failure to act pursuant to such Instructions, the Fund may not
claim that such Instructions were received by the Custodian, and the Fund shall
deliver a Certificate by some other means.
7. (a) The Fund agrees that where it delivers to the Custodian
Instructions hereunder, it shall be the Fund's sole responsibility to ensure
that only persons duly authorized by the Fund transmit such Instructions to the
Custodian. The Fund will cause all persons transmitting Instructions to the
Custodian to treat applicable user and authorization codes, passwords and
authentication keys with extreme care, and irrevocably authorizes the Custodian
to act in accordance with and rely upon Instructions received by it pursuant
hereto.
(b) The Fund hereby represents, acknowledges and agrees that
it is fully informed of the protections and risks associated with the various
methods of transmitting Instructions to the Custodian and that there may be more
secure methods of transmitting Instructions to the Custodian than the method(s)
selected by the Fund. The Fund hereby agrees that the security procedures (if
any) to be followed in connection with the Fund's transmission of Instructions
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provide to it a commercially reasonable degree of protection in light of its
particular needs and circumstances.
8. The Fund hereby presents, warrants and covenants to the Custodian
that this Agreement has been duly approved by a resolution of its Board of
Directors, and that its transmission of Instructions pursuant hereto shall at
all times comply with the Investment Company Act of 1940, as amended.
9. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours after
the earliest of (i) discovery thereof, (ii) the Business Day on which discovery
should have occurred through the exercise of reasonable care and (iii) in the
case of any error, the date of actual receipt of the earliest notice which
reflects such error, it being agreed that discovery and receipt of notice may
only occur on a business day. The Custodian shall promptly advise the Fund
whenever the Custodian learns of any errors, omissions or interruption in, or
delay or unavailability of, the Fund's ability to send Instructions.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as
sub-custodian for each Series' Foreign Securities (as such term is defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as
amended) and other assets, the foreign banking institutions and foreign
securities depositories and clearing agencies designated on Schedule I hereto
("Foreign Sub-Custodians") to carry out their respective responsibilities in
accordance with the terms of the sub-custodian agreement between each such
Foreign Sub-Custodian and the Custodian, copies of which have been previously
delivered to the Fund and receipt of which is hereby acknowledged (each such
agreement, a "Foreign Sub-Custodian Agreement"). Upon receipt of a Certificate,
together with a certified resolution substantially in the form attached as
Exhibit E of the Fund's Board of Directors, the Fund may designate any
additional foreign sub-custodian with which the Custodian has an agreement for
such entity to act as the Custodian's agent, as its sub-custodian and any such
additional foreign sub-custodian shall be deemed added to Schedule I. Upon
receipt of a Certificate from the Fund, the Custodian shall cease the employment
of any one or more Foreign Sub-Custodians for maintaining custody of the Fund's
assets and such Foreign Sub-Custodian shall be deemed deleted from Schedule I.
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2. Each Foreign Sub-Custodian Agreement shall be substantially in the
form previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the Fund
or any Series against a Foreign Sub-Custodian as a consequence of any loss,
damage, cost, expense, liability or claim sustained or incurred by the Fund or
any Series if and to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the
terms of the applicable Foreign Sub Custodian Agreement, use reasonable efforts
to arrange for the independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as such books and
records relate to the performance of such Foreign Sub-Custodian under its
agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Series held by Foreign Sub-Custodians, including but not limited to, an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually agreed
upon, information concerning the Foreign Sub-Custodians employed by the
Custodian. Such information shall be similar in kind and scope to that furnished
to the Fund in connection with the Fund's initial approval of such Foreign
Sub-Custodians and, in any event, shall include information pertaining to (i)
the Foreign Custodians' financial strength, general reputation and standing in
the countries in which they are located and their ability to provide the
custodial services required, and (ii) whether the Foreign Sub-Custodians would
provide a level of safeguards for safekeeping and custody of securities not
materially different from those prevailing in the United States. The Custodian
shall monitor the general operating performance of each Foreign Sub-Custodian.
The Custodian agrees that it will use reasonable care in monitoring compliance
by each Foreign Sub-Custodian with the terms of the relevant Foreign
Sub-Custodian Agreement
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and that if it learns of any breach of such Foreign Sub-Custodian Agreement
believed by the Custodian to have a material adverse effect on the Fund or any
Series it will promptly notify the Fund of such breach. The Custodian also
agrees to use reasonable and diligent efforts to enforce its rights under the
relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
9. Notwithstanding any other provision in this Agreement to the
contrary, with respect to any losses or damages arising out of or relating to
any actions or omissions of any Foreign Sub-Custodian the sole responsibility
and liability of the Custodian shall be to take appropriate action at the Fund's
expense to recover such loss or damage from the Foreign Sub-Custodian. It is
expressly understood and agreed that the Custodian's sole responsibility and
liability shall be limited to amounts so recovered from the Foreign
Sub-Custodian.
ARTICLE XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions specifying
with respect to such FX Transaction: (a) the Series to which such FX Transaction
is specifically allocated; (b) the type and amount of Currency to be purchased
by the Fund; (c) the type and amount of Currency to be sold by the Fund; (d) the
date on which the Currency to be purchased is to be delivered; (e) the date on
which the Currency to be sold is to be delivered; and (f) the name of the person
from whom or through whom such currencies are to be purchased and sold. Unless
otherwise instructed by a Certificate or Oral Instructions, the
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Custodian shall deliver, or shall instruct a Foreign Sub-Custodian to deliver,
the Currency to be sold on the date on which such delivery is to be made, as set
forth in the Certificate, and shall receive, or instruct a Foreign Sub-Custodian
to receive, the Currency to be purchased on the date as set forth in the
Certificate.
2. Where the Currency to be sold is to be delivered on the same day as
the Currency to be purchased, as specified in the Certificate or Oral
Instructions, the Custodian or a Foreign Sub-Custodian may arrange for such
deliveries and receipts to be made in accordance with the customs prevailing
from time to time among brokers or dealers in Currencies, and such receipt and
delivery may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
such receipts and deliveries, which responsibility and liability shall continue
until the Currency to be received by the Fund has been received in full.
3. Any FX Transaction effected by the Custodian in connection with this
Agreement may be entered with the Custodian, any office, branch or subsidiary of
The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as
principal or otherwise through customary banking channels. The Fund may issue a
standing Certificate with respect to FX Transaction but the Custodian may
establish rules or limitations concerning any foreign exchange facility made
available to the Fund. The Fund shall bear all risks of investing in Securities
or holding Currency. Without limiting the foregoing, the Fund shall bear the
risks that rules or procedures imposed by a Foreign Sub-Custodian or foreign
depositories, exchange controls, asset freezes or other laws, rules, regulations
or orders shall prohibit or impose burdens or costs on the transfer to, by or
for the account of the Fund of Securities or any cash held outside the Fund's
jurisdiction or denominated in Currency other than its home jurisdiction or the
conversion of cash from one Currency into another currency. The Custodian shall
not be obligated to substitute another Currency for a Currency (including a
Currency that is a component of a Composite Currency Unit) whose
transferability, convertibility or availability has been affected by such law,
regulation, rule or procedure. Neither the Custodian nor any Foreign
Sub-Custodian shall be liable to the Fund for any loss resulting from any of the
foregoing events.
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI,
neither the Custodian nor its nominee shall be
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<PAGE> 34
liable for any loss or damage, including counsel fees, resulting from its action
or omission to act or otherwise, either hereunder or under any Margin Account
Agreement, except for any such loss or damage arising out of its own negligence
or willful misconduct. In no event shall the Custodian be liable to the Fund or
any third party for special, indirect or consequential damages or lost profits
or loss of business, arising under or in connection with this Agreement, even if
previously informed of the possibility of such damages and regardless of the
form of action. The Custodian may, with respect to questions of law arising
hereunder or under any Margin Account Agreement, apply for and obtain the advice
and opinion of counsel to the Fund or of its own counsel, at the expense of the
Fund, and shall be fully protected with respect to anything done or omitted by
it in good faith in conformity with such advice or opinion. The Custodian shall
be liable to the Fund for any loss or damage resulting from the use of the
Book-Entry System or any Depository arising by reason of any negligence or
willful misconduct on the part of the Custodian or any of its employees or
agents.
2. Without limiting the generality of the foregoing, the Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(a) the validity of the issue of any Securities purchased,
sold, or written by or for the Fund, the legality of the purchase, sale or
writing thereof, or the propriety of the amount paid or received therefor;
(b) the legality of the sale or redemption of any Shares, or
the propriety of the amount to be received or paid therefor;
(c) the legality of the declaration or payment of any dividend
by the Fund;
(d) the legality of any borrowing by the Fund using Securities
as collateral;
(e) the legality of any loan of portfolio Securities, nor
shall the Custodian be under any duty or obligation to see to it that any cash
collateral delivered to it by a broker, dealer, or financial institution or held
by it at any time as a result of such loan of portfolio Securities of the Fund
is adequate collateral for the Fund against any loss it might sustain as a
result of such loan. The Custodian specifically, but not by way of limitation,
shall not be under any duty or obligation periodically to check or notify the
Fund that the amount of such cash collateral held by it for the Fund is
sufficient collateral for the Fund, but such duty or obligation shall be the
sole responsibility of the Fund. In addition, the Custodian shall be under no
duty or obligation to see that any broker, dealer or financial institution
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<PAGE> 35
to which portfolio Securities of the Fund are lent pursuant to Article X of this
Agreement makes payment to it of any dividends or interest which are payable to
or for the account of the Fund during the period of such loan or at the
termination of such loan, provided, however, that the Custodian shall promptly
notify the Fund in the event that such dividends or interest are not paid and
received when due; or
(f) the sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or Collateral
Account in connection with transactions by the Fund. In addition, the Custodian
shall be under no duty or obligation to see that any broker, dealer, futures
commission merchant or Clearing Member makes payment to the Fund of any
variation margin payment or similar payment which the Fund may be entitled to
receive from such broker, dealer, futures commission merchant or Clearing
Member, to see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount the Fund is
entitled to receive, or to notify the Fund of the Custodian's receipt or
non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the Fund
until the Custodian actually receives and collects such money directly or by the
final crediting of the account representing the Fund's interest at the
Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable
for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held in
the Depository, unless the Custodian shall have actually received timely notice
from the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action suit or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or liability, unless
indemnity satisfactory to it against all expense and liability be furnished as
often as may be required.
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<PAGE> 36
5. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from the Transfer
Agent of the Fund nor to take any action to effect payment or distribution by
the Transfer Agent of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount if the Securities upon which such
amount is payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XVI appoint one or more banking institutions
as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as
Co-Custodian or Co-Custodians including, but not limited to, banking
institutions located in foreign countries, of Securities and moneys at any time
owned by the Fund, upon such terms and conditions as may be approved in a
Certificate or contained in an agreement executed by the Custodian, the Fund and
the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to
ascertain whether any Securities at any time delivered to, or held by it or by
any Foreign Sub-Custodian, for the account of the Fund and specifically
allocated to a Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or (b) to ascertain
whether any transactions by the Fund, whether or not involving the Custodian,
are such transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian all out-of-pocket expenses and such compensation as may be
agreed upon from time to time between the Custodian and the Fund. The Custodian
may charge such compensation and any expenses with respect to a Series incurred
by the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be entitled to charge against any money held by it for the account of a
Series such Series' pro rata share (based on such Series net asset value at the
time of the charge to the aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability or expense, including counsel fees,
for which it shall be
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<PAGE> 37
entitled to reimbursement under the provisions of this Agreement. The expenses
for which the Custodian shall be entitled to reimbursement hereunder shall
include, but are not limited to, the expenses of sub-custodians and foreign
branches of the Custodian incurred in settling outside of New York City
transactions involving the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the Custodian a
Certificate or facsimile thereof confirming such Oral Instructions in such
manner so that such Certificate or facsimile thereof is received by the
Custodian, whether by hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such Oral Instructions
are given to the Custodian. The Fund agrees that the fact that such confirming
instructions are not received, or that contrary instructions are received, by
the Custodian shall in no way affect the validity of the transactions or
enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund in acting upon
Oral Instructions given to the Custodian hereunder concerning such transactions
provided such instructions reasonably appear to have been received from an
Officer.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the
-37-
<PAGE> 38
Custodian its expenses of providing such copies. Upon reasonable request of the
Fund, the Custodian shall provide in hard copy or on microfilm, whichever the
Custodian elects, any records included in any such delivery which are maintained
by the Custodian on a computer disk, or are similarly maintained, and the Fund
shall reimburse the Custodian for its expenses of providing such hard copy or
microfilm.
13. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI and XVII the Custodian may
deliver and receive Securities, and receipts with respect to such Securities,
and arrange for payments to be made and received by the Custodian in accordance
with the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XIX.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving
to the other party a notice in writing
-38-
<PAGE> 39
specifying the date of such termination, which shall be not less than ninety
(90) days after the date of giving of such notice. In the event such notice is
given by the Fund, it shall be accompanied by a copy of a resolution of the
Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, electing to terminate this Agreement and designating a successor
custodian or custodians, each of which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus and undivided profits. In
the event such notice is given by the Custodian, the Fund shall, on or before
the termination date, deliver to the Custodian a copy of a resolution of the
Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, designating a successor custodian or custodians. In the absence of
such designation by the Fund, the Custodian may designate a successor custodian
which shall be a bank or trust company having not less than $2,000,000 aggregate
capital, surplus and undivided profits. Upon the date set forth in such notice
this Agreement shall terminate, and the Custodian shall upon receipt of a notice
of acceptance by the successor custodian on that date deliver directly to the
successor custodian all Securities and moneys then owned by the Fund and held by
it as Custodian, after deducting all fees, expenses and other amounts for the
payment or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund be deemed to be its own custodian and the Custodian shall thereby be
relieved of all duties and responsibilities pursuant to this Agreement, other
than the duty with respect to Securities held in the Book=Entry System which
cannot be delivered to the Fund to hold such Securities hereunder in accordance
with this Agreement.
ARTICLE XX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Officers of the Fund under its seal, setting forth the names and the
signatures of the present Officers of the Fund. The Fund agrees to furnish to
the Custodian a new Certificate in similar form in the event that any such
present Officer ceases to be an Officer of the Fund, or in the event that other
or additional Officers are elected or appointed. Until such new Certificate
shall be received, the Custodian shall be fully protected in acting under the
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<PAGE> 40
provisions of this Agreement or Oral Instructions upon the signatures of the
Officers as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund may from time to
time designate in writing.
4. This Agreement may not be amended or modified in any manner except
by a written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Directors of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Directors.
6. This Agreement shall be construed in accordance with the laws of the
State of New York without giving effect to conflict of laws principles thereof.
Each party hereby consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any dispute arising
hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
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<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
INCOME OPPORTUNITIES
FUND 2006, INC.
[SEAL] By:_________________________
Attest:
_________________________
THE BANK OF NEW YORK
[SEAL] By:_________________________
Name:
Title:
Attest:
_________________________
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<PAGE> 42
APPENDIX A
I, _________________________ , _________________________ and I,
_________________________ , _________________________ of INCOME OPPORTUNITIES
FUND 2006, INC., a Maryland corporation (the "Fund"), do hereby certify that:
The following individuals serve in the following positions with the
Fund and each has been duly elected or appointed by the Board of Directors of
the Fund to each such position and qualified therefor in conformity with the
Fund's Articles of Incorporation and By-Laws, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
_______________________ _______________________ _______________________
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<PAGE> 43
APPENDIX B
SERIES
-43-
<PAGE> 44
APPENDIX C
I, Jorge Ramos, a Vice President with THE BANK OF NEW YORK do hereby
designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
44
<PAGE> 45
EXHIBIT A
CERTIFICATION
The undersigned, _________________________ , hereby certifies that he
or she is the duly elected and acting _________________________ of INCOME
OPPORTUNITIES FUND 2006, INC., a Maryland corporation (the "Fund"), and further
certifies that the following resolution was adopted by the Board of Directors of
the Fund at a meeting duly held on _________________________ , 1998, at which a
quorum was at all times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of _________________________ , 1999, (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis to deposit
in the Book Entry System, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of the Series to
which the same are specifically allocated, and to utilize the
Book-Entry System to the extent possible in connection with its
performance thereunder, including, without limitation, in connection
with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of INCOME
OPPORTUNITIES FUND 2006, INC., as of the _________________________ day of
_________________________ , 1999.
_________________________
[SEAL]
<PAGE> 46
EXHIBIT B
CERTIFICATION
The undersigned, _________________________ , hereby certifies that he
or she is the duly elected and acting _________________________ of INCOME
OPPORTUNITIES FUND 2006, INC., a Maryland corporation (the "Fund"), and further
certifies that the following resolution was adopted by the Board of Directors of
the Fund at a meeting duly held on__________, 1999, at which a quorum was at all
times present and that such resolution has not been modified or rescinded and is
in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of _________________________ , 1998, (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis until such
time as it receives a Certificate, as defined in the Custody Agreement,
to the contrary to deposit in the Depository, as defined in the Custody
Agreement, all securities eligible for deposit therein, regardless of
the Series to which the same are specifically allocated, and to utilize
the Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in connection
with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of INCOME
OPPORTUNITIES FUND 2006, INC., as of the _________________________ day of
_________________________ , 1999.
_________________________
[SEAL]
<PAGE> 47
EXHIBIT B-1
CERTIFICATION
The undersigned, _________________________ , hereby certifies that he
or she is the duly elected and acting _________________________ of INCOME
OPPORTUNITIES FUND 2006, INC., a Maryland corporation (the "Fund"), and further
certifies that the following resolution was adopted by the Board of Directors of
the Fund at a meeting duly held on _________________________ , 1999, at which a
quorum was at all times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of _________________________ , 1999, (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis until such
time as it receives a Certificate, as defined in the Custody Agreement,
to the contrary to deposit in the Participants Trust Company as
Depository, as defined in the Custody Agreement, all securities
eligible for deposit therein, regardless of the Series to which the
same are specifically allocated, and to utilize the Participants Trust
Company to the extent possible in connection with its performance
thereunder, including, without limitation, in connection with
settlements of purchases and sales of securities, loans of securities,
and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of INCOME
OPPORTUNITIES FUND 2006, INC., as of the _________________________ day of
_________________________ , 1999.
_________________________
[SEAL]
<PAGE> 48
EXHIBIT C
CERTIFICATION
The undersigned, _________________________ , hereby certifies that he
or she is the duly elected and acting _________________________ of MUNIHOLDINGS
INSURED FUND IV, INC., a Maryland corporation (the "Fund"), and further
certifies that the following resolution was adopted by the Board of Directors of
the Fund at a meeting duly held on _________________________ , 1999, at which a
quorum was at all times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date hereof .
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of _________________________ , 1999, (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis until such
time as it receives a Certificate, as defined in the Custody Agreement,
to the contrary, to accept, utilize and act with respect to Clearing
Member confirmations for Options and transaction in Options, regardless
of the Series to which the same are specifically allocated, as such
terms are defined in the Custody Agreement, as provided in the Custody
Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of INCOME
OPPORTUNITIES FUND 2006, INC., as of the _________________________ day of
_________________________ , 1999.
_________________________
[SEAL]
<PAGE> 49
EXHIBIT D
The undersigned,_________________________ , hereby certifies that he or
she is the duly elected and acting _________________________ of INCOME
OPPORTUNITIES FUND 2006, INC., a Maryland corporation (the "Fund"), further
certifies that the following resolutions were adopted by the Board of Directors
of the Fund at a meeting duly held on _________________________ , 1999 at which
a quorum was at all times present and that such resolutions have not been
modified or rescinded and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
the Custody Agreement between The Bank of New York and the Fund dated
as of _________________________ , 1999 (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis to act in
accordance with, and to rely on Instructions (as defined in the Custody
Agreement).
RESOLVED, that the Fund shall establish access codes and grant
use of such access codes only to Officers of the Fund as defined in the
Custody Agreement, shall establish internal safekeeping procedures to
safeguard and protect the confidentiality and availability of user and
access codes, passwords and authentication keys, and shall use
Instructions only in a manner that does not contravene the Investment
Company Act of 1940, as amended, or the rules and regulations
thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of INCOME
OPPORTUNITIES FUND 2006, INC., as of the _________________________ day of
_________________________ , 1999.
_________________________
[SEAL]
<PAGE> 50
EXHIBIT E
The undersigned, _________________________ , hereby certifies that he
or she is the duly elected and acting _________________________ of INCOME
OPPORTUNITIES FUND 2006, INC., a Maryland corporation (the "Fund"), further
certifies that the following resolutions were adopted by the Board of Directors
of the Fund at a meeting duly held on _________________________ , 1999 at which
a quorum was at all times present and that such resolutions have not been
modified or rescinded and are in full force and effect as of the date hereof.
RESOLVED, that the maintenance of the Fund's assets in each
country listed in Schedule I hereto be, and hereby is, approved by the
Board of Directors as consistent with the best interests of the Fund
and its shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the
foreign branches of The Bank of New York (the "Bank") listed in
Schedule I located in the countries specified therein, and with the
foreign sub-custodians and depositories listed in Schedule I located in
the countries specified therein be, and hereby is, approved by the
Board of Directors as consistent with the best interest of the Fund and
its shareholders; and further
RESOLVED, that the Sub-Custodian Agreements presented to this
meeting between the Bank and each of the foreign sub-custodians and
depositories listed in Schedule I providing for the maintenance of the
Fund's assets with the applicable entity, be and hereby are, approved
by the Board of Directors as consistent with the best interests of the
Fund and its shareholders; and further
RESOLVED, that the appropriate officers of the Fund are hereby
authorized to place assets of the Fund with the aforementioned foreign
branches and foreign sub-custodians and depositories as hereinabove
provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of
them, are authorized to do any and all other acts, in the name of the
Fund and on its behalf, as they, or any of them, may determine to be
necessary or desirable and proper in connection with or in furtherance
of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of INCOME
OPPORTUNITIES FUND 2006, INC., as of the _________________________ day of
_________________________ , 1999.
_________________________
[SEAL]
<PAGE> 1
EXHIBIT (K)
THE
BANK OF
NEW
YORK
================================================================================
STOCK TRANSFER AGENCY AGREEMENT
between
INCOME OPPORTUNITIES FUND 2006, INC.
and
THE BANK OF NEW YORK
ACCOUNT NUMBER(S) _________________________
================================================================================
STOCK TRANSFER AGENCY AGREEMENT
AGREEMENT, made as of ___________________, by and between Income
Opportunities Fund 2006, Inc., a corporation organized and existing under the
laws of the State of Maryland (hereinafter referred to as the "Customer"), and
THE BANK OF NEW YORK, a New York trust company (hereinafter referred to as the
"Bank").
WITNESSETH:
That for and in consideration of the mutual promises hereinafter set
forth, the parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall
have the following meanings:
1. "Business Day" shall be deemed to be each day on which the Bank is
open for business.
<PAGE> 2
2. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Bank by the Customer which is signed by any Officer, as hereinafter defined,
and actually received by the Bank.
3. "Officer" shall be deemed to be the Customer's Chief Executive
Officer, President, any Vice President, the Secretary, the Treasurer, the
Controller, any Assistant Treasurer, and any Assistant Secretary duly authorized
by the Board of Directors of the Customer to execute any Certificate,
instruction, notice or other instrument on behalf of the Customer and named in a
Certificate, as such Certificate may be amended from time to time.
4. "Shares" shall mean all or any part of each class of the shares of
capital stock of the Customer which from time to time are authorized and/or
issued by the Customer and identified in a Certificate of the Secretary of the
Customer under corporate seal, as such Certificate may be amended from time to
time, with respect to which the Bank is to act hereunder.
ARTICLE II
APPOINTMENT OF BANK
1. The Customer hereby constitutes and appoints the Bank as its agent
to perform the services described herein and as more particularly described in
Schedule I attached hereto (the "Services"), and the Bank hereby accepts
appointment as such agent and agrees to perform the Services in accordance with
the terms hereinafter set forth.
2. In connection with such appointment, the Customer shall deliver the
following documents to the Bank:
(a) A certified copy of the Certificate of Incorporation or other
document evidencing the Customer's form of organization (the
"Charter") and all amendments thereto;
(b) A certified copy of the By-Laws of the Customer;
-2-
<PAGE> 3
(c) A certified copy of a resolution of the Board of Directors of
the Customer appointing the Bank to perform the Services and
authorizing the execution and delivery of this Agreement;
(d) A Certificate signed by the Secretary of the Customer
specifying: the number of authorized Shares, the number of
such authorized Shares issued and currently outstanding, and
the names and specimen signatures of all persons duly
authorized by the Board of Directors of the Customer to
execute any Certificate on behalf of the Customer, as such
Certificate may be amended from time to time;
(e) A Specimen Share certificate for each class of Shares in the
form approved by the Board of Directors of the Customer,
together with a Certificate signed by the Secretary of the
Customer as to such approval and covenanting to supply a new
such Certificate and specimen whenever such form shall change;
(f) A copy of the Customer's Registration Statement, as amended to
date, and the most recently filed Post-Effective Amendment
thereto, filed by the Customer with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended, together with any applications filed in connection
therewith; and
(g) An opinion of counsel for the Customer, in a form satisfactory
to the Bank, with respect to the validity of the authorized
and outstanding Shares, the obtaining of all necessary
governmental consents, whether such Shares are fully paid and
non-assessable and the status of such Shares under the
Securities Act of 1933, as amended, and any other applicable
law or regulation (i.e., if subject to registration, that they
have been registered and that the Registration Statement has
become effective or, if exempt, the specific grounds
therefor);
(h) A list of the name, address, social security or taxpayer
identification number of each Shareholder, number of Shares
owned, certificate numbers, and whether any "stops" have been
placed; and
(i) An opinion of counsel for the Customer, in a form satisfactory
to the Bank, with respect to the due authorization by the
Customer and the validity and effectiveness of the use of
facsimile signatures by the Bank in connection with the
countersigning and registering of Share certificates of the
Customer.
3. The Customer shall furnish the Bank with a sufficient supply of
blank Share certificates and from time to time will renew such supply upon
request of the Bank. Such blank Share certificates shall be properly signed, by
facsimile or otherwise, by Officers of the Customer authorized by law or by the
By-Laws to sign Share certificates, and, if required, shall bear the corporate
seal or a facsimile thereof.
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
------------------------------------
1. The Customer shall deliver to the Bank the following documents on or
before the effective date of any increase, decrease or other change in the total
number of Shares authorized to be issued:
(a) A certified copy of the amendment to the Charter giving effect
to such increase, decrease or change;
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<PAGE> 4
(b) An opinion of counsel for the Customer, in a form satisfactory
to the Bank, with respect to the validity of the Shares, the
obtaining of all necessary governmental consents, whether such
Shares are fully paid and non-assessable and the status of
such Shares under the Securities Act of 1933, as amended, and
any other applicable federal law or regulations (i.e., if
subject to registration, that they have been registered and
that the Registration Statement has become effective or, if
exempt, the specific grounds therefor); and
(c) In the case of an increase, if the appointment of the Bank was
theretofore expressly limited, a certified copy of a
resolution of the Board of Directors of the Customer
increasing the authority of the Bank.
2. Prior to the issuance of any additional Shares pursuant to stock
dividends, stock splits or otherwise, and prior to any reduction in the number
of Shares outstanding, the Customer shall deliver the following documents to the
Bank:
(a) A certified copy of the resolutions adopted by the Board of
Directors and/or the shareholders of the Customer authorizing
such issuance of additional Shares of the Customer or such
reduction, as the case may be;
(b) A certified copy of the order or consent of each governmental
or regulatory authority required by law as a prerequisite to
the issuance or reduction of such Shares, as the case may be,
and an opinion of counsel for the Customer that no other order
or consent is required; and
(c) An opinion of counsel for the Customer, in a form satisfactory
to the Bank, with respect to the validity of the Shares, the
obtaining of all necessary governmental consents, whether such
Shares are fully paid and non-assessable and the status of
such Shares under the Securities Act of 1933, as amended, and
any other applicable law or regulation (i.e., if subject to
registration, that they have been registered and that the
Registration Statement has become effective, or, if exempt,
the specific grounds therefor).
ARTICLE IV
RECAPITALIZATION OR CAPITAL ADJUSTMENT
1. In the case of any negative stock split, recapitalization or other
capital adjustment requiring a change in the form of Share certificates, the
Bank will issue Share certificates in the new form in exchange for, or upon
transfer of, outstanding Share certificates in the old form, upon receiving:
(a) A Certificate authorizing the issuance of Share certificates
in the new form;
(b) A certified copy of any amendment to the Charter with respect
to the change;
(c) Specimen Share certificates for each class of Shares in the
new form approved by the Board of Directors of the Customer,
with a Certificate signed by the Secretary of the Customer as
to such approval;
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<PAGE> 5
(d) A certified copy of the order or consent of each governmental
or regulatory authority required by law as a prerequisite to
the issuance of the Shares in the new form, and an opinion of
counsel for the Customer that the order or consent of no other
governmental or regulatory authority is required; and
(e) An opinion of counsel for the Customer, in a form satisfactory
to the Bank, with respect to the validity of the Shares in the
new form, the obtaining of all necessary governmental
consents, whether such Shares are fully paid and
non-assessable and the status of such Shares under the
Securities Act of 1933, as amended, and any other applicable
law or regulation (i.e., if subject to registration, that the
Shares have been registered and that the Registration
Statement has become effective or, if exempt, the specific
grounds therefore).
2. The Customer shall furnish the Bank with a sufficient supply of
blank Share certificates in the new form, and from time to time will replenish
such supply upon the request of the Bank. Such blank Share certificates shall be
properly signed, by facsimile or otherwise, by Officers of the Customer
authorized by law or by the By-Laws to sign Share certificates and, if required,
shall bear the corporate seal or a facsimile thereof.
ARTICLE V
ISSUANCE AND TRANSFER OF SHARES
1. The Bank will issue Share certificates upon receipt of a Certificate
from an Officer, but shall not be required to issue Share certificates after it
has received from an appropriate federal or state authority written notification
that the sale of Shares has been suspended or discontinued, and the Bank shall
be entitled to rely upon such written notification. The Bank shall not be
responsible for the payment of any original issue or other taxes required to be
paid by the Customer in connection with the issuance of any Shares.
2. Shares will be transferred upon presentation to the Bank of Share
certificates in form deemed by the Bank properly endorsed for transfer,
accompanied by such documents as the Bank deems necessary to evidence the
authority of the person making such transfer, and bearing satisfactory evidence
of the payment of applicable stock transfer taxes. In the case of small estates
where no administration is contemplated, the Bank may, when furnished with an
appropriate surety bond, and without further approval of the Customer, transfer
Shares registered in the name of the decedents where the current market value of
the Shares being transferred does not exceed such amount as may from time to
time be prescribed by the various states. The Bank reserves the right to refuse
to transfer Shares until it is satisfied that the endorsements on Share
certificates are valid and genuine, and for that purpose it may require, unless
otherwise instructed by an Officer of the Customer, a guaranty of signature by
an "eligible guarantor institution" meeting the requirements of the Bank, which
requirements include membership or participation in STAMP or such other
"signature guarantee program" as may be determined by the Bank in addition to,
or in substitution for, STAMP, all in accordance with the Securities Exchange
Act of 1934, as amended. The Bank also reserves the right to refuse to transfer
Shares until it is satisfied that the requested transfer is legally authorized,
and it shall incur no liability for the refusal in good faith to make transfers
which the Bank, in its judgment, deems improper or unauthorized, or until it is
satisfied that there is no basis to any claims adverse to such transfer. The
Bank may, in effecting transfers of Shares, rely upon those provisions of the
Uniform Act for the Simplification of Fiduciary Security Transfers or the
Uniform Commercial Code, as the same may be amended from time to time,
applicable to the transfer of securities, and the Customer shall indemnify the
Bank for any act done or omitted by it in good faith in reliance upon such laws.
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<PAGE> 6
3. All certificates representing Shares that are subject to
restrictions on transfer (e.g., securities acquired pursuant to an investment
representation, securities held by controlling person, securities subject to
stockholders' agreement, etc.), shall be stamped with a legend describing the
extent and conditions of the restrictions or referring to the source of such
restrictions. The Bank assumes no responsibility with respect to the transfer of
restricted securities where counsel for the Customer advises that such transfer
may be properly effected.
4. Notwithstanding the foregoing or any other provision contained in
this Agreement to the contrary, the Bank shall be fully protected by the
Customer in not requiring any instruments, documents, assurances, endorsements
or guarantees, including, without limitation, any signature guarantees, in
connection with a transfer of Shares whenever the Bank reasonably believes that
requiring the same would be inconsistent with the transfer procedures as
described in the Prospectus.
ARTICLE VI
DIVIDENDS AND DISTRIBUTIONS
1. The Customer shall furnish to the Bank a copy of a resolution of its
Board of Directors, certified by the Secretary or any Assistant Secretary,
either (i) setting forth the date of the declaration of a dividend or
distribution, the date of accrual or payment, as the case may be, the record
date as of which shareholders entitled to payment, or accrual, as the case may
be shall be determined, the amount per Share of such dividend or distribution,
the payment date on which all previously accrued and unpaid dividends are to be
paid, and the total amount, if any, payable to the Bank on such payment date, or
(ii) authorizing the declaration of dividends and distributions on a periodic
basis and authorizing the Bank to rely on a Certificate setting forth the
information described in subsection (i) of this paragraph.
2. Prior to the payment date specified in such Certificate or
resolution, as the case may be, the Customer shall, in the case of a cash
dividend or distribution, pay to the Bank an amount of cash, sufficient for the
Bank to make the payment, specified in such Certificate or resolution, to the
shareholders of record as of such payment date. The Bank will, upon receipt of
any such cash, (i) in the case of shareholders who are participants in a
dividend reinvestment and/or cash purchase plan of the Customer, reinvest such
cash dividends or distributions in accordance with the terms of such plan, and
(ii) in the case of shareholders who are not participants in any such plan, make
payment of such cash dividends or distributions to the shareholders of record as
of the record date by mailing a check, payable to the registered shareholder, to
the address of record or dividend mailing address. The Bank shall not be liable
for any improper payment made in accordance with a Certificate or resolution
described in the preceding paragraph. If the Bank shall not receive sufficient
cash prior to the payment date to make payments of any cash dividend or
distribution pursuant to subsections (i) and (ii) above to all shareholders of
the Customer as of the record date, the Bank shall, upon notifying the Customer,
withhold payment to all shareholders of the Customer as of the record date until
sufficient cash is provided to the Bank.
3. It is understood that the Bank shall in no way be responsible for
the determination of the rate or form of dividends or distributions due to the
shareholders.
4. It is understood that the Bank shall file such appropriate
information returns concerning the payment of dividends and distributions with
the proper federal, state and local authorities as are required by law to be
filed by the Customer but shall in no way be responsible for the collection or
withholding of taxes due on such dividends or distributions due to shareholders,
except and only to the extent required of it by applicable law.
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<PAGE> 7
ARTICLE VII
CONCERNING THE CUSTOMER
1. The Customer shall promptly deliver to the Bank written notice of
any change in the Officers authorized to sign Share certificates, Certificates,
notifications or requests, together with a specimen signature of each new
Officer. In the event any Officer who shall have signed manually or whose
facsimile signature shall have been affixed to blank Share certificates shall
die, resign or be removed prior to issuance of such Share certificates, the Bank
may issue such Share certificates as the Share certificates of the Customer
notwithstanding such death, resignation or removal, and the Customer shall
promptly deliver to the Bank such approvals, adoptions or ratifications as may
be required by law.
2. Each copy of the Charter of the Customer and copies of all
amendments thereto shall be certified by the Secretary of State (or other
appropriate official) of the state of incorporation, and if such Charter and/or
amendments are required by law also to be filed with a county or other officer
or official body, a certificate of such filing shall be filed with a certified
copy submitted to the Bank. Each copy of the By-Laws and copies of all
amendments thereto, and copies of resolutions of the Board of Directors of the
Customer, shall be certified by the Secretary or an Assistant Secretary of the
Customer under the corporate seal.
3. Customer hereby represents and warrants:
(a) It is a corporation duly organized and validly existing under
the laws of Maryland.
(b) This Agreement has been duly authorized, executed and
delivered on its behalf and constitutes the legal, valid and
binding obligation of Customer. The execution, delivery and
performance of this Agreement by Customer do not and will not
violate any applicable law or regulation and do not require
the consent of any governmental or other regulatory body
except for such consents and approvals as have been obtained
and are in full force and effect.
4. It shall be the sole responsibility of the Customer to deliver to
the Bank the Customer's currently effective Prospectus and, for purposes of this
Agreement, the Bank shall not be deemed to have notice of any information
contained in such Prospectus until it is actually received by the Bank.
ARTICLE VIII
CONCERNING THE BANK
1. The Bank shall not be liable and shall be fully protected in acting
upon any oral instruction, writing or document reasonably believed by it to be
genuine and to have been given, signed or made by the proper person or persons
and shall not be held to have any notice of any change of authority of any
person until receipt of written notice thereof from an Officer of the Customer.
It shall also be protected in processing Share certificates which it reasonably
believes to bear the proper manual or facsimile signatures of the duly
authorized Officer or Officers of the Customer and the proper countersignature
of the Bank.
2. The Bank may establish such additional procedures, rules and
regulations governing the transfer or registration of Share certificates as it
may deem advisable and consistent with such rules and regulations generally
adopted by bank transfer agents.
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<PAGE> 8
3. The Bank may keep such records as it deems advisable but not
inconsistent with resolutions adopted by the Board of Directors of the Customer.
The Bank may deliver to the Customer from time to time at its discretion, for
safekeeping or disposition by the Customer in accordance with law, such records,
papers, Share certificates which have been cancelled in transfer or exchange and
other documents accumulated in the execution of its duties hereunder as the Bank
may deem expedient, other than those which the Bank is itself required to
maintain pursuant to applicable laws and regulations, and the Customer shall
assume all responsibility for any failure thereafter to produce any record,
paper, cancelled Share certificate or other document so returned, if and when
required. The records maintained by the Bank pursuant to this paragraph which
have not been previously delivered to the Customer pursuant to the foregoing
provisions of this paragraph shall be considered to be the property of the
Customer, shall be made available upon request for inspection by the Officers,
employees and auditors of the Customer, and shall be delivered to the Customer
upon request and in any event upon the date of termination of this Agreement, as
specified in Article IX of this Agreement, in the form and manner kept by the
Bank on such date of termination or such earlier date as may be requested by the
Customer.
4. The Bank may employ agents or attorneys-in-fact at the expense of
the Customer, and shall not be liable for any loss or expense arising out of, or
in connection with, the actions or omissions to act of its agents or
attorneys-in-fact, so long as the Bank acts in good faith and without negligence
or willful misconduct in connection with the selection of such agents or
attorneys-in-fact.
5. The Bank shall only be liable for any loss or damage arising out of
its own negligence or willful misconduct; provided, however, that the Bank shall
not be liable for any indirect, special, punitive or consequential damages.
6. The Customer shall indemnify and hold harmless the Bank from and
against any and all claims (whether with or without basis in fact or law),
costs, demands, expenses and liabilities, including reasonable attorney's fees,
which the Bank may sustain or incur or which may be asserted against the Bank
except for any liability which the Bank has assumed pursuant to the immediately
preceding section. The Bank shall be deemed not to have acted with negligence
and not to have engaged in willful misconduct by reason of or as a result of any
action taken or omitted to be taken by the Bank without its own negligence or
willful misconduct in reliance upon (i) any provision of this Agreement, (ii)
any instrument, order or Share certificate reasonably believed by it to be
genuine and to be signed, countersigned or executed by any duly authorized
Officer of the Customer, (iii) any Certificate or other instructions of an
Officer, (iv) any opinion of legal counsel for the Customer or the Bank, or (v)
any law, act, regulation or any interpretation of the same even though such law,
act, or regulation may thereafter have been altered, changed, amended or
repealed. Nothing contained herein shall limit or in any way impair the right of
the Bank to indemnification under any other provision of this Agreement.
7. Specifically, but not by way of limitation, the Customer shall
indemnify and hold harmless the Bank from and against any and all claims
(whether with or without basis in fact or law), costs, demands, expenses and
liabilities, including reasonable attorney's fees, of any and every nature which
the Bank may sustain or incur or which may be asserted against the Bank in
connection with the genuineness of a Share certificate, the Bank's due
authorization by the Customer to issue Shares and the form and amount of
authorized Shares.
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<PAGE> 9
8. At any time the bank may apply to an Officer of the Customer for
written instructions with respect to any matter arising in connection with the
Bank's duties and obligations under this Agreement, and the Bank shall not be
liable for any action taken or omitted to be taken by the Bank in good faith in
accordance with such instructions. Such application by the Bank for instructions
from an Officer of the Customer may, at the option of the Bank, set forth in
writing any action proposed to be taken or omitted to be taken by the Bank with
respect to its duties or obligations under this Agreement and the date on and/or
after which such action shall be taken, and the Bank shall not be liable for any
action taken or omitted to be taken in accordance with a proposal included in
any such application on or after the date specified therein unless, prior to
taking or omitting to take any such action, the Bank has received written
instructions in response to such application specifying the action to be taken
or omitted. The Bank may consult counsel to the Customer or its own counsel, at
the expense of the Customer, and shall be fully protected with respect to
anything done or omitted by it in good faith in accordance with the advice or
opinion of such counsel.
9. When mail is used for delivery of non-negotiable Share certificates,
the value of which does not exceed the limits of the Bank's Blanket Bond, the
Bank shall send such non-negotiable Share certificates by first class mail, and
such deliveries will be covered while in transit by the Bank's Blanket Bond.
Non-negotiable Share certificates, the value of which exceed the limits of the
Bank's Blanket Bond, will be sent by insured registered mail. Negotiable Share
certificates will be sent by insured registered mail. The Bank shall advise the
Customer of any Share certificates returned as undeliverable after being mailed
as herein provided for.
10. The Bank may issue new Share certificates in place of Share
certificates represented to have been lost, stolen or destroyed upon receiving
instructions in writing from an Officer and indemnity satisfactory to the Bank.
Such instructions from the Customer shall be in such form as approved by the
Board of Directors of the Customer in accordance with applicable law or the
ByLaws of the Customer governing such matters. If the Bank receives written
notification from the owner of the lost, stolen or destroyed Share certificate
within a reasonable time after he has notice of it, the Bank shall promptly
notify the Customer and shall act pursuant to written instructions signed by an
Officer. If the Customer receives such written notification from the owner of
the lost, stolen or destroyed Share certificate within a reasonable time after
he has notice of it, the Customer shall promptly notify the Bank and the Bank
shall act pursuant to written instructions signed by an Officer. The Bank shall
not be liable for any act done or omitted by it pursuant to the written
instructions described herein. The Bank may issue new Share certificates in
exchange for, and upon surrender of, mutilated Share certificates.
11. The Bank will issue and mail subscription warrants for Shares,
Shares representing stock dividends, exchanges or splits, or act as conversion
agent upon receiving written instructions from an Officer and such other
documents as the Bank may deem necessary.
12. The Bank will supply shareholder lists to the Customer from time to
time upon receiving a request therefor from an Officer of the Customer.
13. In case of any requests or demands for the inspection of the
shareholder records of the Customer, the Bank will notify the Customer and
endeavor to secure instructions from an Officer as to such inspection. The Bank
reserves the right, however, to exhibit the shareholder record to any person
whenever it is advised by its counsel that there is a reasonable likelihood that
the Bank will be held liable for the failure to exhibit the shareholder records
to such person.
14. At the request of an Officer, the Bank will address and mail such
appropriate notices to shareholders as the Customer may direct.
15. Notwithstanding any provisions of this Agreement to the contrary,
the Bank shall be under no duty or obligation to inquire into, and shall not be
liable for:
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<PAGE> 10
(a) The legality of the issue, sale or transfer of any Shares, the
sufficiency of the amount to be received in connection
therewith, or the authority of the Customer to request such
issuance, sale or transfer;
(b) The legality of the purchase of any Shares, the sufficiency of
the amount to be paid in connection therewith, or the
authority of the Customer to request such purchase;
(c) The legality of the declaration of any dividend by the
Customer, or the legality of the issue of any Shares in
payment of any stock dividend; or
(d) The legality of any recapitalization or readjustment of the
Shares.
16. The Bank shall be entitled to receive and the Customer hereby
agrees to pay to the Bank for its performance hereunder (i) out-of-pocket
expenses (including legal expenses and attorney's fees) incurred in connection
with this Agreement and its performance hereunder, and (ii) the compensation for
services as set forth in Schedule I.
17. The Bank shall not be responsible for any money, whether or not
represented by any check, draft or other instrument for the payment of money,
received by it on behalf of the Customer, until the Bank actually receives and
collects such funds.
18. The Bank shall have no duties or responsibilities whatsoever except
such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied against the Bank in
connection with this Agreement.
ARTICLE IX
TERMINATION
-----------
Either of the parties hereto may terminate this Agreement by giving to
the other party a notice in writing specifying the date of such termination,
which shall be not less than 60 days after the date of receipt of such notice.
In the event such notice is given by the Customer, it shall be accompanied by a
copy of a resolution of the Board of Directors of the Customer, certified by the
Secretary, electing to terminate this Agreement and designating a successor
transfer agent or transfer agents. In the event such notice is given by the
Bank, the Customer shall, on or before the termination date, deliver to the Bank
a copy of a resolution of its Board of Directors certified by the Secretary
designating a successor transfer agent or transfer agents. In the absence of
such designation by the Customer, the Bank may designate a successor transfer
agent. If the Customer fails to designate a successor Transfer agent and if the
Bank is unable to find a successor transfer agent, the Customer shall, upon the
date specified in the notice of termination of this Agreement and delivery of
the records maintained hereunder, be deemed to be its own transfer agent and the
Bank shall thereafter be relieved of all duties and responsibilities hereunder.
Upon termination hereof, the Customer shall pay to the Bank such compensation as
may be due to the Bank for any disbursements and expenses made or incurred by
the Bank and payable or reimbursable hereunder.
ARTICLE X
MISCELLANEOUS
-------------
1. The Customer agrees that prior to effecting any change in the
Prospectus which would increase or alter the duties and obligations of the Bank
hereunder, it shall advise the Bank of such proposed change at least 30 days
prior to the intended date of the same, and shall proceed with such change only
if it shall have received the written consent of the Bank thereto.
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<PAGE> 11
2. The indemnities contained herein shall be continuing obligations of
the Customer, its successors and assigns, notwithstanding the termination of
this Agreement.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Customer shall be sufficiently given if
addressed to the Customer and mailed or delivered to it at 800 Scudders Mill
Road, Plainsboro, N.J. 08536, or at such other place as the Customer may from
time to time designate in writing.
4. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Bank shall be sufficiently given if addressed
to the Bank and mailed or delivered to it at its office at 101 Barclay Street
(12W), New York, New York 10286 or at such other place as the Bank may from time
to time designate in writing.
5. This Agreement may not be amended or modified in any manner except
by a written agreement duly authorized and executed by both parties. Any duly
authorized Officer may amend any Certificate naming Officers authorized to
execute and deliver Certificates, instructions, notices or other instruments,
and the Secretary or any Assistant Secretary may amend any Certificate listing
the Shares of capital stock of the Customer for which the Bank performs Services
hereunder.
6. This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by either party without the prior written
consent of the other party, and provided, further, that any reorganization,
merger, consolidation, or sale of assets, by the Bank shall not be deemed to
constitute an assignment of this Agreement.
7. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
8. This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original; but such counterparts, together, shall
constitute only one instrument.
9. The provisions of this Agreement are intended to benefit only the
Bank and the Customer, and no rights shall be granted to any other person by
virtue of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate officers, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as of the day and year
first above written.
Attest:
______________________________________
_______________________ By: INCOME OPPORTUNITIES FUND 2006, INC.
______________________________________
Name:_________________________________
Title:________________________________
Attest: THE BANK OF NEW YORK
_______________________ By: ______________________________________
Name:_________________________________
Title:________________________________
