<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1995.
SECURITIES ACT FILE NO. 33-
INVESTMENT COMPANY ACT FILE NO. 811-5870
POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT AS STATED BELOW
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / PRE-EFFECTIVE AMENDMENT NO.
/ / POST-EFFECTIVE AMENDMENT NO. AND/OR
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/ AMENDMENT NO. 11
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
(Exact name of Registrant as specified in charter)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ARTHUR ZEIKEL
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
THOMAS R. SMITH, JR., ESQ.
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
PHILIP L. KIRSTEIN, ESQ.
MERRILL LYNCH ASSET MANAGEMENT
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) FEE(2)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)...................... 100,000,000 shares $10.01 $1,001,000,000 $345,172.41(3)
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</TABLE>
(1) Estimated solely for the purposed of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to the filing date to the designated lockbox at Mellon
Bank in Pittsburgh, PA.
(3) The amount of the registration fee does not include $633,180 which has
previously been paid to the Commission for registration fees relating to
183,437,538 shares registered pursuant to Securities Act File No. 33-56391
and unissued as of October 31, 1995.
------------------------
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.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT, THE PROSPECTUS IN THIS
REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATES TO REGISTRATION
STATEMENT NO. 33-56391, AS AMENDED, PREVIOUSLY FILED BY THE REGISTRANT ON FORM
N-2. THIS REGISTRATION STATEMENT ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT NO. 2
TO REGISTRATION STATEMENT NO. 33-56391, AND SUCH POST-EFFECTIVE AMENDMENT SHALL
HEREAFTER BECOME EFFECTIVE CONCURRENTLY WITH THE EFFECTIVENESS OF THIS
REGISTRATION STATEMENT AND IN ACCORDANCE WITH SECTION 8(c) OF THE SECURITIES
ACT. THE REGISTRATION STATEMENT AND THE REGISTRATION STATEMENT AMENDED HEREBY
ARE COLLECTIVELY REFERRED TO HEREUNDER AS THE "REGISTRATION STATEMENT".
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<PAGE> 2
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(c)
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
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<C> <S> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover Page.................... Cover Page
2. Inside Front and Outside Back Cover Pages... Cover Page
3. Fee Table and Synopsis...................... Fund Expenses
4. Financial Highlights........................ Financial Highlights
5. Plan of Distribution........................ Prospectus Summary; Purchase of Shares
6. Selling Shareholders........................ Not Applicable
7. Use of Proceeds............................. Investment Objective and Policies
8. General Description of the Registrant....... The Fund; Prospectus Summary; Investment
Objective and Policies; Special Leverage
Considerations; Investment Restrictions
9. Management.................................. Directors and Officers; Investment Advisory
and Administrative Arrangements
10. Capital Stock, Long-Term Debt, and Other
Securities................................ Description of Capital Stock
11. Defaults and Arrears on Senior Securities... Not Applicable
12. Legal Proceedings........................... Not Applicable
13. Table of Contents of the Statement of
Additional Information.................... Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page.................................. Not Applicable
15. Table of Contents........................... Not Applicable
16. General Information and History............. Not Applicable
17. Investment Objective and Policies........... Investment Objective and Policies;
Investment Restrictions
18. Management.................................. Directors and Officers; Investment Advisory
and Administrative Arrangements
19. Control Persons and Principal Holders of
Securities................................ Investment Advisory and Administrative
Arrangements
20. Investment Advisory and Other Services...... Investment Advisory and Administrative
Arrangements; Custodian; Experts
21. Brokerage Allocation and Other Practices.... Portfolio Transactions
22. Tax Status.................................. Taxes
23. Financial Statements........................ Financial Statements
</TABLE>
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 7, 1995
PROSPECTUS
DECEMBER , 1995
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
COMMON STOCK
------------------------
Merrill Lynch Senior Floating Rate Fund, Inc. (the "Fund") is a continuously
offered, non-diversified, closed-end fund. The Fund seeks as high a level of
current income and such preservation of capital as is consistent with investment
in senior collateralized corporate loans ("Corporate Loans") primarily in the
form of participation interests in Corporate Loans made by banks and other
financial institutions. It is anticipated that the Corporate Loans will pay
interest at rates which float or reset at a margin above a generally-recognized
base lending rate such as the prime rate ("Prime Rate") of a designated U.S.
bank, the Certificate of Deposit ("CD") rate or the London InterBank Offered
Rate ("LIBOR"). There can be no assurance that the investment objective of the
Fund will be realized.
Shares of Common Stock of the Fund are offered on a best efforts basis at a
price equal to the next determined net asset value per share without a front-end
sales charge. As of the date of this Prospectus, net asset value per share is
$10.02. Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 (609)
282-2800, or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases directly through the Fund's transfer agent are not subject to the
processing fee. The minimum initial purchase is $1,000 and the minimum
subsequent purchase is $50, except that different minimums may be applicable to
certain retirement accounts and other retirement plans. See "Purchase of
Shares".
No market presently exists for the Fund's Common Stock and it is not
currently expected that a secondary market will develop. Since the Fund's Common
Stock may not be considered readily marketable, the Board of Directors of the
Fund presently intends to consider the making of tender offers on a quarterly
basis to purchase all or a portion of the Common Stock of the Fund from
shareholders at the net asset value per share. See "Tender Offers". Shares of
Common Stock purchased by the Fund pursuant to tender offers which have been
held for less than three years will be subject to an "Early Withdrawal Charge"
which will not exceed 3.0% of the original purchase amount for such Common
Stock, and which will be paid to the Fund's distributor. See "Early Withdrawal
Charge".
Merrill Lynch Asset Management, L.P. (the "Investment Adviser"), an
affiliate of Merrill Lynch, acts as investment adviser and administrator for the
Fund. The address of the Fund is 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and its telephone number is (609) 282-2800. Investors are advised to read
this Prospectus carefully and retain it for future reference.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) FUND(3)
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<S> <C> <C> <C>
Per Share................................................. $ None $
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Total(3).................................................. $ None $
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</TABLE>
(1) The Common Stock is offered on a best efforts basis at a price equal to net
asset value, which, from November 3, 1989 (commencement of operations) to
the date of this Prospectus, has ranged from $9.98 to $10.02 per share.
(2) Because Merrill Lynch Funds Distributor, Inc. will pay all offering expenses
(other than registration fees) and sales commissions to selected dealers
(primarily Merrill Lynch) from its own assets, all of the proceeds of the
offering will be available to the Fund for investment in portfolio
securities. See "Purchase of Shares".
(3) These amounts (a) do not take into account prepaid registration fees, in the
amount of approximately $ , which are being charged to income as the
related shares are issued, and (b) assume all shares currently registered
are sold pursuant to a continuous offering.
----------------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE FUND Merrill Lynch Senior Floating Rate Fund, Inc. (the
"Fund") is a continuously offered, non-diversified,
closed-end fund. See "The Fund".
THE OFFERING Shares of Common Stock of the Fund may be offered by
Merrill Lynch Funds Distributor, Inc. (the
"Distributor") and other securities dealers which have
entered into selected dealer agreements with the
Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch").
The Fund will offer its Common Stock at a price equal to
the next determined net asset value per share without a
front-end sales charge. The minimum initial purchase is
$1,000 and the minimum subsequent purchase is $50,
except with respect to retirement plans, the minimum
initial purchase is $250 and minimum subsequent purchase
is $1. For plans established under Sections 401(k) and
403(b) of the Internal Revenue Code of 1986 which are
maintained through Merrill Lynch. For such 401(k) and
403(b) plans there are no minimum initial or subsequent
purchase requirements. The Fund reserves the right to
waive or modify the initial and subsequent minimum
investment requirements at any time. See "Purchase of
Shares".
The Fund presently intends to offer only shares of
Common Stock. Although the Fund has no present intention
to do so, it may in the future offer shares of preferred
stock, subject to the requirements of the Investment
Company Act of 1940, as amended (the "1940 Act").
INVESTMENT OBJECTIVE
AND POLICIES The investment objective of the Fund is to provide
shareholders with as high a level of current income and
such preservation of capital as is consistent with
investment in senior collateralized loans ("Corporate
Loans") made to U.S. or non-U.S. corporations
("Borrowers") that meet credit standards established by
the Investment Adviser.
The Fund invests primarily in Corporate Loans that have
interest rates which float at a margin above a
generally-recognized base lending rate such as the Prime
Rate of a designated U.S. bank, or in variable rate
Corporate Loans which provide for the adjustment of
interest rates to the base rate on set dates, typically
30 days but not to exceed one year, such as the
Certificate of Deposit ("CD") rate or the London
InterBank Offered Rate ("LIBOR"). Under normal market
conditions, at least 65% of the total
2
<PAGE> 5
assets of the Fund will be invested in floating or
variable rate Corporate Loans made to corporations.
Except during interim periods pending investment of the
net proceeds of the public offering of the Fund's
securities and during temporary defensive periods when,
in the opinion of the Investment Adviser, suitable
Corporate Loans are not available for investment by the
Fund or prevailing market or economic conditions
warrant, the Fund will invest at least 80% of its total
assets in interests in Corporate Loans and the remainder
of its total assets in senior loans made on an unsecured
basis to Borrowers that meet the credit standards
established by the Investment Adviser ("Unsecured
Corporate Loans"), in cash or in secured or unsecured
short-term debt obligations rated within the four
highest rating categories assigned by a nationally
recognized rating service, or determined to be of
comparable quality by the Investment Adviser.
Obligations rated in the fourth highest rating category
may include obligations considered to have certain
speculative characteristics. The Fund has no
restrictions on portfolio maturity, but it is
anticipated that a majority of the Corporate Loans in
which it will invest will have stated maturities ranging
from three to ten years. As a result of prepayments,
however, the actual maturities of the Corporate Loans
are expected to be in the two to three year range.
The net asset value of the shares of Common Stock of an
investment company which invests primarily in
fixed-income securities changes as the general level of
interest rates fluctuates. The Investment Adviser
expects the Fund's net asset value to be relatively
stable during normal market conditions because the
Fund's portfolio will consist primarily of floating and
variable rate Corporate Loans and to a lesser extent
short-term instruments. For this reason, the Investment
Adviser expects the value of the Fund's portfolio to
fluctuate significantly less as a result of interest
rate changes than would a portfolio of fixed-rate
obligations. However, because the Fund's policy is to
invest primarily in floating and variable rate
obligations and variable interest rates only reset
periodically, the Fund's net asset value may fluctuate
from time to time in the event of an imperfect
correlation between the interest rates on variable rate
loans in the Fund's portfolio and prevailing interest
rates. Also, defaults on Corporate Loans could cause a
decline in the Fund's net asset value.
The Fund will invest in a Corporate Loan only if, in the
Investment Adviser's judgment, the Borrower can meet
debt service on such Corporate Loan. The Corporate Loans
in which the Fund invests currently are not rated by any
nationally recognized rating service. The Investment
Adviser
3
<PAGE> 6
will perform its own credit analysis of the Borrower.
Since the minimum debt rating of a Borrower may not have
a meaningful relation to the quality of such Borrower's
senior collateralized debt, the Fund does not impose any
minimum standard regarding the rating of other debt
instruments of the Borrower. The Fund will only invest
in Unsecured Corporate Loans made to Borrowers that meet
the credit standards established by the Investment
Adviser for Corporate Loans.
The Corporate Loans in which the Fund invests primarily
consist of direct obligations of a Borrower undertaken
to finance the growth of the Borrower's business
internally or externally, or to finance a capital
restructuring. It is anticipated that a significant
portion of such Corporate Loans may include highly
leveraged loans such as leveraged buy-out loans,
leveraged recapitalization loans and other types of
acquisition loans. As noted above, the Fund may invest
in Corporate Loans which are made to non-U.S. Borrowers,
provided that the loans are U.S. dollar-denominated or
otherwise provide for payment to the Fund in U.S.
dollars, and any such Borrower meets the credit
standards established by the Investment Adviser for U.S.
Borrowers. The Fund similarly may invest in loans to
U.S. Borrowers with significant non-dollar-denominated
revenues provided that the loans are U.S.
dollar-denominated or otherwise provide for payment in
U.S. dollars. In all cases where the Corporate Loans are
not denominated in U.S. dollars, the Corporate Loan
facility will provide for payments to the lenders,
including the Fund, in U.S. dollars pursuant to foreign
currency swap arrangements. See "Investment Objective
and Policies". Loans to such non-U.S. Borrowers or U.S.
Borrowers may involve risks not typically involved in
domestic investment, including fluctuation in foreign
exchange rates, future foreign political and economic
developments, and the possible imposition of exchange
controls or other foreign or U.S. governmental laws or
restrictions applicable to such loans.
Corporate Loans may be issued in the form of senior
syndicated loans or senior secured notes. Typically, the
Corporate Loans are structured by two or more lenders
("Co-Lenders"), one or more of which administers the
Loan on behalf of all the Co-Lenders (the "Agent Bank").
Co-Lenders may sell Corporate Loans to third parties
called "Participants". The Fund may invest in a
Corporate Loan either by participating as a Co-Lender at
the time the loan is originated or by buying an interest
from a Co-Lender or a Participant (collectively,
"Participation Interests"). All institutions interposed
between the Fund and a Borrower must meet minimum
creditworthiness standards as discussed herein. See
"Investment Objective and
4
<PAGE> 7
Policies". For these purposes, when the Fund invests in
a Corporate Loan as a Co-Lender it may be deemed to be
making a loan to the Borrower.
In addition to fluctuations in net asset value caused by
variations in prevailing interest rates, net asset value
also may be affected by changes in the creditworthiness
of Borrowers, Co-Lenders or Participants interposed
between the Fund and the Borrowers. In the event such
institutions were to default on their obligations, the
Fund might experience a reduction of both income and the
value of its assets.
The Fund may seek to hedge against interest rate risk by
engaging in certain interest rate hedging transactions.
If the Investment Adviser is incorrect in its forecasts
of market values, interest rates and other applicable
factors, the investment performance of the Fund would
diminish compared with what it would have been if these
investment techniques were not used. If the other party
to an interest rate hedging transaction defaults, the
Fund's risk of loss consists of the net amount of
interest payments that the Fund contractually is
entitled to receive.
LEVERAGE The Fund may borrow money in amounts up to 33 1/3% of
the value of its total assets for the purpose of
financing additional investments or to satisfy tender
offers. Although it has no present intention to do so,
the Fund also may issue one or more series of preferred
shares. The Fund will borrow to finance additional
investments or issue a class of preferred shares only
when it believes that the return that may be earned on
investments purchased with the proceeds of such
borrowings or offerings will exceed the costs, including
debt service and dividend obligations, associated
therewith. However, to the extent such costs exceed the
return on the additional investments, the return
realized by the Fund's common shareholders will be
adversely affected.
Leverage creates certain risks for holders of Common
Stock, including the risk that higher volatility of both
the net asset value and market value of the Common
Stock, and that fluctuations in the dividend rates on
the preferred shares will affect the yield to holders of
Common Stock. Additionally, changes in certain factors
could cause the relationship between the rates paid by
the Fund as dividends on the preferred shares and the
rates received by the Fund on its investment portfolio
to change so that rates on the preferred shares may
substantially increase relative to rates on the
obligations in which the Fund may be invested. Under
such conditions, the benefit of leverage to holders of
Common Stock would be reduced and the Fund's
5
<PAGE> 8
leveraged capital structure could result in a lower rate
of return to holders of Common Stock than if the Fund
were not leveraged.
Any issuance of preferred shares or any bank borrowings
by the Fund are subject to and will comply with the
requirements of the 1940 Act. Pursuant to the 1940 Act,
among other things, the Fund may not issue preferred
shares unless immediately after their issuance the Fund
is able to maintain asset coverage of at least 200%. In
the case of bank borrowings, asset coverage of at least
300% must be maintained.
INVESTMENT ADVISER AND
ADMINISTRATOR Merrill Lynch Asset Management, L.P. (the "Investment
Adviser") is the Fund's investment adviser and is
responsible for the management of the Fund's investment
portfolio and for providing administrative services to
the Fund. For its advisory services, the Fund pays the
Investment Adviser a monthly fee at the annual rate of
0.95 of 1% of the Fund's average daily net assets. For
administrative services, the Fund pays the Investment
Adviser a monthly fee at the annual rate of 0.25 of 1%
of the Fund's average daily net assets. While the
aggregate of the advisory and administrative fees is
higher than that paid by most other investment
companies, it is similar to that paid by other
closed-end funds investing primarily in Corporate Loans
or Participation Interests in Corporate Loans. The
Investment Adviser is owned and controlled by Merrill
Lynch & Co., Inc. As of September 30, 1995, the
Investment Adviser or its affiliate, Fund Asset
Management, L.P., had a total of approximately $189.4
billion in investment company and other portfolio assets
under management, including accounts of certain
affiliates of the Investment Adviser. See "Investment
Advisory and Administrative Arrangements".
DISTRIBUTIONS The Fund intends to continue to declare dividends daily
and to pay dividends monthly and to distribute
substantially all of its net investment income to
holders of Common Stock. Net capital gains, if any, will
be distributed at least annually to holders of Common
Stock. See "Dividends and Distributions".
TENDER OFFERS No market presently exists for the Fund's Common Stock
and it is not currently anticipated that a secondary
market will develop. In view of this, the Board of
Directors of the Fund intends to continue to consider
the making of tender offers on a quarterly basis to
purchase Common Stock of the Fund from shareholders at a
price per share equal to the net asset value per share
of the Common Stock determined at the close of business
on the day an offer terminates. The Board of Directors
is under no obligation to authorize the making of a
tender offer and no assurance can be given that in
6
<PAGE> 9
any particular quarter a tender offer will be made. If a
tender offer is not made, shareholders may be unable to
sell their shares. Shares of Common Stock which have
been held for less than three years and which are
purchased by the Fund pursuant to tender offers will be
subject to an early withdrawal charge. See "Early
Withdrawal Charge". In addition, Merrill Lynch charges
its customers a processing fee (presently $4.85) to
confirm a repurchase of shares from such customers
pursuant to a Tender Offer. Tenders made directly
through the Fund's Transfer Agent are not subject to the
processing fee.
SPECIAL CONSIDERATIONS
AND RISK FACTORS The Fund expects that there will be no secondary market
for its Common Stock. Moreover, Merrill Lynch and other
selected dealers are prohibited under applicable law
from making a market in the Fund's Common Stock while
the Fund is making either a public offering of or a
tender offer to purchase its Common Stock. To the extent
a secondary market does develop, however, investors
should be aware that the shares of closed-end funds
frequently trade in the secondary market at a discount.
Should there be a secondary market for the Fund's shares
of Common Stock, the market price of the shares may vary
from net asset value from time to time.
Because of the lack of a secondary market and the early
withdrawal charge, the Fund is designed primarily for
long-term investors and should not be considered a
vehicle for trading purposes.
The Fund has registered as a "non-diversified"
investment company so that it will be able to invest
more than 5% of its assets in the obligations of any
single issuer, subject to the diversification
requirements of Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), applicable to the
Fund. Since the Fund may invest a relatively high
percentage of its assets in the obligations of a limited
number of issuers, the Fund may be more susceptible than
a more widely-diversified fund to any single economic,
political or regulatory occurrence.
The Fund may be deemed to be concentrated in securities
of issuers in the industry group consisting of financial
institutions and their holding companies, including
commercial banks, thrift institutions, insurance
companies and finance companies. As a result, the Fund
is subject to certain risks associated with such
institutions, including, among other things, changes in
governmental regulation, interest rate levels and
general economic conditions. See "Investment Objectives
and Policies--Description of Participation Interests"
and "Investment Restrictions".
7
<PAGE> 10
The debt instruments in which the Fund may invest may be
subject to the risk of nonpayment of scheduled interest
or principal payments. In such event, the Fund may
experience a decline in the value of the related debt
instruments, including Corporate Loans, and, therefore,
a decline in the net asset value of the Fund's shares of
Common Stock. There is no assurance that the liquidation
of collateral underlying Corporate Loans will satisfy
the related Borrowers' obligations in the event of
nonpayment of scheduled interest or principal, or that
the collateral could be readily resold.
Corporate Loans made in connection with highly leveraged
transactions are subject to greater credit risks than
other Corporate Loans in which the Fund may invest.
These credit risks include a greater possibility of
default or bankruptcy of the Borrower and the assertion
that the pledging of collateral to secure the loan
constituted a fraudulent conveyance or preferential
transfer which can be nullified or subordinated to the
rights of other creditors of the Borrower under
applicable law. Highly leveraged Corporate Loans also
may be less liquid than other Corporate Loans.
When the Fund is acting in the capacity of a Participant
with respect to a Corporate Loan, the financial status
of the Agent Bank and Co-Lenders and Participants
interposed between the Fund and a Borrower may affect
the ability of the Fund to receive payments of interest
and principal. For this reason, the Fund will invest in
Corporate Loans only if, at the time of investment, the
outstanding debt obligations of the Agent Bank and any
such Co-Lenders and Participants interposed between the
Fund and a Borrower are investment grade; i.e., rated
BBB or A-3 or higher by Standard & Poor's Ratings Group
or Baa or P-3 or higher by Moody's Investors Service,
Inc., or determined to be of comparable quality in the
judgment of the Investment Adviser.
Generally, changes in interest rates may affect the
market value of the Fund's investments resulting in
changes in the net asset value of the shares of Common
Stock of the Fund. It is expected, however, that a
portfolio consisting primarily of floating and variable
rate Corporate Loans, Unsecured Corporate Loans and
short-term instruments will experience less significant
fluctuations in value as a result of interest rate
changes than would a portfolio of fixed rate
obligations. If interest rates decline, there is the
risk that Borrowers will prepay principal. In addition,
if a Borrower experiences unanticipated excess cash
flow, principal may be prepaid.
Some or all of the Corporate Loans in which the Fund
invests will be considered to be illiquid, which may
impair the Fund's ability to realize the
8
<PAGE> 11
full value of its assets in the event of a voluntary or
involuntary liquidation of such assets. To the extent
that such investments are illiquid, the Fund may have
difficulty disposing of portfolio securities in order to
purchase shares of its Common Stock pursuant to tender
offers, if any. The Board of Directors of the Fund will
consider the liquidity of the Fund's portfolio
securities in determining whether a tender offer should
be made by the Fund. See "Net Asset Value" for
information with respect to valuation of illiquid
Corporate Loans.
The success of the Fund depends, to a great degree, on
the skill with which the Agent Banks administer the
terms of the Corporate Loan agreements, monitor Borrower
compliance with covenants, collect principal, interest
and fee payments from Borrowers and, where necessary,
enforce creditor remedies against Borrowers. Typically,
the Agent Bank will have broad discretion in enforcing a
Corporate Loan agreement.
The 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 holders of Common
Stock an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. See
"Description of Capital Stock--Certain Provisions of the
Articles of Incorporation".
9
<PAGE> 12
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering price).......................... None
Dividend Reinvestment and Cash Purchase Plan Fees............................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)
Management Fees(a).............................................................. 0.95%
Administrative Fees............................................................. 0.25
Other Expenses.................................................................. 0.14
-----
Total Annual Expenses................................................................ 1.34%
====
</TABLE>
- - ---------------
(a) See "Investment Advisory and Administrative Arrangements"--page 34.
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
--- --- --- ----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) total annual expenses
of 1.34%, (2) a 5% annual return throughout the
periods and (3) tender at the end of the period...... $44* $52* $73 $161
An investor would pay the following expenses on a
$1,000 investment assuming no tender at the end of
the period........................................... $14 $42 $73 $161
</TABLE>
- - ---------------
* Reflects the Early Withdrawal Charge.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on estimated
amounts through the end of the Fund's current fiscal year. The Example set forth
above assumes reinvestment of all dividends and distributions and utilizes a 5%
annual rate of return as mandated by Securities and Exchange Commission
regulations. The Example should not be considered a representation of future
expenses or annual rate of return, and actual expenses or annual rate of return
may be more or less than those assumed for purposes of the Example. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and repurchases directly through the
Transfer Agent are not subject to the processing fee.
10
<PAGE> 13
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the year
ended August 31, 1995 and the independent auditors' report thereon are set forth
herein under "Financial Statements".
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE YEAR ENDED NOVEMBER 3,
AUGUST 31, 1989+ TO
INCREASE (DECREASE) IN NET ASSET ---------------------------------------------- AUGUST 31,
VALUE: 1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period................ $10.02 $10.02 $ 9.99 $ 9.99 $10.00 $10.00
------ ------ ------ ------ ------ ------
Investment income--net..... .75 .59 .53 .64 .85 .76
Realized and unrealized
gain (loss) on
investments--net......... --++ --++ .03 --++ (.01) --++
------ ------ ------ ------ ------ ------
Total from investment
operations............... .75 .59 .56 .64 .84 .76
------ ------ ------ ------ ------ ------
Less dividends from
investment income--net... (.75) (.59) (.53) (.64) (.85) (.76)
------ ------ ------ ------ ------ ------
Net asset value, end of
period................... $10.02 $10.02 $10.02 $ 9.99 $ 9.99 $10.00
====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................ 7.68% 5.94% 5.74% 6.58% 8.79% 7.63%#
====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement............ 1.34% 1.43% 1.47% 1.39% 1.27% .79%*
====== ====== ====== ====== ====== ======
Expenses................... 1.34% 1.43% 1.47% 1.41% 1.33% 1.35%*
====== ====== ====== ====== ====== ======
Investment income--net..... 7.45% 5.75% 5.27% 6.58% 8.44% 9.06%*
====== ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period
(in millions)............ $2,163 $ 934 $ 713 $ 834 $1,705 $1,728
====== ====== ====== ====== ====== ======
Portfolio turnover......... 55.23% 61.31% 90.36% 46.48% 58.22% 29.61%
====== ====== ====== ====== ====== ======
</TABLE>
- - ---------------
* Annualized.
** Total investment returns exclude the effects of the Early Withdrawal Charge,
if any. The Fund is a continuously offered closed-end fund, the shares of
which are offered at net asset value; no separate market exists for such
shares.
+ Commencement of operations.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
11
<PAGE> 14
THE FUND
Merrill Lynch Senior Floating Rate Fund, Inc. (the "Fund") is a
continuously offered, non-diversified, closed-end management investment company.
The Fund was incorporated under the name "Merrill Lynch Prime Fund, Inc." under
the laws of the State of Maryland on July 27, 1989 and has registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's
principal office is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08536 and its telephone number is (609) 282-2800.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current
income and such preservation of capital as is consistent with investment in
senior collateralized corporate loans ("Corporate Loans") primarily in the form
of Participation Interests, as defined below, in Corporate Loans made by banks
or other financial institutions. It is anticipated that the Corporate Loans will
pay interest at rates which float at a margin above a generally recognized base
lending rate such as the prime rate of a designated U.S. bank, or which adjust
periodically at a margin above the Certificate of Deposit ("CD") rate or the
London InterBank Offered Rate ("LIBOR"). This is a fundamental policy of the
Fund and may not be changed without a vote of a majority of the outstanding
shares of the Fund. There can be no assurance that the investment objective of
the Fund will be realized.
Under normal market conditions the Fund will invest at least 80% of its
total assets in interests in Corporate Loans that primarily are made to
corporations (each a "Borrower") and have floating or variable interest rates.
Under normal market conditions, at least 65% of the total assets of the Fund
will be invested in floating or variable rate Corporate Loans made to
corporations. The Fund may invest up to 20% of its total assets in cash or in
short-term debt obligations including, but not limited to, U.S. Government and
Government agency securities (some of which may not be backed by the full faith
and credit of the United States), bank money instruments (such as certificates
of deposit and bankers' acceptances), corporate and commercial obligations (such
as commercial paper and medium-term notes) and repurchase agreements. Such
short-term debt obligations, which need not be secured, will all be investment
grade (rated Baa, P-3 or higher by Moody's Investors Service, Inc. or BBB, A-3
or higher by Standard & Poor's Ratings Group or, if unrated, determined to be of
comparable quality in the judgment of the Investment Adviser). Securities rated
Baa, BBB, P-3 or A-3 are considered to have adequate capacity for payment of
principal and interest, but are more susceptible to adverse economic conditions
and, in the case of securities rated BBB or Baa (or comparable unrated
securities), have speculative characteristics. Such securities or cash will not
exceed 20% of the Fund's total assets except during interim periods pending
investment of the net proceeds of public offerings of the Fund's securities and
during temporary defensive periods when, in the opinion of the Investment
Adviser, suitable Corporate Loans are not available for investment by the Fund
or prevailing market or economic conditions warrant. The Fund also may invest up
to 20% of its total assets in senior loans made on an unsecured basis to
Borrowers that meet the credit standards established by the Investment Adviser
("Unsecured Corporate Loans"). The Fund will only invest in Unsecured Corporate
Loans made to Borrowers that meet the credit standards established by the
Investment Adviser for Corporate Loans. Investments in Unsecured Corporate Loans
will be made on the same basis as investments in Corporate Loans as described
herein, except with respect to collateral requirements. To a limited extent,
incidental to and in connection with its lending activities, the Fund also may
acquire warrants and other equity securities.
12
<PAGE> 15
The Fund has no restrictions on portfolio maturity, but it is anticipated
that a majority of the Corporate Loans in which it will invest will have stated
maturities ranging from three to ten years. As a result of prepayments, however,
it is expected that the actual maturities of the Corporate Loans will be in the
two to three year range. See "Description of Corporate Loans".
The Fund will limit its investments to those which could be acquired
directly by national banks for their own portfolios, as provided in 12 U.S.
Code, Section 24, paragraph seventh and the implementing regulations and
interpretations of the Comptroller of the Currency, including in particular 12
Code of Federal Regulations, Part I. Pursuant to the cited law and regulations,
national banks may invest in "investment securities", which include debt
obligations meeting certain standards of marketability and creditworthiness and
all types of loans, including loans to corporations, such as the Corporate
Loans. The conditions and restrictions governing the purchase of Fund shares by
national banks are set forth in the U.S. Comptroller of the Currency's Banking
Circular No. 220, dated November 21, 1986. Among these conditions and
limitations, investments by a national bank in an investment company, such as
the Fund, whose portfolio contains investments and loans subject to the
investment limitations of 12 U.S. Code, Section 24, or the lending limits of 12
U.S. Code, Section 84, are limited to 10% of the bank's capital and surplus, and
the bank's investment in the Fund must be marked-to-market on a regular basis.
Subject to such conditions and restrictions, national banks may acquire Fund
shares for their own investment portfolios.
Investment in shares of Common Stock of the Fund offers several benefits.
The Fund offers investors the opportunity to receive a high level of current
income by investing in a professionally managed portfolio comprised primarily of
Corporate Loans, a type of investment typically not available to individual
investors. In managing such portfolio, the Investment Adviser provides the Fund
and its shareholders with professional credit analysis and portfolio
diversification. The Fund also relieves the investor of the burdensome
administrative details involved in managing a portfolio of such investments, if
available to individual investors. The benefits are at least partially offset by
the expenses involved in operating an investment company. Such expenses
primarily consist of the management and administrative fees and operational
costs. See "Special Leverage Considerations".
The net asset value of the shares of Common Stock of an investment company
which invests primarily in fixed-income securities changes as the general levels
of interest rates fluctuate. When interest rates decline, the value of a
fixed-income portfolio can be expected to rise. Conversely when interest rates
rise, the value of a fixed-income portfolio can be expected to decline. The
Investment Adviser expects the Fund's net asset value to be relatively stable
during normal market conditions, because the Fund's portfolio will consist
primarily of floating and variable rate Corporate Loans, of fixed rate Corporate
Loans hedged by interest rate swap transactions and of short-term instruments.
For these reasons, the Investment Adviser expects the value of the Fund's
portfolio to fluctuate significantly less as a result of interest rate changes
than would a portfolio of fixed-rate obligations. However, because variable
interest rates only reset periodically, the Fund's net asset value may fluctuate
from time to time in the event of an imperfect correlation between either the
interest rates on variable rate loans in the Fund's portfolio or the variable
interest rates on nominal amounts in the Fund's interest rate swap transactions,
and prevailing interest rates. Also, a default on a Corporate Loan in which the
Fund has invested or a sudden and extreme increase in prevailing interest rates
may cause a decline in the Fund's net asset value. Conversely, a sudden and
extreme decline in interest rates could result in an increase in the Fund's net
asset value.
13
<PAGE> 16
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"). See "Taxes". To qualify, among other requirements, the
Fund will limit its investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities (other than U.S. Government
securities) of a single issuer and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities (other than U.S. Government securities) of a
single issuer. A fund which elects to be classified as "diversified" under the
1940 Act must satisfy the foregoing 5% requirement with respect to 75% of its
total assets. To the extent that the Fund assumes large positions in the
securities of a small number of issuers, the Fund's yield may fluctuate to a
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
DESCRIPTION OF CORPORATE LOANS
The Corporate Loans in which the Fund invests primarily consist of direct
obligations of a Borrower undertaken to finance the growth of the Borrower's
business internally or externally, or to finance a capital restructuring.
Corporate Loans may also include senior obligations of a borrower issued in
connection with a restructuring pursuant to Chapter 11 of the United States
Bankruptcy Code provided that such senior obligations meet the credit standards
established by the Investment Adviser. It is anticipated that a significant
portion of such Corporate Loans may include highly leveraged loans such as
leveraged buy-out loans, leveraged recapitalization loans and other types of
acquisition loans. Such Corporate Loans may be structured to include both term
loans, which are generally fully funded at the time of the Fund's investment,
and revolving credit facilities, which would require the Fund to make additional
investments in the Corporate Loans as required under the terms of the credit
facility. Such Corporate Loans may also include receivables purchase facilities,
which are similar to revolving credit facilities secured by a Borrower's
receivables. Corporate Loans may be issued in the form of senior syndicated
loans or senior secured notes.
The Fund may invest in Corporate Loans which are made to non-U.S.
Borrowers, provided that the loans are U.S. dollar-denominated or otherwise
provide for payment in U.S. dollars, and any such Borrower meets the credit
standards established by the Investment Adviser for U.S. Borrowers. The Fund
similarly may invest in Corporate Loans made to U.S. Borrowers with significant
non-dollar denominated revenues, provided that the loans are U.S.
dollar-denominated or otherwise provide for payment to the Fund in U.S. dollars.
In all cases where the Corporate Loans are not denominated in U.S. dollars, the
Corporate Loan facility will provide for payments to the lenders, including the
Fund, in U.S. dollars pursuant to foreign currency swap arrangements. Loans to
such non-U.S. Borrowers or U.S. Borrowers may involve risks not typically
involved in domestic investment, including fluctuation in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or U.S. governmental laws or
restrictions applicable to such loans. With respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
the Fund's investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment position. In
addition, information with respect to non-U.S. Borrowers may differ from that
available with respect to U.S. Borrowers, since foreign
14
<PAGE> 17
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. Borrowers.
The Corporate Loans in which the Fund invests will, in many instances, hold
the most senior position in the capitalization structure of the Borrower, and,
in any case, will, in the judgment of the Investment Adviser, be in the category
of senior debt of the Borrower. Each Corporate Loan will be secured by
collateral which the Investment Adviser believes to have a market value, at the
time of the Fund's investment in the Corporate Loan, which equals or exceeds the
principal amount of the Corporate Loan. The value of such collateral generally
will be determined by an independent appraisal or by obtaining the market value
of such collateral (e.g., cash or securities) if it is readily ascertainable. In
the event of a default, however, the ability of the lender to have access to the
collateral may be limited by bankruptcy and other insolvency laws. The value of
the collateral may decline below the amount of the Corporate Loan subsequent to
the Fund's investment in the loan. Under certain circumstances, the collateral
may be released with the consent of the Agent Bank and Co-Lenders or pursuant to
the terms of the underlying credit agreement with the Borrower. There is no
assurance that the liquidation of the collateral would satisfy the Borrower's
obligation in the event of nonpayment of scheduled interest or principal, or
that the collateral could be readily liquidated. As a result, the Fund might not
receive payments to which it is entitled and thereby may experience a decline in
the value of the investment and, possibly, its net asset value.
In the case of highly leveraged loans, a Borrower generally is required to
pledge collateral which may include (i) working capital assets, such as accounts
receivable and inventory, (ii) tangible fixed assets, such as real property,
buildings and equipment, (iii) intangible assets, such as trademarks, copyrights
and patent rights and (iv) security interests in securities of subsidiaries or
affiliates. In the case of Corporate Loans to privately held companies, the
companies' owners may pledge additional security in the form of guarantees
and/or other securities that they own. There may be temporary periods in the
course of financing a Borrower's tender offer where the collateral for the loan
consists of common stock having a value not less than 200% of the value of the
loan on the date the loan is made. Under such circumstances, the Borrower
generally proceeds with a subsequent transaction which will permit it to pledge
assets of a company as collateral for the loan, although there can be no
assurance that the Borrower will be able to effect such transaction.
The rate of interest payable on floating or variable rate Corporate Loans
is established as the sum of a base lending rate plus a specified margin. These
base lending rates generally are the Prime Rate of a designated U.S. bank, the
London InterBank Offered Rate ("LIBOR"), the Certificate of Deposit ("CD") rate
or another base lending rate used by commercial lenders. The interest rate on
Prime Rate-based Corporate Loans floats daily as the Prime Rate changes, while
the interest rate on LIBOR-based and CD-based Corporate Loans is reset
periodically, typically every 30 days to one year. Certain of the floating or
variable rate Corporate Loans in which the Fund will invest may permit the
Borrower to select an interest rate reset period of up to one year. A portion of
the Fund's portfolio may be invested in Corporate Loans with interest rates that
are fixed for the term of the loan. Investment in Corporate Loans with longer
interest rate reset periods or fixed interest rates may increase fluctuations in
the Fund's net asset value as a result of changes in interest rates. However,
the Fund will attempt to hedge all of its fixed rate Corporate Loans against
fluctuations in interest rates by entering into interest rate swap transactions.
The Fund also will attempt to maintain a portfolio of Corporate Loans that will
have a dollar weighted average period to the next interest rate adjustment of no
more than 90 days.
15
<PAGE> 18
Corporate Loans traditionally have been structured so that Borrowers pay
higher margins when they elect LIBOR and CD-based borrowing options, in order to
permit lenders to obtain generally consistent yields on Corporate Loans,
regardless of whether Borrowers select the LIBOR or CD-based options, or the
Prime-based option. In recent years, however, the differential between the lower
LIBOR and CD base rates and the higher Prime Rate base rates prevailing in the
commercial bank markets has widened to the point where the higher margins paid
by Borrowers for LIBOR and CD-based pricing options do not currently compensate
for the differential between the Prime Rate and the LIBOR and CD base rates.
Consequently, Borrowers have increasingly selected the LIBOR-based pricing
option, resulting in a yield on Corporate Loans that is consistently lower than
the yield would be if Borrowers selected the Prime Rate-based pricing option.
This trend has significantly limited the ability of the Fund to achieve a net
return to shareholders that consistently approximates the average published
prime rate of leading U.S. banks. At the date of this Prospectus, the Investment
Adviser cannot predict any significant change in this market trend.
The Fund may receive and/or pay certain fees in connection with its lending
activities. These fees are in addition to interest payments received and may
include facility fees, commitment fees, commissions and prepayment penalty fees.
When the Fund buys a Corporate Loan it may receive a facility fee and when it
sells a Corporate Loan may pay a facility fee. In certain circumstances, the
Fund may receive a prepayment penalty fee on the prepayment of a Corporate Loan
by a Borrower. In connection with the acquisition of Corporate Loans, the Fund
may also acquire warrants and other equity securities of the Borrower or its
affiliates. The acquisition of such equity securities will only be incidental to
the Fund's purchase of an interest in a Corporate Loan.
The Fund will invest in a Corporate Loan only if, in the Investment
Adviser's judgment, the Borrower can meet debt service on such loan. In
addition, the Investment Adviser will consider other factors deemed by it to be
appropriate to the analysis of the Borrower and the Corporate Loan. Such factors
include financial ratios of the Borrower such as pre-tax interest coverage,
leverage ratios, the ratio of cash flows to total debt and the ratio of tangible
assets to debt. In its analysis of these factors, the Investment Adviser also
will be influenced by the nature of the industry in which the Borrower is
engaged, the nature of the Borrower's assets and the Investment Adviser's
assessments of the general quality of the Borrower. The factors utilized have
been reviewed and approved by the Fund's Board of Directors. The Corporate Loans
in which the Fund invests are not currently rated by any nationally recognized
rating service.
The primary consideration in selecting such Corporate Loans for investment
by the Fund is the creditworthiness of the Borrower. In evaluating Corporate
Loans, the quality ratings assigned to other debt obligations of a Borrower may
not be a determining factor, since they will often be subordinated to the
Corporate Loans. Instead, the Investment Adviser will perform its own
independent credit analysis of the Borrower in addition to utilizing information
prepared and supplied by the Agent Bank, Co-Lender or Participant (each defined
below) from whom the Fund purchases its Participation Interest in a Corporate
Loan. The Investment Adviser's analysis will continue on an ongoing basis for
any Corporate Loans in which the Fund has invested. Although the Investment
Adviser will use due care in making such analysis, there can be no assurance
that such analysis will disclose factors which may impair the value of the
Corporate Loan.
Corporate Loans made in connection with highly leveraged transactions are
subject to greater credit risks than other Corporate Loans in which the Fund may
invest. These credit risks include a greater possibility of default or
bankruptcy of the Borrower and the assertion that the pledging of collateral to
secure the loan constituted a fraudulent conveyance or preferential transfer
which can be nullified or subordinated to the rights
16
<PAGE> 19
of other creditors of the Borrower under applicable law. Highly leveraged
Corporate Loans also may be less liquid than other Corporate Loans.
A Borrower also must comply with various restrictive covenants contained in
any Corporate Loan agreement between the Borrower and the lending syndicate (the
"Corporate Loan Agreement"). Such covenants, in addition to requiring the
scheduled payment of interest and principal, may include restrictions on
dividend payments and other distributions to stockholders, provisions requiring
the Borrower to maintain specific financial ratios or relationships and limits
on total debt. In addition, the Corporate Loan Agreement may contain a covenant
requiring the Borrower to prepay the Corporate Loan with any excess cash flow.
Excess cash flow generally includes net cash flow after scheduled debt service
payments and permitted capital expenditures, among other things, as well as the
proceeds from asset dispositions or sales of securities. A breach of a covenant
(after giving effect to any cure period) which is not waived by the Agent Bank
and the lending syndicate normally is an event of acceleration; i.e., the Agent
Bank has the right to call the outstanding Corporate Loan.
It is expected that a majority of the Corporate Loans will have stated
maturities ranging from three to ten years. However, such Corporate Loans
usually will require, in addition to scheduled payments of interest and
principal, the prepayment of the Corporate Loan from excess cash flow, as
discussed above, and may permit the Borrower to prepay at its election. The
degree to which Borrowers prepay Corporate Loans, whether as a contractual
requirement or at their election, may be affected by general business
conditions, the financial condition of the Borrower and competitive conditions
among lenders, among other factors. Accordingly, prepayments cannot be predicted
with accuracy. Upon a prepayment, the Fund may receive both a prepayment penalty
fee from the prepaying Borrower and a facility fee on the purchase of a new
Corporate Loan with the proceeds from the prepayment of the former. Such fees
may mitigate any adverse impact on the yield on the Fund's portfolio which may
arise as a result of prepayments and the reinvestment of such proceeds in
Corporate Loans bearing lower interest rates.
Loans to non-U.S. Borrowers or to U.S. Borrowers with significant non-U.S.
dollar-denominated revenues may provide for conversion of all or part of the
loan from a U.S. dollar-denominated obligation into a foreign currency
obligation at the option of the Borrower. The Fund may invest in Corporate Loans
which have been converted into non-U.S. dollar-denominated obligations only when
the Corporate Loan facility provides for payments to the lenders in U.S. dollars
pursuant to foreign currency swap arrangements. Foreign currency swaps involve
the exchange by the lenders, including the Fund, with another party (the
"counterparty") of the right to receive the currency in which the loan is
denominated for the right to receive U.S. dollars. The Fund will enter into a
transaction subject to a foreign currency swap only if, at the time of entering
into such swap, the outstanding debt obligations of the counterparty are
investment grade; i.e., rated BBB or A-3 or higher by Standard & Poor's Ratings
Group or Baa or P-3 or higher by Moody's Investors Service, Inc., or determined
to be of comparable quality in the judgment of the Investment Adviser. The
amounts of U.S. dollar payments to be received by the lenders and the foreign
currency payments to be received by the counterparty are fixed at the time the
swap arrangement is entered into. Accordingly, the swap protects the Fund from
fluctuations in exchange rates and locks in the right to receive payments under
the loan in a predetermined amount of U.S. dollars. If there is a default by the
counterparty, the Fund will have contractual remedies pursuant to the swap
arrangements; however, the U.S. dollar value of the Fund's right to foreign
currency payments under the loan will be subject to fluctuations in the
applicable exchange rate to the extent that a replacement swap arrangement is
unavailable or the Fund is unable to recover damages from the
17
<PAGE> 20
defaulting counterparty. If the Borrower defaults on or prepays the underlying
Corporate Loan, the Fund may be required pursuant to the swap arrangements to
compensate the counterparty to the extent of fluctuations in exchange rates
adverse to the counterparty. In the event of such a default or prepayment, an
amount of cash or high grade liquid debt securities having an aggregate net
asset value at least equal to the amount of compensation that must be paid to
the counterparty pursuant to the swap arrangements will be maintained in a
segregated account by the Fund's custodian.
DESCRIPTION OF PARTICIPATION INTERESTS
A Corporate Loan in which the Fund may invest typically is originated,
negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting of
commercial banks, thrift institutions, insurance companies, finance companies or
other financial institutions one or more of which administers the Loan on behalf
of the syndicate (the "Agent Bank"). Co-Lenders may sell Corporate Loans to
third parties called "Participants". The Fund may invest in a Corporate Loan
either by participating as a Co-Lender at the time the loan is originated or by
buying an interest in the Corporate Loan from a Co-Lender or a Participant.
Co-Lenders and Participants interposed between the Fund and a Borrower, together
with Agent Banks, are referred to herein as "Intermediate Participants".
The Fund may invest in a Corporate Loan at origination as a Co-Lender or by
acquiring participations in, assignments of or novations of a Corporate Loan
(collectively, "Participation Interests"). In a novation, the Fund would accept
all of the rights of the Intermediate Participants in a Corporate Loan,
including the right to receive payments of principal and interest and other
amounts directly from the Borrower and to enforce its rights as a lender
directly against the Borrower and would assume all of the obligations of the
Intermediate Participants, including any obligations to make future advances to
the Borrower. As a result, therefore, the Fund would have the status of a
Co-Lender. As an alternative, the Fund may purchase an assignment of all or a
portion of an Intermediate Participant's interest in a Corporate Loan, in which
case the Fund may be required generally to rely on the assigning lender to
demand payment and enforce its rights against the Borrower but would otherwise
be entitled to all of such lender's rights in the Corporate Loan. The Fund also
may purchase a participation in a portion of the rights of an Intermediate
Participant in a Corporate Loan by means of a participation agreement with such
Intermediate Participant. A participation in the rights of an Intermediate
Participant is similar to an assignment in that the Intermediate Participant
transfers to the Fund all or a portion of an interest in a Corporate Loan.
Unlike an assignment, however, a participation does not establish any direct
relationship between the Fund and the Borrower. In such a case, the Fund would
be required to rely on the Intermediate Participant that sold the participation
not only for the enforcement of the Fund's rights against the Borrower but also
for the receipt and processing of payments due to the Fund under the Corporate
Loans. The Fund will not act as an Agent Bank, guarantor, sole negotiator or
sole structuror with respect to a Corporate Loan.
Because it may be necessary to assert through an Intermediate Participant
such rights as may exist against the Borrower, in the event the Borrower fails
to pay principal and interest when due, the Fund may be subject to delays,
expenses and risks that are greater than those that would be involved if the
Fund could enforce its rights directly against the Borrower. Moreover, under the
terms of a participation, the Fund may be regarded as a creditor of the
Intermediate Participant (rather than of the Borrower), so that the Fund may
also be subject to the risk that the Intermediate Participant may become
insolvent. Similar risks may arise with respect to the Agent Bank, as described
below. Further, in the event of the bankruptcy or insolvency of
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<PAGE> 21
the Borrower, the obligation of the Borrower to repay the Corporate Loan may be
subject to certain defenses that can be asserted by such Borrower as a result of
improper conduct by the Agent Bank or Intermediate Participant. The Fund will
invest in Corporate Loans only if, at the time of investment, the outstanding
debt obligations of the Agent Bank and Intermediate Participants are investment
grade, i.e., rated BBB or A-3 or higher by Standard & Poor's Ratings Group or
Baa or P-3 or higher by Moody's Investors Service, Inc., or determined to be of
comparable quality in the judgment of the Investment Adviser.
Because the Fund will regard the issuer of a Corporate Loan as including
the Borrower under a Corporate Loan Agreement, the Agent Bank and any
Intermediate Participant, the Fund may be deemed to be concentrated in
securities of issuers in the industry group consisting of financial institutions
and their holding companies, including commercial banks, thrift institutions,
insurance companies and finance companies. As a result, the Fund is subject to
certain risks associated with such institutions. Banking and thrift institutions
are subject to extensive governmental regulations which may limit both the
amounts and types of loans and other financial commitments which such
institutions may make and the interest rates and fees which such institutions
may charge. The profitability of these institutions is largely dependent on the
availability and cost of capital funds, and has shown significant recent
fluctuation as a result of volatile interest rate levels. In addition, general
economic conditions are important to the operations of these institutions, with
exposure to credit losses resulting from possible financial difficulties of
borrowers potentially having an adverse effect. Insurance companies are also
affected by economic and financial conditions and are subject to extensive
government regulation, including rate regulation. The property and casualty
industry is cyclical, being subject to dramatic swings in profitability which
can be affected by natural catastrophes and other disasters. Individual
companies may be exposed to material risks, including reserve inadequacy, latent
health exposure and inability to collect from their reinsurance carriers. The
financial services area is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. In
this regard, recent business combinations have included insurance, finance and
securities brokerage under single ownership. Moreover, the Federal laws
generally separating commercial and investment banking are currently being
studied by Congress.
In a typical Corporate Loan, the Agent Bank administers the terms of the
Corporate Loan Agreement and is responsible for the collection of principal and
interest and fee payments from the Borrower and the apportionment of these
payments to the credit of all lenders which are parties to the Corporate Loan
Agreement. The Fund generally will rely on the Agent Bank or an Intermediate
Participant to collect its portion of the payments on the Corporate Loan.
Furthermore, the Fund will rely on the Agent Bank to use appropriate creditor
remedies against the Borrower. Typically, under Corporate Loan Agreements, the
Agent Bank is given broad discretion in enforcing the Corporate Loan Agreement,
and is obligated to use only the same care it would use in the management of its
own property. The Borrower compensates the Agent Bank for these services. Such
compensation may include special fees paid on structuring and funding the
Corporate Loan and other fees paid on a continuing basis.
In the event that an Agent Bank becomes insolvent, or has a receiver,
conservator, or similar official appointed for it by the appropriate bank
regulatory authority or becomes a debtor in a bankruptcy proceeding, assets held
by the Agent Bank under the Corporate Loan Agreement should remain available to
holders of Corporate Loans. If, however, assets held by the Agent Bank for the
benefit of the Fund were determined by an appropriate regulatory authority or
court to be subject to the claims of the Agent Bank's general or secured
creditors, the Fund might incur certain costs and delays in realizing payment on
a Corporate Loan or suffer a
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loss of principal and/or interest. In situations involving Intermediate
Participants similar risks may arise, as described above.
Intermediate Participants may have certain obligations pursuant to a
Corporate Loan Agreement, which may include the obligation to make future
advances to the Borrower in connection with revolving credit facilities in
certain circumstances. The Fund currently intends to reserve against such
contingent obligations by segregating sufficient investments in high quality,
short-term, liquid instruments. The Fund will not invest in Corporate Loans that
would require the Fund to make any additional investments in connection with
such future advances if such commitments would exceed 20% of the Fund's total
assets or would cause the Fund to fail to meet the diversification requirements
described under "Investment Objective and Policies".
ILLIQUID SECURITIES
Corporate Loans are, at present, not readily marketable and may be subject
to restrictions on resale. Although Corporate Loans are transferred among
certain financial institutions, as described above, the Corporate Loans in which
the Fund invests do not have the liquidity of conventional debt securities
traded in the secondary market and may be considered illiquid. As the market for
Corporate Loans becomes more seasoned, the Investment Adviser expects that
liquidity will improve. The Fund has no limitation on the amount of its
investments which are not readily marketable or are subject to restrictions on
resale. Such investments, which may be considered illiquid, may affect the
Fund's ability to realize the net asset value in the event of a voluntary or
involuntary liquidation of its assets. To the extent that such investments are
illiquid, the Fund may have difficulty disposing of portfolio securities in
order to purchase shares of its Common Stock pursuant to tender offers, if any.
The Board of Directors of the Fund will consider the liquidity of the Fund's
portfolio securities in determining whether a tender offer should be made by the
Fund. See "Net Asset Value" for information with respect to valuation of
illiquid Corporate Loans.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Leverage. The Fund is authorized to borrow money in amounts of up to
33 1/3% of the value of its total assets at the time of such borrowings.
Borrowings by the Fund (commonly known as "leveraging") create an opportunity
for greater total return but, at the same time, increase exposure to capital
risk. In addition, borrowed funds are subject to interest costs that may offset
or exceed the return earned on the borrowed funds. See "Special Leverage
Considerations".
Repurchase Agreements. The Fund may enter into repurchase agreements with
respect to its permitted investments but currently intends to do so only with
member banks of the Federal Reserve System or with primary dealers in U.S.
Government securities. Under a repurchase agreement the Fund buys a security at
one price and simultaneously promises to sell that same security back to the
seller at a higher price. The Fund's repurchase agreements will provide that the
value of the collateral underlying the repurchase agreement will always be at
least equal to the repurchase price, including any accrued interest earned on
the repurchase agreement, and will be marked to market daily. The repurchase
date usually is within seven days of the original purchase date. Repurchase
agreements are deemed to be loans under the 1940 Act. In all cases, the
Investment Adviser must be satisfied with the creditworthiness of the other
party to the agreement before entering into a repurchase agreement. In the event
of the bankruptcy (or other insolvency proceeding) of the other party to a
repurchase agreement, the Fund might experience delays in recovering its cash.
To the extent
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<PAGE> 23
that, in the meantime, the value of the securities the Fund purchases may have
declined, the Fund could experience a loss.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive collateral
in cash or securities issued or guaranteed by the United States Government. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the 1940 Act. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If cash
collateral is received by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of such investment is
retained by the Fund. Alternatively, if securities are delivered to the Fund as
collateral, the Fund and the borrower negotiate a rate for the loaned premium to
be received by the Fund for lending its portfolio securities. In either event,
the total yield on the Fund's portfolio is increased by loans of its portfolio
securities. The Fund will have the right to regain record ownership of loaned
securities to exercise beneficial rights such as voting rights, subscription
rights and rights to dividends, interest or other distributions. Such loans are
terminable at any time. The Fund may pay reasonable finder's, administrative and
custodial fees in connection with such loans. In the event that the borrower
defaults on its obligation to return borrowed securities, because of insolvency
or otherwise, the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the borrowed securities.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell interests in Corporate Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Corporate Loans and other portfolio debt
securities at delivery may be more or less than their purchase price, and yields
generally available on such interests or securities when delivery occurs may be
higher than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or high-grade portfolio securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. The Fund
will make commitments to purchase such interest or securities on such basis only
with the intention of actually acquiring these interests or securities, but the
Fund may sell such interests or securities prior to the settlement date if such
sale is considered to be advisable. To the extent the Fund engages in "when
issued" and "delayed delivery" transactions, it will do so for the purpose of
acquiring interests or securities for the Fund's portfolio consistent with the
Fund's investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.
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<PAGE> 24
INTEREST RATE HEDGING TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates by entering into interest rate hedging
transactions. While the Fund's use of hedging strategies is intended to further
the Fund's investment objective, there can be no assurance that the Fund's
interest rate hedging transactions will be effective.
Certain Federal income tax requirements may limit the Fund's ability to
engage in interest rate hedging transactions. Gains from transactions in
interest rate hedges distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to shareholders.
See "Taxes".
The Fund expects to enter into interest rate hedging transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund also will attempt to enter into
interest rate hedging transactions to hedge all of its fixed rate Corporate
Loans against fluctuations in interest rates. The Fund may enter into interest
rate hedges on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or its liabilities. Typically, the parties with
which the Fund will enter into interest rate hedging transactions will be
broker-dealers and other financial institutions.
The interest rate hedging transactions in which the Fund may engage include
interest rate swaps involving the exchange by the Fund with another party of
their respective commitments to pay or receive interest, such as an exchange of
fixed rate payments for floating rate payments. For example, if the Fund holds a
Corporate Loan with an interest rate that is reset only once each year, it may
swap the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset every week. This would enable the Fund to
offset a decline in the value of the Corporate Loan due to rising interest
rates, but would also limit its ability to benefit from falling interest rates.
Conversely, if the Fund holds a Corporate Loan with an interest rate that is
reset every week and it would like to lock in what it believes to be a high
interest rate for one year, it may swap the right to receive interest at this
variable weekly rate for the right to receive interest at a rate that is fixed
for one year. Such a swap would protect the Fund from a reduction in yield due
to falling interest rates, but would preclude it from taking full advantage of
rising interest rates.
The Fund may also engage in interest rate hedging transactions in the form
of purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (the reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index
and the predetermined rate on a notional principal amount from the party selling
such interest rate floor. The Fund will not enter into caps or floors if, on a
net basis, the aggregate notional principal amount with respect to such
agreements exceeds the net assets of the Fund.
Inasmuch as these interest rate hedging transactions are entered into for
good faith hedging purposes, the Investment Adviser believes that such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to its borrowing restrictions. The Fund usually 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
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<PAGE> 25
be, only the net amount of the two payments. The net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis, and an amount of cash or
high grade liquid debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the interest rate swap transaction is entered into on other
than a net basis, the full amount of the Fund's obligations will be accrued on a
daily basis, and the full amount of the Fund's obligations will be maintained in
a segregated account by the Fund's custodian. The Fund will not enter into any
interest rate hedging transaction unless the Investment Adviser considers the
credit quality of the unsecured senior debt or the claims-paying ability of the
other party thereto to be investment grade. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant to
the agreements related to the transaction but such remedies may be subject to
bankruptcy and insolvency laws which could affect the Fund's rights as a
creditor. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid in comparison with other similar instruments traded
in the interbank market. Interest rate caps and floors are more recent
innovations and they are less liquid than swaps. There can be no assurance,
however, that the Fund will be able to enter into interest rate swaps or to
purchase interest rate caps or floors at prices or on terms the Investment
Adviser believes are advantageous to the Fund. In addition, although the terms
of interest rate swaps, caps and floors may provide for termination, there can
be no assurance the Fund will be able to terminate an interest rate swap or to
sell or offset interest rate caps or floors that it has purchased.
The use of interest rate hedges is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared with
what it would have been if these investment techniques were not used.
There is no limit on the amount of interest rate hedging transactions that
may be entered into by the Fund. These transactions do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate hedges is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the
Corporate Loan underlying an interest rate swap is prepaid and the Fund
continues to be obligated to make payments to the other party to the swap, the
Fund would have to make such payments from another source. If the other party to
an interest rate swap defaults, the Fund's risk of loss consists of the net
amount of interest payments that the Fund contractually is entitled to receive.
Since interest rate transactions are individually negotiated, the Investment
Adviser expects to achieve an acceptable degree of correlation between the
Fund's rights to receive interest on Participation Interests and its rights and
obligations to receive and pay interest pursuant to interest rate swaps.
SPECIAL LEVERAGE CONSIDERATIONS
EFFECTS OF LEVERAGE
The Fund may borrow money representing approximately 33 1/3%, or issue
shares of preferred stock representing up to approximately 50%, of the Fund's
total assets immediately after such borrowing or issuance. There can be no
assurance, however, that preferred stock representing such percentage of the
Fund's capital
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<PAGE> 26
will actually be issued. Borrowings by the Fund or the issuance of the preferred
stock will result in leveraging of the Common Stock. The Fund currently
anticipates that it may incur borrowings and issue such preferred shares for the
purpose of acquiring additional income-producing investments when it believes
that the interest or dividend payments and other costs with respect to such
borrowings and preferred shares will be exceeded by the anticipated return on
such investments. The amount of any such borrowing or issuance will depend on
market or economic conditions existing at that time.
Capital raised through leverage will be subject to interest costs or
dividend payments which may or may not exceed the interest on the assets
purchased. The Fund also may be required to maintain minimum average balances in
connection with borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements will increase the cost of borrowing
over the stated interest rate. The issuance of additional classes of preferred
shares involves offering expenses and other costs and may limit the Fund's
freedom to pay dividends on shares of Common Stock or to engage in other
activities. Borrowings and the issuance of a class of preferred stock having
priority over the Fund's Common shares create an opportunity for greater income
per Common share, but at the same time such borrowing or issuance is a
speculative technique in that it will increase the Fund's exposure to capital
risk. Such risks may be reduced through the use of borrowings and preferred
stock that have floating rates of interest. Unless the income and appreciation,
if any, on assets acquired with borrowed funds or offering proceeds exceeds the
cost of borrowing or issuing additional classes of securities, the use of
leverage will diminish the investment performance of the Fund compared with what
it would have been without leverage.
The Fund also may borrow money to finance the purchase of shares pursuant
to tender offers, if any, or for temporary, extraordinary or emergency purposes.
The Fund has entered into an agreement with a financial institution
providing for an unsecured revolving credit facility (the "Facility"), the
proceeds of which may be used to finance, in part, the payment for Shares
tendered in a tender offer by the Fund. The Facility provides for the borrowing
by the Fund of up to $100,000,000 at a rate of interest equal to the sum of the
federal funds rate (as published by the Federal Reserve Bank of New York) plus
(i) 1% for the first 45 days that such borrowing is outstanding, (ii) 2% for the
next 15 days that such borrowing is outstanding and (iii) 3% for the next 30
days that such borrowing is outstanding. Interest on borrowings is computed on
the basis of a year of 360 days for the actual number of days elapsed and is
payable monthly in arrears. Each borrowing under the Facility is required to be
repaid on the earlier of (i) 90 days after the date of such borrowing or (ii)
the last date prior to the expiration of the next tender offer by the Fund for
its shares. As of the date of this Prospectus, the term of the Facility is
scheduled to expire in March 1996, unless terminated earlier as provided
therein. Borrowings under the Facility, if any, may be repaid with the proceeds
of portfolio investments sold by the Fund subsequent to the expiration date of a
tender offer. The terms of the Facility may be modified by written agreement of
the parties thereto. Pursuant to the terms of the Facility the Fund is required
to maintain asset coverages ranging from 500% to 650% of the outstanding
principal balance of borrowings under the Facility depending upon the period of
time a borrowing is outstanding. The Fund also may not during the term of the
Facility issue any additional capital stock other than common stock or incur
indebtedness except for indebtedness incurred under the Facility, in hedging
transactions and for purchases of securities on short-term credit as may be
necessary for the clearance of sales or purchases of portfolio securities.
Additionally, during the term of the Facility, the Fund is restricted with
respect to the payment of dividends. Pursuant to such agreement the Fund may
make its periodic dividend payments to shareholders in an amount not in excess
of its net investment income for such period, and may
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<PAGE> 27
distribute each year all of its income (including net capital gain) so that it
will not be subject to tax under the Internal Revenue Code of 1986, as amended.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act the Fund may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be.
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount it will borrow, will depend on many factors,
the most important of which are investment outlook, market conditions and
interest rates. Successful use of a leveraging strategy depends on the
Investment Adviser's ability to predict correctly interest rates and market
movements, and there is no assurance that a leveraging strategy will be
successful during any period in which it is employed.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term rates or other changed market
conditions to the point where the Fund's leverage could adversely affect holders
of Common Stock as noted above, or in anticipation of such changes, the Fund may
attempt to shorten the average maturity of its investment portfolio, which would
tend to offset the negative impact of leverage on holders of Common Stock.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
stock (expected to equal original purchase price per share plus any accrued and
unpaid dividends). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Stock unless, at the time of such
declaration, the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or distribution) is at least 200% of such
liquidation value. If, for example, the Fund sold shares of preferred stock
representing 35% of the Fund's capital, the net asset value of the Fund's
portfolio would be approximately 285% of the liquidation value of the Fund's
preferred stock. In the event preferred shares are issued, the Fund intends, to
the extent possible, to purchase or redeem shares of preferred stock from time
to time to maintain coverage of any preferred stock of at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and,
prior to issuance of any preferred stock, may not be changed without the
approval of the holders of a majority of the Fund's outstanding shares of Common
Stock (which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the shares of Common Stock represented at a meeting at which more than 50% of
the outstanding shares of Common Stock are represented or (ii) more than 50% of
the outstanding shares). Subsequent to the issuance of a class of preferred
stock, the following investment restrictions may not be changed without the
approval of a majority of the outstanding shares of Common Stock and of the
preferred stock, voting together as a class, and the approval of a majority of
the outstanding shares of preferred stock, voting separately by class. The Fund
may not:
1. Borrow money or issue senior securities, except as permitted by
Section 18 of the 1940 Act.
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2. Make investments for the purpose of exercising control or
management.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter's or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than 10% of the Fund's total assets would be invested
in such securities.
4. Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
5. 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 (i) to the extent that the
Fund may be deemed to be making loans by purchasing Corporate Loans, as a
Co-Lender or otherwise, and other debt securities and entering into
repurchase agreements in accordance with its investment objective, policies
and limitations and (ii) the Fund may lend its portfolio securities in an
amount not in excess of 33 1/3% of its total assets, taken at market value,
provided that such loans shall be made in accordance with the guidelines
set forth in this Prospectus.
7. Invest more than 25% of its total assets in the securities of
issuers in any one industry; provided that this limitation shall not apply
with respect to obligations issued or guaranteed by the U.S. Government or
by its agencies or instrumentalities; and provided further that the Fund
may invest more than 25% and may invest up to 100% of its assets in
securities of issuers in the industry group consisting of financial
institutions and their holding companies, including commercial banks,
thrift institutions, insurance companies and finance companies. For
purposes of this restriction, the term "issuer" includes the Borrower, the
Agent Bank and any Intermediate Participant (as defined under "Investment
Objective and Policies--Description of Participation Interests").
8. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities.
9. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options.
An additional investment restriction adopted by the Fund, which may be
changed by the Board of Directors, provides that the Fund may not mortgage,
pledge, hypothecate or in any manner transfer, as security for indebtedness, any
securities owned or held by the Fund except as may be necessary in connection
with hedging techniques involving interest rate transactions, foreign currency
swap transactions relating to non-U.S. dollar-denominated loans and permitted
borrowings by the Fund.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch except
pursuant to an exemptive order or otherwise in compliance with the provisions of
the 1940 Act and the rules and regulations thereunder. Included among such
restricted
26
<PAGE> 29
transactions will be purchases from or sales to Merrill Lynch of securities in
transactions in which it acts as principal. See "Portfolio Transactions".
The Fund has established procedures for blocking the use of inside
information in securities transactions (commonly referred to as "Chinese Wall
procedures"). As a result, in relation to other funds managed by the same
portfolio manager as the Fund (currently, Senior Strategic Income Fund, Inc.,
Senior High Income Portfolio, Inc. and Senior High Income Portfolio II, Inc.),
if one fund buys a security that is publicly traded or privately placed,
respectively, the other funds may be deprived of the opportunity to buy a
security of the same issuer that is privately placed or publicly traded,
respectively.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a wholly owned
subsidiary of the Investment Adviser, acts as the distributor of shares of
Common Stock of the Fund. The Fund is engaged in a continuous offering of its
shares of Common Stock through the Distributor and other securities dealers
which have entered into selected dealer agreements with the Distributor,
including Merrill Lynch. The Fund may, from time to time, suspend the sale of
its shares of Common Stock. During any continuous offering of the Fund's Common
Stock, shares of the Fund may be purchased from the Distributor or selected
dealers, including Merrill Lynch, or by mailing a purchase order directly to the
Transfer Agent. The minimum initial purchase is $1,000 ($250 in the case of
individual retirement accounts and other retirement plans except for 401(k) and
403(b) Plans maintained through Merrill Lynch, for which there is no minimum)
and the minimum subsequent purchase is $50 ($1 in the case of individual
retirement accounts and other retirement plans except that for 401(k) and 403(b)
Plans maintained through Merrill Lynch there is no minimum).
The Fund is offering its shares at a public offering price equal to the
next determined net asset value per share without a front-end sales charge. The
applicable offering price for purchase orders is based on the net asset value of
the Fund next determined after receipt of the purchase order by the Distributor.
As to purchase orders received by securities dealers prior to the close of
business on the New York Stock Exchange (the "NYSE") (generally, 4:00 p.m., New
York time), which includes orders received after the close of business on the
previous day, the applicable offering price will be based on the net asset value
determined as of 15 minutes after the close of business on the NYSE on that day
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE, such orders shall be deemed received on the
next business day. Any order may be rejected by the Distributor or the Fund. The
Fund or the Distributor may suspend the continuous offering of the Fund's shares
at any time in response to conditions in the securities markets or otherwise and
may thereafter resume such offering from time to time. Neither the Distributor
nor the dealers are permitted to withhold placing orders to benefit themselves
by a price change. The Distributor is required to advise the Fund promptly of
all purchase orders and cause payments for shares of Common Stock to be
delivered promptly to the Fund. Merrill Lynch charges its customers a processing
fee (presently $4.85) to confirm a purchase of shares by such customers.
Purchases directly through the Fund's Transfer Agent are not subject to the
processing fee.
Due to the administrative complexities associated with a continuous
offering, administrative errors may result in the Distributor or an affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of the
shares of Common Stock) of shares of Common Stock which it may wish to resell.
Such shares of
27
<PAGE> 30
Common Stock will not be subject to any investment restriction and may be resold
pursuant to this Prospectus.
The Distributor compensates Merrill Lynch or other selected dealers at a
rate of 3.0% of amounts purchased. If the shares remain outstanding after one
year from the date of their original purchase, the Distributor will compensate
Merrill Lynch or such dealers quarterly at an annual rate equal to 0.25% of the
value of Fund shares sold by Merrill Lynch or such dealers and remaining
outstanding. These amounts do not represent an expense to the Fund and its
shareholders since the foregoing payments made by the Distributor will be made
from its own assets, which may include amounts received by the Distributor as
early withdrawal charges. See "Early Withdrawal Charge". The compensation paid
to selected dealers and the Distributor, including the compensation paid at the
time of purchase, the quarterly payments mentioned above and the early
withdrawal charge, if any, will not in the aggregate exceed the applicable limit
(presently, 8%), as determined from time to time by the National Association of
Securities Dealers, Inc. ("NASD"). For the years ended August 31, 1993, 1994 and
1995 the Distributor paid $4,156,096, $10,310,601 and $38,181,431, respectively,
to Merrill Lynch in connection with the sale of shares of Common Stock of the
Fund.
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholder's name may be opened at the
Fund's transfer agent, dividend disbursing agent and shareholder servicing
agent. Shareholders should be aware that it will not be possible to transfer
their shares from Merrill Lynch to another brokerage firm or financial
institution. Shareholders interested in transferring their brokerage accounts
from Merrill Lynch and who do not wish to have an account maintained for such
shares at the Fund's transfer agent must tender the shares for repurchase by the
Fund as described under "Tender Offers" so that the cash proceeds can be
transferred to the account at the new firm.
TENDER OFFERS
In recognition of the possibility that a secondary market for the Fund's
shares will not exist, the Fund may take actions which will provide liquidity to
shareholders. The Fund may from time to time make offers to purchase its shares
of Common Stock from all beneficial holders of the Fund's Common Stock at a
price per share equal to the net asset value per share of the Common Stock
determined at the close of business on the day an offer terminates ("Tender
Offer"). Commencing with the second quarter of Fund operations, the Board of
Directors has considered the making of Tender Offers on a quarterly basis, and
the Board of Directors intends to continue this practice. There can be no
assurance, however, that the Board of Directors will decide to undertake the
making of a Tender Offer. Subject to the Fund's investment restriction with
respect to borrowings, the Fund may borrow money to finance the repurchase of
shares pursuant to any Tender Offers. See "Special Leverage Considerations" and
"Investment Restrictions".
The Fund expects that ordinarily there will be no secondary market for the
Fund's Common Stock and that periodic tenders will be the only source of
liquidity for Fund shareholders. Nevertheless, if a secondary market develops
for the Common Stock of the Fund, the market price of the shares may vary from
net asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the Fund,
especially as it affects the yield on and net asset value of the Common Stock of
the Fund. A Tender Offer for shares of Common Stock of the Fund at net asset
value is expected to reduce any spread between net asset value and market price
that may otherwise develop. However,
28
<PAGE> 31
there can be no assurance that such action would result in the Fund's Common
Stock trading at a price which equals or approximates net asset value.
Although the Board of Directors believes that the Tender Offers generally
would be beneficial to holders of the Fund's Common Stock, the acquisition of
shares of Common Stock by the Fund will decrease the total assets of the Fund
and therefore have the likely effect of increasing the Fund's expense ratio
(assuming such acquisition is not offset by the issuance of additional shares of
Common Stock). Furthermore, to the extent the Fund borrows to finance the making
of Tender Offers, interest on such borrowings reduce the Fund's net investment
income.
It is the Board's announced policy, which may be changed by the Board, not
to purchase shares pursuant to a Tender Offer if (1) such purchases would impair
the Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund); (2) the Fund would not be able to liquidate portfolio
securities in a manner which is orderly and consistent with the Fund's
investment objective and policies in order to purchase Common Stock tendered
pursuant to the Tender Offer; or (3) there is, in the Board's judgment, any (a)
legal action or proceeding instituted or threatened challenging the Tender Offer
or otherwise materially adversely affecting the Fund, (b) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by banks in the United States or New York State, which is material to the Fund,
(c) limitation imposed by Federal or state authorities on the extension of
credit by lending institutions, (d) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States which is material to the Fund, or (e) other event or condition
which would have a material adverse effect on the Fund or its shareholders if
shares of Common Stock tendered pursuant to the Tender Offer were purchased.
Thus, there can be no assurance that the Board will proceed with any Tender
Offer. The Board of Directors may modify these conditions in light of
circumstances existing at the time. If the Board of Directors determines to
purchase the Fund's shares of Common Stock pursuant to a Tender Offer, such
purchases could significantly reduce the asset coverage of any borrowing or
outstanding senior securities. The Fund may not purchase shares of Common Stock
to the extent such purchases would result in the asset coverage with respect to
such borrowing or senior securities being reduced below the asset coverage
requirement set forth in the 1940 Act. Accordingly, in order to purchase all
shares of Common Stock tendered, the Fund may have to repay all or part of any
then outstanding borrowing or redeem all or part of any then outstanding senior
securities to maintain the required asset coverage. See "Special Leverage
Considerations". In addition, the amount of shares of Common Stock for which the
Fund makes any particular Tender Offer may be limited for the reasons set forth
above or in respect of other concerns related to liquidity of the Fund's
portfolio.
The Fund has obtained an exemption from the Securities and Exchange
Commission relating to Tender Offers which includes representations by the Fund
that no secondary market for shares of the Fund's Common Stock is expected to
develop. The exemption is conditioned on the absence of a secondary market. In
the event that circumstances arise under which the Fund does not conduct the
Tender Offers regularly, the Board of Directors would consider alternative means
of providing liquidity for holders of Common Stock. Such action would include an
evaluation of any secondary market that then existed and a determination of
whether such market provided liquidity for holders of Common Stock. If the Board
of Directors determines that such market, if any, fails to provide liquidity for
the holders of Common Stock, the Board expects that it will consider all then
available alternatives to provide such liquidity. Among the alternatives which
the Board of
29
<PAGE> 32
Directors may consider is the listing of the Fund's Common shares on a major
domestic stock exchange or on the NASDAQ National Market System in order to
provide such liquidity. The Board of Directors also may consider causing the
Fund to repurchase its shares from time to time in open-market or private
transactions when it can do so on terms that represent a favorable investment
opportunity. In any event, the Board of Directors expects that it will cause the
Fund to take whatever action it deems necessary or appropriate to provide
liquidity for the holders of Common Stock in light of the facts and
circumstances existing at such time.
To consummate a Tender Offer in order to repurchase its shares of Common
Stock, the Fund may be required to liquidate portfolio securities, and realize
gains or losses, at a time when the Investment Adviser would otherwise consider
it disadvantageous to do so. In such event gains may be realized on securities
held for less than three months. In order to qualify as a regulated investment
company under the Code, the Fund must limit such gains and, accordingly, the
amount of gain that the Fund could realize in the ordinary course of its
portfolio management from sales of other securities held for less than three
months would be reduced. This may adversely affect the Fund's yield. See
"Taxes".
Each Tender Offer will be made and shareholders notified in accordance with
the requirements of the Securities Exchange Act of 1934 and the 1940 Act, either
by publication or mailing or both. The offering documents will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. The repurchase of tendered shares by the Fund is a
taxable event. See "Taxes". The Fund will pay all costs and expenses associated
with the making of any Tender Offer. An Early Withdrawal Charge will be imposed
on most shares accepted for tender which have been held for less than three
years. See "Early Withdrawal Charge". In addition, Merrill Lynch charges its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
from such customers pursuant to a Tender Offer. Tenders made directly through
the Fund's Transfer Agent are not subject to the processing fee.
Shareholders of the Fund have an investment option consisting of the right
to reinvest the net proceeds from a sale of shares of the Fund's Common Stock
(the "Original Shares") pursuant to a tender offer by the Fund in Class A
initial sales charge shares of certain Merrill Lynch-sponsored open-end
investment companies ("Eligible Class A Shares") at their net asset value,
without the imposition of the initial sales charge, if the conditions set forth
below are satisfied. First, net proceeds from the sale of the Original Shares in
the tender offer must be immediately reinvested in Eligible Class A Shares.
Second, the investment option is available only with respect to the proceeds of
shares of the Fund's Common Stock as to which no Early Withdrawal Charge is
applicable. Before taking advantage of this investment option, shareholders of
the Fund should obtain a currently effective prospectus of the mutual fund which
they intend to purchase. To exercise this investment option, shareholders should
consult their Merrill Lynch financial consultant.
EARLY WITHDRAWAL CHARGE
An Early Withdrawal Charge to recover distribution expenses incurred by the
Distributor will be charged against the shareholder's investment account and
paid to the Distributor in connection with most shares of Common Stock held for
less than three years which are accepted by the Fund for repurchase pursuant to
a Tender Offer in the manner described below. The Early Withdrawal Charge will
be imposed on those shares of Common Stock accepted for tender based on an
amount equal to the lesser of the then current net asset value of the shares of
Common Stock or the cost of the shares of Common Stock being tendered.
Accordingly, the Early Withdrawal Charge is not imposed on increases in the net
asset value above the initial purchase price. In
30
<PAGE> 33
addition, the Early Withdrawal Charge is not imposed on shares derived from
reinvestments of dividends or capital gains distributions. In determining
whether an Early Withdrawal Charge is payable, it is assumed that the acceptance
of an offer to repurchase pursuant to a Tender Offer would be made from the
earliest purchase of shares of Common Stock. The Early Withdrawal Charge imposed
will vary depending on the length of time the Common Stock has been owned since
purchase (separate purchases shall not be aggregated for these purposes), as set
forth in the following table:
<TABLE>
<CAPTION>
EARLY
YEAR OF REPURCHASE WITHDRAWAL
AFTER PURCHASE CHARGE
------------------------------------------------------- ----------
<S> <C>
First.................................................. 3.0%
Second................................................. 2.0%
Third.................................................. 1.0%
Fourth and following................................... 0.0%
</TABLE>
In determining whether an Early Withdrawal Charge is applicable to a tender
of shares of Common Stock, the calculation will be determined in the manner that
results in the lowest possible amount being charged. Therefore, it will be
assumed that the tender is first of shares of Common Stock held for over three
years and shares of Common Stock acquired pursuant to reinvestment of dividends
or distributions and then of shares of Common Stock held longest during the
three-year period. The Early Withdrawal Charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase.
Example:
Assume an investor purchased 1,000 shares of Common Stock (at a cost of
$10,000) and in the second year after purchase, the net asset value per share is
$10.15 and, during such time, the investor has acquired 100 additional shares of
Common Stock upon dividend reinvestment. If at such time the investor makes his
first redemption of 500 shares of Common Stock (proceeds of $5,075), 100 shares
will not be subject to the Early Withdrawal Charge because of dividend
reinvestment. With respect to the remaining 400 shares of Common Stock, the
Early Withdrawal Charge is applied only to the original cost of $10 per share
and not to the increase in net asset value of $0.15 per share. Therefore, $4,000
of the $5,075 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the second year after purchase).
For the years ended August 31, 1993, 1994 and 1995 the amount paid to the
Distributor in Early Withdrawal Charges aggregated $514,601, $264,686 and
$859,057, respectively.
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations during the last five years are set forth below. Unless
otherwise noted, the address of each Director and executive officer is P.O. Box
9011, Princeton, New Jersey 08536-9011.
ARTHUR ZEIKEL(63)--President and Director(1)(2)--President of the
Investment Adviser (which term as used herein includes the Investment Adviser's
corporate predecessors) since 1977; President of Fund Asset Management, L.P.
("FAM") (which term as used herein includes FAM's corporate predecessors), since
1977; President and Director of Princeton Services, Inc. ("Princeton Services")
since 1993; an Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") since 1990 and an Executive Vice
31
<PAGE> 34
President of Merrill Lynch since 1990 and a Senior Vice President from 1985 to
1990; Director of the Distributor.
RONALD W. FORBES(55)--Director(2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York at
Albany, since 1989, and Associate Professor prior thereto; Member, Task Force on
Municipal Securities Markets, Twentieth Century Fund.
CYNTHIA A. MONTGOMERY(43)--Director(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 20163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate School
of Business Administration, The University of Michigan from 1979 to 1985;
Director, UNUM Corporation.
CHARLES C. REILLY(64)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Partner, Small
Cities Cable Television since 1986.
KEVIN A. RYAN(63)--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder, current Director and professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University from 1982 to 1994; formerly taught on the
faculties of The University of Chicago, Stanford University and The Ohio State
University.
RICHARD R. WEST(57)--Director(2)--287 Genoa Springs Drive, Genoa, NV 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, New York University
Leonard N. Stern School of Business Administration; Professor of Finance at the
Amos Tuck School of Business Administration from 1976 to 1984 and Dean from 1976
to 1983; Director of Vornado, Inc. (real estate investment trust), Bowne & Co.,
Inc. (financial printer), Smith Corona Corporation (manufacturer of typewriters
and word processors) and Alexander's Inc. (real estate company).
TERRY K. GLENN(55)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and FAM since 1983 and Director since 1991;
Executive Vice President and Director of Princeton Services since 1993;
President of the Distributor since 1986 and Director thereof since 1991;
President of Princeton Administrators (and its corporate predecessor) since
1988.
N. JOHN HEWITT(60)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1980 and Vice President from 1979 to 1980.
R. DOUGLAS HENDERSON(37)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1989; Vice President, Leveraged Finance Department,
Security Pacific Merchant Bank from 1987 to 1989; Vice President, Corporate
Finance and Banking Department, Security Pacific Merchant Bank from 1983 to
1987.
JOHN W. FRASER(34)--Vice President(1)(2)--Vice President of the Investment
Adviser since 1991; Vice President, Corporate Bond Department, Continental Bank
from 1988 to 1991; Analyst, Drexel Burnham Lambert Commercial Paper, Inc. from
1987 to 1988; Second Vice President, Chase Manhattan Bank from 1985 to 1987.
32
<PAGE> 35
DONALD C. BURKE(35)--Vice President(1)(2)--Vice President and Director of
Taxation of FAM since 1990; employee of Deloitte & Touche LLP from 1982 to 1990.
GERALD M. RICHARD(46)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and FAM since 1984; Vice President of the Distributor
since 1981 and Treasurer since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993.
PATRICK D. SWEENEY(41)--Secretary(1)(2)--Vice President of the Investment
Adviser since 1990; Vice President and Associate Counsel of Security Pacific
Merchant Bank from 1988 to 1990; Lawyer in private practice from 1981 to 1988.
- - ------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, officer or member of the advisory
board of certain other investment companies for which the Investment Adviser
or FAM acts as investment adviser.
COMPENSATION OF DIRECTORS
Pursuant to the terms of its investment advisory agreement with the Fund
(the "Investment Advisory Agreement"), the Investment Adviser pays all
compensation of officers and employees of the Fund as well as the fees of all
Directors of the Fund who are affiliated persons of ML & Co. or its
subsidiaries. The Fund pays each unaffiliated Director a fee of $4,000 per year
plus $800 per meeting attended and pays all Directors' actual out-of-pocket
expenses relating to attendance at meetings. The Fund also pays members of its
audit committee, which consists of all the Directors not affiliated with the
Investment Adviser, an annual fee of $2,000; the chairman of the audit committee
receives an additional fee of $1,000. Fees and expenses paid to the unaffiliated
Directors aggregated $47,374 for the year ended August 31, 1995.
The following table sets forth for the fiscal year ended August 31, 1995
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1994 the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised
Funds") to the non-interested Directors.
<TABLE>
<CAPTION>
AGGREGATE
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF TRUSTEE FROM FUND OF FUND EXPENSE DIRECTORS(1)
- - ------------------------------------------- ------------ ------------------------ ----------------
<S> <C> <C> <C>
Ronald W. Forbes(1)........................ $ 9,200 None $154,400
Cynthia A. Montgomery(1)................... $ 9,200 None $133,817
Charles C. Reilly(1)....................... $ 9,200 None $276,900
Kevin A. Ryan(1)........................... $ 9,200 None $154,400
Richard R. West(1)......................... $ 10,200 None $300,900
</TABLE>
- - ---------------
(1) In addition to the Fund, the Directors served on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Forbes (36 funds); Ms. Montgomery (36
funds); Mr. Reilly (53 funds); Mr. Ryan (36 funds); and Mr. West (53 funds).
33
<PAGE> 36
INVESTMENT ADVISORY
AND ADMINISTRATIVE ARRANGEMENTS
Merrill Lynch Asset Management, L.P. (the "Investment Adviser"), which is
owned and controlled by ML & Co., a financial services holding company and the
parent of Merrill Lynch, provides the Fund with investment advisory and
administrative services. The Investment Adviser or FAM acts as the investment
adviser for more than 130 registered investment companies. The Investment
Adviser also offers investment advisory services to individuals and
institutions. As of September 30, 1995, the Investment Adviser and FAM had a
total of approximately $189.4 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Investment Adviser. The Investment Adviser is a limited partnership, the
partners of which are ML&Co., Merrill Lynch Investment Management, Inc. and
Princeton Services. The principal business address of the Investment Adviser is
800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the direction
of the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources, make the
necessary investment decisions, and place orders for transactions accordingly.
The Investment Adviser also will be responsible for the performance of certain
management services for the Fund. The Portfolio Manager for the Fund is R.
Douglas Henderson.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund pays a monthly fee at an annual rate of 0.95 of 1%
of the Fund's average daily net assets (i.e., the average daily value of the
total assets of the Fund, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the shares of preferred stock, if any). For purposes of
this calculation, average daily net assets is determined at the end of each
month on the basis of the average net assets of the Fund for each day during the
month.
Under the terms of an administration agreement with the Fund (the
"Administration Agreement"), the Investment Adviser also performs or arranges
for the performance of the administrative services (i.e., services other than
investment advice and related portfolio activities) necessary for the operation
of the Fund, including paying all compensation of and furnishing office space
for officers and employees 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.
For the administrative services rendered to the Fund and the facilities
furnished, the Fund pays the Investment Adviser a monthly fee at an annual rate
of 0.25 of 1% of the Fund's average daily net assets determined in the same
manner as the fee payable by the Fund under the Investment Advisory Agreement.
The combined advisory and administration fees are greater than the advisory fees
paid by most funds but are similar in amount to the fees paid by similar funds
making similar investments.
For the years ended August 31, 1993, 1994 and 1995, the fee paid by the
Fund to the Investment Adviser pursuant to the Investment Advisory Agreement was
$7,202,400, $7,145,339 and $13,654,371, respectively, and the fee paid by the
Fund pursuant to the Administration Agreement was $1,895,368, $1,880,353 and
34
<PAGE> 37
$3,593,255, respectively (based on average daily net assets of approximately
$760 million, $752.1 million and $1.4 billion, respectively). The Investment
Adviser voluntarily reimbursed to the Fund $0, $0 and $0, respectively, of the
combined advisory and administration fees payable by the Fund which resulted in
an effective fee rate of 1.20%, 1.20% and 1.20%, respectively, for the years
ended August 31, 1993, 1994 and 1995.
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 Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent, expenses of registering the
shares under Federal and state securities laws, fees and expenses with respect
to the issuance of preferred shares or any borrowing, Securities and Exchange
Commission fees, fees and expenses of unaffiliated Directors, accounting and
pricing costs, insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, mailing and other expenses properly
payable by the Fund. Accounting services are provided to the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for its costs
in connection with such services. For the years ended August 31, 1993, 1994 and
1995, the reimbursement for such services aggregated $98,259, $51,304 and
$197,653, respectively.
Certain states impose limitations on the expenses of the Fund. California's
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the ordinary operating expenses of the Fund (excluding
interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary charges such as litigation costs) from exceeding 2.5% of the
Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the remaining average daily net
assets. Under Ohio's limitations, the Investment Adviser must reimburse the Fund
in an amount necessary to prevent the Fund's aggregate annual expenses (subject
to the exclusions set forth above with the exception of distribution fees) from
exceeding 2.0% of the Fund's average daily net assets. The Investment Adviser's
obligation to reimburse the Fund is limited to the amount of the investment
advisory fee. No fee payment will be made to the Investment Adviser during any
fiscal year which will cause such expenses to exceed the most restrictive
expense limitation applicable at the time of such payment.
Unless earlier terminated as described below, the Investment Advisory and
Administration Agreements will remain in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940 Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
Securities held by the Fund, including Corporate Loans, may also be held
by, or be appropriate investments for, other funds or investment advisory
clients for which the Investment Adviser or its affiliate act as an adviser.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities by the Investment Adviser for the
Fund or other funds for which it acts as investment adviser or for advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or its affiliate during
the same period
35
<PAGE> 38
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
Transfer Agency Services. Merrill Lynch Financial Data Services, Inc. (the
"Transfer Agent"), which is a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc., acts as the Fund's transfer agent pursuant to a transfer agency, dividend
disbursing agency and shareholder servicing agency agreement (the "Transfer
Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and tender of shares and the
opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Fund pays the Transfer Agent an annual fee of $14.00 per
shareholder account, and the Transfer Agent is entitled to certain nominal
miscellaneous charges and reimbursement for out-of-pocket expenses incurred by
it under the Transfer Agency Agreement. For the year ended August 31, 1995, the
Fund's payments to the Transfer Agent pursuant to the Transfer Agency Agreement,
including reimbursement for out-of-pocket expenses, aggregated $956,857. At
September 30, 1995, the Fund had 88,144 shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $1,234,016, plus out-of-pocket expenses.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable fee, commission or spread), size of order,
difficulty of execution and operational facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Investment Adviser
generally seeks reasonably competitive fee or commission rates, the Fund does
not necessarily pay the lowest commission or spread available.
The Fund will purchase Corporate Loans in individually negotiated
transactions with commercial banks, thrifts, insurance companies, finance
companies and other financial institutions. In selecting such financial
36
<PAGE> 39
institutions, the Investment Adviser may consider, among other factors, the
financial strength, professional ability, level of service and research
capability of the institution. See "Investment Objective and Policies--
Description of Participation Interests". While such financial institutions
generally are not required to repurchase Participation Interests in Corporate
Loans which they have sold, they may act as principal or on an agency basis in
connection with the Fund's disposition of Corporate Loans.
The Fund has no obligation to deal with any bank, broker or dealer in
execution of transactions in portfolio securities. Subject to obtaining the best
price and execution, securities firms which provided supplemental investment
research to the Investment Adviser, including Merrill Lynch, may receive orders
for transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
Other securities in which the Fund may invest are traded primarily in the
over-the-counter markets, and the Fund intends to deal directly with the dealers
who make markets in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Under the 1940 Act, except
as permitted by exemptive order, persons affiliated with the Fund are prohibited
from dealing with the Fund as principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions. See "Investment Restrictions". An affiliated
person of the Fund may serve as its broker in over-the-counter transactions
conducted on an agency basis.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Investment Adviser. While it is not possible to predict
turnover rates with any certainty, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, will be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.) For the years ended August 31, 1993, 1994 and 1995, the Fund's
portfolio turnover rate was 90.36%, 61.31% and 55.23%, respectively.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to continue to distribute all its net investment income.
Dividends from such net investment income are declared daily and paid monthly to
holders of Common Stock. Monthly distributions to holders of Common Stock
consist of substantially all net investment income remaining after the payment
of interest on any borrowing or dividends or interest on any senior securities
from and after any borrowing or issuance of senior securities. For Federal
income tax purposes, the Fund will be required to distribute substantially all
of its net investment income for each calendar year. All net realized long- or
short-term capital gains, if any, are distributed at least annually to holders
of Common Stock. Shares of Common Stock
37
<PAGE> 40
accrue dividends as long as they are issued and outstanding. Shares of Common
Stock are issued and outstanding from the settlement date of a purchase order to
the settlement date of a tender offer. The Fund has entered into an agreement
providing for an unsecured revolving credit facility (the "Facility") which
contains restrictions on the payment of dividends by the Fund. For a description
of such restrictions see "Special Leverage Considerations".
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act, the Fund may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be.
While any shares of preferred stock are outstanding, the Fund may not
declare any cash dividend or other distribution on its Common Stock, unless at
the time of such declaration, (1) all accumulated preferred stock dividends have
been paid and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
the liquidation value of the outstanding preferred stock (expected to be equal
to original purchase price per share plus any accumulated and unpaid dividends
thereon). This limitation, and the limitation contained in the preceding
paragraph, on the Fund's ability to make distributions on its Common Stock could
under certain circumstances impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company. See "Special
Leverage Considerations" and "Taxes".
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of Common Stock may be
automatically reinvested in shares of Common Stock of the Fund. Dividends and
distributions will be taxable to shareholders whether they are reinvested in
shares of the Fund or received in cash.
TAXES
GENERAL
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, in any taxable year in
which it distributes at least 90% of its net income (see below), the Fund (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 net investment income
and net capital gains.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions, if any, from the excess of net
long-term capital gains over net short-term capital losses derived from the sale
of securities or from certain transactions in interest rate swaps ("capital gain
dividends") are taxable as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or
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<PAGE> 41
less, however, will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's Common Stock and, after such adjusted tax basis is reduced to zero,
will constitute capital gains to such holder (assuming such Common Stock is held
as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividend
received deduction allowed to corporations under the Code. Not later than 60
days after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any dividends eligible for the
dividends received deduction (if any) or capital gain dividends. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which the
dividend was declared.
The Internal Revenue Service has taken the position in a revenue ruling
that if a RIC has two classes of shares, it may designate distributions made to
each class in any year as consisting of no more than such class's proportionate
share of particular types of income, including net long-term capital gains. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC during the year
that was paid to such class. Consequently, if both Common Stock and preferred
stock are outstanding, the Fund intends to designate distributions made to the
classes as consisting of particular types of income in accordance with the
classes' proportionate shares of such income. Thus, capital gain dividends will
be allocated between the holders of Common Stock and preferred stock in
proportion to the total dividends paid to each class during the taxable year, or
otherwise as required by applicable law.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute during each calendar year 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The Fund anticipates that it will make sufficient
timely distributions of income so as to avoid imposition of the excise tax.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions". This may prevent the
Fund from distributing at least 90% of its net income, and may therefore
jeopardize the Fund's qualification for taxation as a RIC or may subject the
Fund to the 4% Federal excise tax described above. Upon any failure to meet the
asset coverage requirement of the 1940 Act, the Fund may, in its sole
discretion, redeem shares of preferred stock in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to qualify as a RIC. There can be no assurance, however,
that any such action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
investment income. A distribution will only be counted for this purpose if it
qualifies for the dividends paid deduction under the Code. Some types of
preferred stock that the Fund has the authority to issue may raise an issue
whether distributions on such preferred stock are "preferential" under the Code
and therefore not eligible for the dividends paid deduction. The Fund intends to
rely on the advice of its counsel and may seek a private letter
39
<PAGE> 42
ruling from the Internal Revenue Service on the issues raised by issuance of
these types of preferred stock. Moreover, the Fund intends to issue preferred
stock that counsel advises or the Internal Revenue Service has ruled will not
result in the payment of a preferential dividend. If the Fund ultimately relies
solely on a legal opinion in the event it issues such preferred stock, there is
no assurance that the Internal Revenue Service would agree that dividends on the
preferred stock are not preferential. If the Internal Revenue Service
successfully disallowed the dividends paid deduction for dividends on the
preferred stock, the Fund could be disqualified as a RIC.
The Federal income tax rules governing the taxation of interest rate swaps
are not entirely clear and may require the Fund to treat payments received under
such arrangements as ordinary income and to amortize payments under certain
circumstances. The Fund will limit its activity in this regard in order to
maintain its qualification as a RIC.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. The Fund will monitor its
dispositions of securities so as to comply with this requirement.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding tax.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Interest income from non-U.S. securities may be subject to withholding and
other taxes imposed by the country in which the issuer is located. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
OFFERS TO PURCHASE SHARES
Under current law, a holder of Common Stock, who, pursuant to any Tender
Offer, tenders all shares of Common Stock owned by such shareholder and any
shares considered owned by such shareholder 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 or short-term
depending upon the shareholder's holding period for the shares. Different tax
consequences may apply to tendering and nontendering holders of Common Stock in
connection
40
<PAGE> 43
with a Tender Offer, and these consequences will be disclosed in the related
offering documents. For example, if a tendering holder of Common Stock tenders
less than all shares owned by or attributed to such shareholder, and if the
distribution to such shareholder does not otherwise qualify as a sale or
exchange, the proceeds received will be treated as a taxable dividend, a return
of capital or capital gain depending on the Fund's earnings and profits and the
shareholder's basis in the tendered shares. Also, there is a remote risk that
non-tendering holders of Common Stock may be considered to have received a
deemed distribution which may be a taxable dividend in whole or in part. Holders
of Common Stock may wish to consult their tax advisers prior to tendering. If
holders of Common Stock whose shares are acquired by the Fund in the open market
sell less than all shares owned by or attributed to them, a risk exists that
these shareholders will be subject to taxable dividend treatment and a remote
risk exists that the remaining shareholders may be considered to have received a
deemed distribution.
------------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial, or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by request to his Merrill Lynch financial consultant or by
written notification to the Transfer Agent, elect to have subsequent dividends
or capital gains distributions, or both, paid in cash, rather than reinvested,
in which event payment will be mailed on or about the payment date.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal income tax that may be payable (or required to be
withheld) on such dividends or distributions. See "Taxes".
NET ASSET VALUE
The net asset value per share of Common Stock is determined Monday through
Friday as of 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time), on each day during which the NYSE is open. The NYSE is not
open on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. For purposes of determining
the net asset value of a share of Common Stock, the value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accumulated but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided
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<PAGE> 44
by the total number of shares of Common Stock outstanding at such time.
Expenses, including the fees payable to the Investment Adviser, are accrued
daily.
The Investment Adviser, subject to guidelines adopted and periodically
reviewed by the Fund's Board of Directors, values the Corporate Loans at fair
value, which approximates market value. In valuing a Corporate Loan, the
Investment Adviser considers, among other factors, (i) the creditworthiness of
the Borrower and any Intermediate Participants, (ii) the current interest rate,
period until next interest rate reset and maturity of the Corporate Loan, (iii)
recent prices in the market for similar Corporate Loans, if any, and (iv) recent
prices in the market for instruments of similar quality, rate, period until next
interest rate reset and maturity. The Investment Adviser believes that
Intermediate Participants selling Corporate Loans or otherwise involved in a
Corporate Loan transaction may tend, in valuing Corporate Loans for their own
accounts, to be less sensitive to interest rate and credit quality changes and,
accordingly, the Investment Adviser may not rely solely on such valuations in
valuing the Corporate Loans for the Fund's account. In addition, because a
secondary trading market in Corporate Loans has not yet fully developed, in
valuing Corporate Loans, the Investment Adviser may not rely solely on but may
consider prices or quotations provided by banks, dealers or pricing services
with respect to secondary market transactions in Corporate Loans. To the extent
that an active secondary market in Corporate Loans develops to a reliable
degree, or exists in respect of other loans or instruments deemed to be similar
to Corporate Loans, the Investment Adviser may rely to an increasing extent on
such market prices and quotations in valuing the Corporate Loans in the Fund's
portfolio.
Other portfolio securities (other than short-term obligations but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities are valued at the last sale price on the exchange that is the primary
market for such securities, or the last quoted bid price for those securities
for which the over-the-counter market is the primary market or for listed
securities in which there were no sales during the day. The value of interest
rate swaps, caps and floors is determined in accordance with a formula and then
confirmed periodically by obtaining a bank quotation. Positions in options are
valued at the last sale price on the market where any such option is principally
traded. Obligations with remaining maturities of 60 days or less are valued at
amortized cost unless this method no longer produces fair valuations. Repurchase
agreements are valued at cost plus accrued interest. Rights or warrants to
acquire stock, or stock acquired pursuant to the exercise of a right or warrant,
may be valued taking into account various factors such as original cost to the
Fund, earnings and net worth of the issuer, market prices for securities of
similar issuers, assessment of the issuer's future prosperity, liquidation value
or third party transactions involving the issuer's securities. Securities for
which there exist no price quotations or valuations and all other assets are
valued at fair value as determined in good faith by or on behalf of the Board of
Directors of the Fund.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 1,000,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify and reclassify
any unissued shares of capital stock by setting or changing in any one or more
respects the designation and number of shares of any such class or series, and
the nature, rates, amounts and times at which and the conditions under which
dividends shall be payable on, and the voting, conversion, redemption
42
<PAGE> 45
and liquidation rights of, such class or series and any other preferences,
rights, restrictions and qualifications applicable thereto. The Fund may
reclassify an amount of unissued Common Stock as preferred stock and at that
time offer shares of preferred stock representing up to approximately 35% of the
Fund's capital immediately after the issuance of such preferred stock.
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
In the event that the Fund issues preferred stock and so long as any shares
of the Fund's preferred stock are outstanding, holders of Common Stock will not
be entitled to receive any net income of or other distributions from the Fund
unless all accumulated dividends on preferred stock have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to preferred stock
would be at least 200% after giving effect to such distributions. During the
term of the Facility, the Fund may not issue any additional capital stock other
than common stock. See "Special Leverage Considerations".
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders of record.
The following table sets forth the authorized shares of the Fund, the
number of shares held by the Fund for its own account and the total number of
shares outstanding as of September 30, 1995, exclusive of that held by the Fund.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING AS
OF SEPTEMBER 30,
1995 (EXCLUSIVE
AMOUNT HELD BY OF AMOUNT HELD
AMOUNT FUND FOR OWN BY FUND FOR OWN
CLASS OF SHARES AUTHORIZED ACCOUNT ACCOUNT)
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock.................................... 1,000,000,000 -- 228,147,789
</TABLE>
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
In February 1994, the shareholders of the Fund approved the change of the
name of the Fund from "Merrill Lynch Prime Fund, Inc." to "Merrill Lynch Senior
Floating Rate Fund, Inc.".
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director elected by all holders of
capital stock or by the holders of preferred stock may be removed from office
only for cause by vote of the holders of at least 66 2/3% of the shares of
capital stock or preferred stock, as the case may be, of the Fund entitled to be
voted on the matter.
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66% of the Fund's shares of capital stock, then entitled
to be voted, voting as a single class, to approve, adopt or authorize the
following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations;
(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities); or
(iii) a liquidation or dissolution of the Fund,
43
<PAGE> 46
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with the
by-laws, in which case the affirmative vote of a majority of the Fund's shares
of capital stock is required. Following any issuance of preferred stock, it is
anticipated that the approval, adoption or authorization of the foregoing would
also require the favorable vote of a majority of the Fund's shares of preferred
stock then entitled to be voted, voting as a separate class.
The Board of Directors has determined that the 66 2/3% voting requirements
described in the foregoing paragraph and under "Certain Provisions of the
Articles of Incorporation", which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Articles of Incorporation on file
with the Securities and Exchange Commission for the full text of these
provisions.
PERFORMANCE DATA
From time to time the Fund may include its yield and/or total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders.
The yield of the Fund refers to the income generated by an investment in
the Fund over a stated period. Yield is calculated by annualizing the most
recent monthly distribution and dividing the product by the average maximum
offering price. For the year ended August 31, 1995, the Fund earned $0.747 per
share income dividends, representing a net annualized yield of 7.46%, based on a
month-end per share net asset value of $10.02.
The Fund also may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the redeemable value of such investment at
the end of the period. For the year ended August 31, 1995, the annual total
return of the Fund was 7.68%, based on a stable net asset value of $10.02, and
assuming reinvestment of $0.743 per share income dividends. For the period
November 3, 1989 (commencement of operations) to August 31, 1995, the aggregate
total return of the Fund was 50.54%, based on the change in per share net asset
value from $10.00 to $10.02, and assuming reinvestment of $4.064 per share
income dividends.
The calculation of yield and total return does not reflect the imposition
of any Early Withdrawal Charges or the amount of any shareholder's tax
liability.
Yield and total return figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
yield is expected to fluctuate, and its total return will vary depending on
market conditions, the Corporate Loans and other securities comprising the
Fund's portfolio, the Fund's operating expenses and the amount of net realized
and unrealized capital gains or losses during the period.
On occasion, the Fund may compare its yield to (1) the Prime Rate, quoted
daily in The Wall Street Journal as the base rate on corporate loans at large
U.S. money center commercial banks, (2) the Certificate of Deposit ("CD") rate,
quoted daily in The Wall Street Journal as the average of top rates paid by
major New York banks on primary new issues of negotiable CDs, usually on amounts
of $1 million and more, (3) one or more averages compiled by Donoghue's Money
Fund Report, a widely recognized independent publication that monitors the
performance of money market mutual funds, (4) the average yield reported by the
Bank Rate
44
<PAGE> 47
Monitor National Index(TM) for money market deposit accounts offered by the 100
leading banks and thrift institutions in the ten largest standard metropolitan
statistical areas, (5) yield data published by Lipper Analytical Services, Inc.,
or (6) the yield on an investment in 90-day Treasury bills on a rolling basis,
assuming quarterly compounding. In addition, the Fund may compare the Prime
Rate, the CD rate, the Donoghue's averages and the other yield data described
above to each other. As with yield quotations, yield comparisons should not be
considered indicative of the Fund's yield or relative performance for any future
period.
CUSTODIAN
The Fund's securities and cash are held under a Custodial Agreement with
The Bank of New York, 90 Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT; SHAREHOLDER REPORTS
The transfer agent, dividend disbursing agent and registrar for the shares
of the Fund is Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484, a wholly owned subsidiary of ML & Co.
Shareholder Reports. Only one copy of each shareholder report and certain
shareholder communications will be mailed to each identified shareholder
regardless of the number of accounts such shareholder has. If a shareholder
wishes to receive separate copies of each report and communication for each of
the shareholder's related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at (800) 637-3863.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
are passed on for the Fund by Brown & Wood, One World Trade Center, New York,
New York 10048-0557.
EXPERTS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the financial statements
of the Fund.
45
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Senior Floating Rate Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Senior Floating Rate Fund, Inc. as
of August 31, 1995, the related statements of operations and cash flows for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each of the
years in the five-year period then ended. These financial statements and the
financial highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at August
31, 1995 by correspondence with the custodian and financial intermediaries. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Senior
Floating Rate Fund, Inc. at August 31, 1995, the results of its operations, its
cash flows, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
As discussed in Notes 1a and 1b, the financial statements include senior secured
floating rate loan interests ("Loan Interests") valued at $1,669,858,757 (77.18%
of total net assets of the Fund), whose values are fair values as determined by
or under the direction of the Board of Directors in the absence of actual market
values. Determination of fair value involves subjective judgment, as the actual
market value of a particular Loan Interest can be established only by
negotiation between the parties in a sales transaction. We have reviewed the
procedures established by the Board of Directors and used by the Fund's
investment adviser in determining the fair values of such Loan Interests and
have inspected underlying documentation, and under the circumstances, we believe
that the procedures are reasonable and the documentation appropriate.
Deloitte & Touche LLP
Princeton, New Jersey
October 16, 1995
46
<PAGE> 49
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<S> <C> <C> <C>
Aerospace--1.87% Aviall Inc., Term Loan B, due 11/30/00:
9.13% to 9/07/95 $ 728 $ 728
9.75% to 9/07/95 5,225 5,225
9.25% to 10/10/95 14,558 14,558
Gulfstream Aerospace Corp., Term Loan, due 3/31/97,
10% to 9/29/95 1,538 1,538
Gulfstream Aerospace Corp., Term Loan, due 3/31/98:
9% to 9/08/95 9,260 9,260
7.88% to 10/13/95 9,224 9,224
---------- ----------
40,533 40,533
Airlines--0.61% Northwest Airlines, Inc., Term Loan, due 6/15/97,
9.125% to 10/20/95 6,130 6,130
Northwest Airlines, Inc., Term Loan, due 9/15/97,
9.125% to 10/20/95 7,110 7,110
---------- ----------
13,240 13,240
Analytical Waters Corp., Term Loan B, due 8/31/01:
Instruments--1.13% 9.25% to 9/29/95 791 791
9.25% to 10/31/95 9,996 9,996
Waters Corp., Term Loan C, due 8/31/02:
9.625% to 9/29/95 554 554
9.625% to 10/31/95 6,995 6,995
Waters Corp., Term Loan D, due 2/28/03:
10% to 9/29/95 445 445
10% to 10/31/95 5,623 5,623
---------- ----------
24,404 24,404
Apparel--0.46% Humphreys, Term Loan B, due 1/15/03, 9.375% to 9/29/95 10,000 10,000
Automobile Exide Corporation, Term Loan B, due 9/30/01:
Products--0.69% 9% to 10/02/95 2,450 2,450
8.9375% to 12/29/95 2,487 2,487
Johnstown America Industrial Inc., Term Loan B, due 3/31/03,
9% to 2/23/96 10,000 10,000
---------- ----------
14,937 14,937
Broadcast/Media--4.85% Classic Cable, Term Loan A, due 3/31/03, 8.69% to 9/29/95 2,500 2,500
Classic Cable, Term Loan B, due 3/31/04, 9.69% to 9/29/95 5,000 5,000
Coaxial Communications, Term Loan, due 12/31/99:
10.75% to 9/29/95 32 32
9.13% to 10/15/95 4,402 4,402
9.19% to 6/14/96 9,468 9,468
8.94% to 7/17/96 5,035 5,035
Ellis Communications, Term Loan B, due 3/31/03:
11%(1) 33 33
9.125% to 9/18/95 4,950 4,950
Enquirer/Star, Term Loan B, due 9/30/02:
10%(1) 134 134
8.44% to 10/22/95 26,532 26,532
Journal News Inc., Term Loan, due 12/31/01, 8.255%
to 10/30/95 10,000 10,000
Marcus Cable Operating Co., Term Loan B, due 4/30/04,
10.25% to 9/30/95 11,500 11,500
Silver King Communications, Term Loan B, due 7/31/02,
8.875% to 10/31/95 17,820 17,820
US Radio Inc., Term Loan A, due 12/31/01:
9.4375% to 9/29/95 1,298 1,298
8.875% to 10/30/95 1,233 1,233
US Radio Inc., Term Loan B, due 9/23/03:
9.9375% to 9/08/95 828 828
10.4375% to 9/29/95 1,695 1,695
9.875% to 10/30/95 1,709 1,709
9.8125% to 12/11/95 823 823
---------- ----------
104,992 104,992
</TABLE>
47
<PAGE> 50
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<S> <C> <C> <C>
Building MTF Acquisition, Term Loan B, due 12/31/02, 9.03% to 9/29/95 $ 20,000 $ 20,000
Products--1.86% Overhead Door Corp., Revolving Credit Loan, due 8/18/99:
8.4375% to 9/28/95 205 205
8.50% to 9/29/95 1,909 1,909
Overhead Door Corp., Term Loan, due 8/18/99, 8.50% to 9/29/95 8,794 8,794
RSI Home Products, Term Loan, due 11/30/99, 8.375% to 11/30/95 9,250 9,250
---------- ----------
40,158 40,158
Carbon & Graphite UCAR International, Term Loan B, due 1/31/03, 8.875% to 9/08/95 7,311 7,311
Products--0.69% UCAR International, Term Loan C, due 7/31/03, 9.375% to 9/08/95 3,827 3,827
UCAR International, Term Loan D, due 1/31/04, 10.0625% to 11/08/95 3,827 3,827
---------- ----------
14,965 14,965
Chemicals--2.17% Freedom Chemical Company, Term Loan B, due 6/30/02,
9.1875% to 10/27/95 27,000 27,000
Harris Specialty Chemicals, Term Loan A, due 12/30/99,
8.75% to 9/18/95 616 616
Harris Specialty Chemicals, Term Loan B, due 12/30/01,
9.25% to 9/18/95 2,871 2,871
Hydro Chemical, Term Loan B, due 7/01/02, 10.0625% to 10/31/95 5,000 5,000
Inspec Technologies, Term Loan B, due 12/02/00, 8.50% to 9/29/95 4,311 4,311
Thoro World Systems, Inc., Term Loan A, due 12/30/99, 8.69%
to 9/29/95 2,252 2,252
Thoro World Systems, Inc., Term Loan B, due 12/30/01, 8.69%
to 9/19/95 4,916 4,916
---------- ----------
46,966 46,966
Consumer Products--2.77% CHF/Ebel USA, Term Loan B, due 9/30/01, 9.1328% to 10/30/95 10,032 10,032
Playtex Family Products Inc., Term Loan A, due 6/30/02:
6.82% to 9/06/95 328 328
7.57% to 9/06/95 1,311 1,311
7.44% to 1/08/96 1,748 1,748
Playtex Family Products Inc., Term Loan B, due 6/30/02:
6.82% to 9/06/95 3,059 3,059
7.57% to 9/06/95 12,237 12,237
7.44% to 1/08/96 16,316 16,316
Revlon Consumer Products, Term Loan B, due 6/30/97,
9.3125% to 12/08/95 15,000 15,000
---------- ----------
60,031 60,031
Containers--1.56% Ivex Packaging Corp., Term Loan B, due 12/31/99:
11%(1) 11 11
9.44% to 9/25/95 2,714 2,714
9.94% to 9/27/95 3,143 3,143
9.94% to 9/29/95 1,429 1,429
9.57% to 11/30/95 1,429 1,429
9.32% to 12/28/95 857 857
Portola Packaging, Inc., Term Loan B, due 7/01/01,
9.6406% to 9/07/95 7,250 7,250
Silgan Corp., Term Loan B, due 3/15/02:
8.875% to 9/11/95 2,267 2,267
8.875% to 10/10/95 7,556 7,556
8.875% to 11/09/95 2,353 2,353
8.9375% to 2/09/96 4,824 4,824
---------- ----------
33,833 33,833
Diversified Desa International Inc., Term Loan B, due 11/30/00,
Manufacturing--3.33% 9.0625% to 12/27/95 9,032 9,032
InterMetro Industries, Term Loan B, due 6/30/01:
8.875% to 9/05/95 2,174 2,174
8.875% to 1/03/96 7,651 7,651
InterMetro Industries, Term Loan C, due 12/31/02:
9.375% to 9/05/95 3,163 3,163
9.375% to 1/03/96 11,132 11,132
</TABLE>
48
<PAGE> 51
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<S> <C> <C> <C>
Diversified The Pullman Co., Inc., Revolving Credit Loan, due 12/31/99:
Manufacturing 10.25%(1) $ 821 $ 821
(concluded) 9% to 9/25/95 3,915 3,915
The Pullman Co., Inc., Term Loan A, due 12/31/99, 9% to 9/25/95 9,359 9,359
The Pullman Co., Inc., Term Loan B, due 12/31/99, 9.50%
to 9/25/95 650 650
Thermadyne Company, Term Loan B, due 2/01/01, 8.875% to 9/07/95 24,068 24,068
---------- ----------
71,965 71,965
Drug Stores--2.30% Duane Reade Co., Term Loan A, due 9/30/97, 8.875% to 11/30/95 7,711 7,711
Duane Reade Co., Term Loan B, due 9/30/99, 9.375% to 11/30/95 10,000 10,000
Eckerd Corp., Term Loan, Series C, due 7/31/00:
7.125% to 9/11/95 2,639 2,639
7.1875% to 10/10/95 2,387 2,387
7.5625% to 11/09/95 5,933 5,933
Thrifty Payless, Term Loan B, due 9/30/01, 9.0625% to 9/22/95 20,987 20,987
---------- ----------
49,657 49,657
Electrical Instruments-- Berg Electronics Inc., Term Loan A, due 3/31/00:
1.89% 8.69% to 9/29/95 365 365
8.69% to 11/27/95 10,875 10,875
Berg Electronics Inc., Term Loan B, due 3/31/01:
8.94% to 9/29/95 4 4
8.94% to 11/27/95 963 963
Communications & Power Industries, Term Loan B, due 8/11/2002,
10.25% to 10/01/95 5,667 5,667
International Wire Corp., Term Loan B, due 9/30/02, 9%
to 12/12/95 10,000 10,000
Tracor Inc., Term Loan A, due 10/31/98, 8.4375% to 9/25/95 3,067 3,067
Tracor Inc., Term Loan B, due 2/28/01:
10.75%(1) 36 36
8.9375% to 9/25/95 9,889 9,889
---------- ----------
40,866 40,866
Fertilizer--0.92% Terra Industries, Term Loan B, due 10/20/01, 8.375%
to 10/20/95 19,875 19,875
Food & Beverage--4.75% American Italian Pasta, Term Loan C, due 12/31/00,
9.9375% to 11/17/95 5,000 5,000
Amerifoods, Term Loan B, due 6/30/01, 10.75% to 9/29/95 7,500 7,500
Amerifoods, Term Loan C, due 6/30/02, 11.25% to 9/29/95 7,500 7,500
Domino's Pizza, Inc., Term Loan B, due 7/27/00:
9.1875% to 9/06/95 5,155 5,155
9.0625% to 11/08/95 2,087 2,087
8.625% to 12/06/95 3,000 3,000
8.625% to 2/07/96 2,380 2,380
Heileman Acquisition Company, Term Loan B, due 12/31/00,
9.6875% to 10/13/95 10,000 10,000
MAFCO Worldwide, Term Loan B, due 6/30/01, 8.88% to 9/29/95 9,900 9,900
President Baking Co., Inc., Term Loan B, due 9/30/00,
7.75% to 12/29/95 4,949 4,949
President Baking Co., Inc., Term Loan B, due 9/30/00,
10.25% to 12/29/95 8 8
Select Beverage Inc., Term Loan B, due 6/30/01, 9.125%
to 11/01/95 2,000 2,000
Select Beverage Inc., Term Loan C, due 6/30/01, 9.375%
to 11/01/95 3,000 3,000
Specialty Foods Corp., Term Loan, due 4/30/01:
8.1875% to 9/21/95 13,399 13,399
8.125% to 10/20/95 13,399 13,399
8.0625% to 1/22/96 13,399 13,399
---------- ----------
102,676 102,676
</TABLE>
49
<PAGE> 52
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<S> <C> <C> <C>
Grocery--3.29% Big V Supermarkets Inc., Term Loan B, due 3/15/00:
9.3125% to 9/20/95 $ 5,200 $ 5,200
8.6875% to 10/17/95 5,200 5,200
Dominick's Finer Foods, Term Loan B, due 3/31/02:
9.125% to 9/07/95 395 395
9.3125% to 10/05/95 3,943 3,943
Dominick's Finer Foods, Term Loan C, due 3/31/03:
9.625% to 9/07/95 395 395
9.8125% to 10/05/95 4,304 4,304
Dominick's Finer Foods, Term Loan D, due 9/30/03:
9.875% to 9/07/95 395 395
10.0625% to 10/05/95 4,304 4,304
Pathmark Stores Inc., Term Loan B, due 10/31/99, 8.9375%
to 11/30/95 4,576 4,576
Ralph's Grocery Company, Revolving Credit Loan, due 6/15/01,
10.25%(1) 300 300
Ralph's Grocery Company, Term Loan A, due 6/15/01:
8.6875% to 9/21/95 515 515
8.625% to 10/19/95 13,180 13,180
Ralph's Grocery Company, Term Loan B, due 6/15/02:
10.25% to 9/15/95 5 5
9.1875% to 9/21/95 19 19
9.1875% to 9/21/95 46 46
10.25% to 9/29/95 13 13
9.125% to 10/19/95 6,917 6,917
Ralph's Grocery Company, Term Loan C, due 6/15/03:
10.75% to 9/15/95 5 5
9.6875% to 9/21/95 65 65
10.75% to 9/29/95 12 12
9.625% to 10/19/95 6,918 6,918
Ralph's Grocery Company, Term Loan D, due 2/15/04:
10.75% to 9/15/95 5 5
9.9375% to 9/21/95 65 65
10.75% to 9/29/95 12 12
9.875% to 10/19/95 6,918 6,918
Star Markets Co., Inc., Term Loan B, due 12/31/01, 8.94%
to 9/18/95 4,211 4,211
Star Markets Co., Inc., Term Loan C, due 12/31/02, 9.44%
to 9/18/95 3,158 3,158
---------- ----------
71,076 71,076
Health Services--2.25% National Medical Enterprises Inc., Revolving Credit Loan,
due 8/31/01:
9%(1) 380 380
7.125% to 9/07/95 600 600
7.1875% to 9/22/95 250 250
7.1875 to 9/29/95 220 220
7.1875% to 10/23/95 200 200
7.1875% to 11/22/95 200 200
7.25% to 2/22/96 1,200 1,200
National Medical Enterprises Inc., Term Loan, due 8/31/01:
7.3125% to 9/01/95 2,917 2,917
7.6875% to 9/01/95 12,500 12,500
7.25% to 10/03/95 6,722 6,722
7.25% to 12/05/95 8,333 8,333
7.125% to 1/03/96 6,750 6,750
7.125% to 2/01/96 8,333 8,333
---------- ----------
48,605 48,605
</TABLE>
50
<PAGE> 53
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<S> <C> <C> <C>
Leasing & Rental Prime Acquisition, Term Loan, due 12/31/00:
Services--0.92% 9.0625% to 9/05/95 $ 6,400 $ 6,400
9.0313% to 10/03/95 7,120 7,120
8.875% to 10/06/95 6,400 6,400
---------- ----------
19,920 19,920
Leisure/ Metro Goldwyn Meyer Co., Term Loan, due 4/15/97, 8.19%
Entertainment--1.36% to 1/24/96 10,000 10,000
Six Flags Entertainment Corp., Term Loan B, due 6/23/03:
8.875% to 12/27/95 16,154 16,154
9% to 2/23/96 3,247 3,247
---------- ----------
29,401 29,401
Manufacturing--0.69% Trans Technology Corp., Term Loan B, due 6/30/02, 9.125%
to 11/02/95 15,000 15,000
Medical Devices--0.79% Deknatel Holdings Corp., Term Loan A, due 4/20/99:
9.3125% to 9/29/95 115 115
9.3125% to 10/25/95 1,938 1,938
9.8125% to 10/25/95 7,500 7,500
Deknatel Holdings Corp., Term Loan B, due 4/20/01, 9.8125%
to 10/25/95 7,500 7,500
---------- ----------
17,053 17,053
Message Dictaphone Co., Term Loan B, due 6/30/02, 9.1875% to 9/15/95 10,000 10,000
Communications--0.46%
Nautical Systems--0.40% Sperry Marine, Inc., Term Loan, due 11/15/00:
9.6875% to 9/29/95 3,639 3,639
9.125% to 12/29/95 4,947 4,947
---------- ----------
8,586 8,586
Paper--19.63% Crown Paper Co., Term Loan B, due 8/22/2003:
9.25% to 9/22/95 5,000 5,000
9.25% to 10/23/95 5,000 5,000
9.25% to 11/21/95 5,000 5,000
9.25% to 2/20/96 5,000 5,000
Fort Howard Corp., Term Loan A, due 3/08/02:
8.50% to 9/19/95 12,000 12,000
8.38% to 12/19/95 12,000 12,000
Fort Howard Corp., Term Loan B, due 12/31/02:
9% to 9/19/95 31,604 31,604
8.88% to 12/19/95 31,604 31,604
Jefferson Smurfit Company/Container Corp. of America,
Revolving Credit Loan, due 4/30/01:
10.25%(1) 179 179
8.375% to 9/07/95 60 60
8.4375% to 9/22/95 149 149
8.4375% to 9/29/95 119 119
Jefferson Smurfit Company/Container Corp. of America,
Term Loan A, due 4/30/01:
8.9375% to 9/28/95 31,043 31,043
8.9375% to 9/29/95 11,340 11,340
8.375% to 10/20/95 22,680 22,680
8.4375% to 10/20/95 2,495 2,495
8.375% to 10/30/95 22,680 22,680
Jefferson Smurfit Company/Container Corp. of America,
Term Loan B, due 4/30/02:
9.4375% to 9/25/95 2,968 2,968
8.9375% to 10/20/95 12,928 12,928
9.375% to 10/24/95 54,086 54,086
</TABLE>
51
<PAGE> 54
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<S> <C> <C> <C>
Paper Mail Well, Term Loan B, due 7/31/03:
(concluded) 10.25%(1) $ 6,100 $ 6,100
8.875% to 9/06/95 13,900 13,900
S.D. Warren Co., Term Loan A, due 12/20/01, 8.38%
to 10/24/95 10,000 10,000
S.D. Warren Co., Term Loan B, due 12/19/02, 8.94%
to 9/25/95 52,000 52,000
Stone Container Corp., Term Loan B, due 4/01/00:
9% to 9/18/95 27,607 27,607
9% to 10/16/95 29,707 29,707
Stone Container Corp., Term Loan C, due 4/01/00, 9.25%
to 9/29/95 17,500 17,500
---------- ----------
424,749 424,749
Printing & K-III Communications, Term Loan, due 12/31/00, 7.13%
Publishing--2.05% to 11/09/95 6,000 6,000
Print Tech International, Term Loan B, due 12/29/01:
8.9375% to 9/29/95 1,375 1,375
8.8125% to 12/08/95 3,542 3,542
Ziff Davis, Term Loan B, due 12/31/01, 9.4375% to 9/28/95 13,696 13,696
Ziff Davis, Term Loan C, due 12/31/02, 9.4375% to 9/28/95 19,755 19,755
---------- ----------
44,368 44,368
Retail-- Federated Department Stores, Revolving Credit Loan,
Specialty--9.43% due 3/31/00:
7.0625% to 9/05/95 3,125 3,125
7.4375% to 9/18/95 7,812 7,812
6.875% to 9/29/95 14,062 14,062
6.9375% to 9/29/95 4,688 4,688
Federated Department Stores, Term Loan, due 3/31/00:
7.4375% to 9/25/95 53,125 53,125
7% to 9/29/95 31,875 31,875
Music Acquisition Corp., Term Loan B, due 8/31/01:
8.875% to 9/18/95 8,156 8,156
8.9375% to 9/21/95 13,781 13,781
Music Acquisition Corp., Term Loan C, due 8/31/02, 9.4375%
to 9/21/95 7,500 7,500
QVC, Inc., Term Loan B, due 1/31/04, 9% to 9/05/95 28,000 28,000
Saks & Co., Term Loan A, due 6/30/98, 8.75% to 11/09/95 4,375 4,375
Saks & Co., Term Loan B, due 6/30/00, 9.25% to 11/09/95 27,469 27,469
---------- ----------
203,968 203,968
Telecommunications--1.82% LDDS Communications, Term Loan, due 12/31/96, 6.88%
to 10/10/95 10,000 10,000
Paging Network, Term Loan B, due 3/31/02, 9.445% to 11/06/95 29,333 29,333
---------- ----------
39,333 39,333
Textiles--1.15% Chicopee, Inc., Term Loan B, due 3/31/03, 9.19% to 9/29/95 24,937 24,937
Transportation Petro Properties, Term Loan B, due 5/24/01, 9.25% to 9/28/95 8,765 8,765
Services--0.40%
Warehousing & Pierce Leahy Corp., Term Loan B, due 6/30/01, 9.125%
Storage--0.69% to 9/29/95 15,000 15,000
Total Senior Secured Floating Rate Loan Interests
(Cost--$1,669,859)--77.18% 1,669,859 1,669,859
</TABLE>
52
<PAGE> 55
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
Face Value
Short-Term Securities Amount (Note 1b)
<S> <C> <C> <C>
Commercial Ciesco L.P., 5.70% due 10/13/95 $ 30,000 $ 29,801
Paper**--19.68% Corporate Asset Funding Co., 5.73% due 9/07/95 50,000 49,952
First Boston, Inc.:
5.71% due 9/27/95 20,000 19,918
5.73% due 9/27/95 30,000 29,876
5.71% due 10/03/95 20,000 19,898
General Electric Capital Corp., 5.82% due 9/01/95 31,448 31,448
Matterhorn Capital Corp.:
5.73% due 9/20/95 30,000 29,909
5.72% due 10/05/95 30,000 29,838
National Fleet Fund, Inc.:
5.70% due 9/13/95 30,000 29,943
5.76% due 9/14/95 40,700 40,615
5.73% due 9/28/95 25,000 24,893
5.74% due 10/06/95 50,000 49,721
Sheffield Receivables Co., 5.75% due 9/08/95 40,000 39,955
---------- ----------
427,148 425,767
US Government & Agency Federal National Mortgage Association, 5.66% due 9/06/95 50,000 49,961
Obligations**--2.31%
Total Short-Term Securities (Cost--$475,728)--21.99% 477,148 475,728
<CAPTION>
Shares
Common Stock Held
<S> <C> <C> <C>
Restaurants--0.01% Flagstar Companies, Inc. 44 173
Total Common Stock (Cost--$0)--0.01% 44 173
Total Investments (Cost--$2,145,587)--99.18% 2,145,760
Other Assets Less Liabilities--0.82% 17,710
----------
Net Assets--100.00% $2,163,470
==========
<FN>
*The interest rates on senior secured floating rate loan interests
are subject to change periodically based on the change in the prime
rate of a US Bank, LIBOR (London Interbank Offered Rate), or, in
some cases, another base lending rate. The interest rates shown are
those in effect at August 31, 1995.
**Commercial Paper and certain US Government & Agency Obligations
are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
(1)Index is based on the prime rate of a US bank, which is subject
to change daily.
</TABLE>
See Notes to Financial Statements.
53
<PAGE> 56
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1995
<S> <C> <C> <C>
Assets: Investments, at value (identified cost-- $2,145,586,427)
(Note 1b) $2,145,759,782
Receivables:
Capital shares sold $ 23,090,039
Interest 15,293,047
Commitment fees 78,144 38,461,230
------------
Prepaid registration fees and other assets (Note 1f) 1,619,465
--------------
Total assets 2,185,840,477
--------------
Liabilities: Payables:
Dividends to shareholders (Note 1g) 4,220,943
Investment adviser (Note 2) 1,664,057
Administrator (Note 2) 437,910 6,322,910
------------
Deferred income (Note 1e) 15,408,761
Accrued expenses and other liabilities 639,193
--------------
Total liabilities 22,370,864
--------------
Net Assets: Net assets $2,163,469,613
==============
Net Assets Common Stock, par value $0.10 per share; 1,000,000,000
Consist of: shares authorized $ 21,597,247
Paid-in capital in excess of par 2,140,838,484
Undistributed realized capital gains on investments--net 860,527
Unrealized appreciation on investments--net (Note 3) 173,355
--------------
Net Assets--Equivalent to $10.02 per share based on
215,972,462 shares of Common Stock outstanding $2,163,469,613
==============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
August 31, 1995
<S> <C> <C> <C>
Investment Income Interest and discount earned $122,873,692
(Note 1e): Facility and other fees 3,427,067
------------
Total income 126,300,759
------------
Expenses: Investment advisory fees (Note 2) $ 13,654,371
Administrative fees (Note 2) 3,593,255
Transfer agent fees (Note 2) 956,857
Professional fees 329,753
Accounting services (Note 2) 197,653
Borrowing costs (Note 6) 189,883
Custodian fees 143,988
Printing and shareholder reports 87,900
Directors' fees and expenses 47,374
Other 18,482
------------
Total expenses 19,219,516
------------
Investment income--net. 107,081,243
------------
Realized & Realized gain on investments--net 901,282
Unrealized Change in unrealized appreciation/depreciation on
Gain (Loss) on investments--net (102,235)
Investments--Net ------------
(Notes 1c, 1e Net Increase in Net Assets Resulting from Operations $107,880,290
& 3): ============
</TABLE>
See Notes to Financial Statements.
54
<PAGE> 57
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
For the Year
Ended August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <C> <C> <C>
Operations: Investment income--net $ 107,081,243 $ 43,213,412
Realized gain (loss) on investments--net 901,282 (13,985)
Change in unrealized appreciation/depreciation on
investments--net (102,235) (124,460)
-------------- ------------
Net increase in net assets resulting from operations 107,880,290 43,074,967
-------------- ------------
Dividends to Investment income--net (107,081,243) (43,213,412)
Shareholders -------------- ------------
(Note 1g): Net decrease in net assets resulting from dividends
to shareholders (107,081,243) (43,213,412)
-------------- ------------
Capital Share Net increase in net assets resulting from capital
Transactions share transactions 1,228,207,869 221,301,485
(Note 4): -------------- ------------
Net Assets: Total increase in net assets 1,229,006,916 221,163,040
Beginning of year 934,462,697 713,299,657
-------------- ------------
End of year $2,163,469,613 $934,462,697
============== ============
</TABLE>
<TABLE>
<CAPTION>
Statement of Cash Flows
For the Year Ended
August 31, 1995
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations $ 107,880,290
Operating Adjustments to reconcile net increase (decrease) in
Activities: net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (9,086,101)
Increase in other assets (1,483,573)
Increase in other liabilities 9,041,608
Realized and unrealized gain on investments--net (799,047)
Amortization of discount (20,924,413)
----------------
Net cash provided by operating activities 84,628,764
----------------
Cash Used for Proceeds from principal payments and sales of loan interests 651,663,489
Investing Purchases of loan interests (1,521,021,788)
Activities: Purchases of short-term investments--net (13,212,737,918)
Proceeds from sales and maturities of short-term investments--net 12,876,338,285
----------------
Net cash used for investing activities (1,205,757,932)
----------------
Cash Provided by Cash receipts on capital shares sold 1,291,293,618
Financing Cash payments on capital shares tendered (116,306,108)
Activities: Dividends paid to shareholders (54,068,371)
----------------
Net cash provided by financing activities 1,120,919,139
----------------
Cash: Net decrease in cash (210,029)
Cash at beginning of year 210,029
----------------
Cash at end of year $ --
================
Non-Cash Capital shares issued in reinvestment of dividends paid to shareholders $ 50,211,612
Financing ================
Activities:
</TABLE>
See Notes to Financial Statements.
55
<PAGE> 58
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (concluded)
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.02 $ 10.02 $ 9.99 $ 9.99 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .75 .59 .53 .64 .85
Realized and unrealized gain (loss) on
investments--net --++ --++ .03 -- (.01)
-------- -------- -------- -------- --------
Total from investment operations .75 .59 .56 .64 .84
-------- -------- -------- -------- --------
Less dividends from investment income--net (.75) (.59) (.53) (.64) (.85)
-------- -------- -------- -------- --------
Net asset value, end of year $ 10.02 $ 10.02 $ 10.02 $ 9.99 $ 9.99
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 7.68% 5.94% 5.74% 6.58% 8.79%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.34% 1.43% 1.47% 1.39% 1.27%
Net Assets: ======== ======== ======== ======== ========
Expenses 1.34% 1.43% 1.47% 1.41% 1.33%
======== ======== ======== ======== ========
Investment income--net 7.45% 5.75% 5.27% 6.58% 8.44%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in millions) $ 2,163 $ 934 $ 713 $ 834 $ 1,705
Data: ======== ======== ======== ======== ========
Portfolio turnover 55.23% 61.31% 90.36% 46.48% 58.22%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads. The
Fund is a continuously offered closed-end fund, the shares of which
are offered at net asset value. Therefore, no separate market
exists.
++Amount is less than $.01 per share.
</TABLE>
See Notes to Financial Statements.
56
<PAGE> 59
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Senior Floating Rate Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
continuously offered non-diversified, closed-end management
investment company.
(a) Loan participation interests--The Fund invests in senior secured
floating rate loan interests ("Loan Interests") with collateral
having a market value, at time of acquisition by the Fund, which
Fund management believes equals or exceeds the principal amount of
the corporate loan. The Fund may invest up to 20% of its total
assets in loans made on an unsecured basis. Depending on how the
loan was acquired, the Fund will regard the issuer as including the
corporate borrower along with an agent bank for the syndicate of
lenders and any intermediary of the Fund's investment. Because
agents and intermediaries are primarily commercial banks, the Fund's
investment in corporate loans at August 31, 1995 could be considered
to be concentrated in commercial banking.
(b) Valuation of investments--Loan interests and common stocks are
valued at fair value. Fair value is determined in good faith by or
under the direction of the Board of Directors of the Fund. Since
Loan Interests are purchased and sold primarily at par value, the
Fund values the Loan Interests at par, unless Merrill Lynch Asset
Management, L.P. ("MLAM") determines par does not represent fair
value. In the event such a determination is made, fair value will be
determined in accordance with guidelines approved by the Fund's
Board of Directors. Short-term securities with remaining maturities
of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Directors of the Fund.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis. Facility fees are accreted into income
over the term of the related loan. For income tax purposes, as of
September 1, 1994, the Loan Interests are treated as discount
obligations.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
2. Investment Advisory and Administrative
Services Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. The general partner of MLAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to perform this investment advisory
function.
For such services, the Fund pays a monthly fee at an annual rate of
0.95% of the Fund's average daily net assets. The Fund also has an
Administrative Services
57
<PAGE> 60
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
NOTES TO FINANCIAL STATEMENTS (concluded)
Agreement with MLAM whereby MLAM will receive a fee equal to an annual
rate of 0.25% of the Fund's average daily net assets on a monthly
basis, in return for the performance of administrative services (other
than investment advice and related portfolio activities) necessary for
the operation of the Fund. The Investment Advisory Agreement obligates
MLAM to reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed the lesser of (a) 2.0% of
the Fund's average daily net assets or (b) 2.5% of the Fund's first
$30 million of average daily net assets, 2.0% of the Fund's next $70
million of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. No fee payment will be made during any
fiscal year which will cause such expenses to exceed the most
restrictive expense limitation at the time of such payment.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, Merrill Lynch, Pierce, Fenner, & Smith Inc.,
MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1995 were $1,521,021,788 and
$651,663,489, respectively.
Net realized and unrealized gains (losses) as of August 31, 1995
were as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $ 904,582 $ 173,355
Short-term investments (3,300) --
---------- -----------
Total $ 901,282 $ 173,355
========== ===========
As of August 31, 1995, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $173,355, all
of which is related to appreciated securities. The aggregate cost of
investments at August 31, 1995 for Federal income tax purposes was
$2,145,586,427.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Year Ended Dollar
August 31,1995 Shares Amount
Shares sold 129,276,626 $1,294,302,365
Shares issued to share-
holders in reinvestment of
dividends 5,015,241 50,211,612
Total issued 134,291,867 1,344,513,977
Shares tendered (11,618,992) (116,306,108)
------------ --------------
Net increase 122,672,875 $1,228,207,869
============ ==============
For the Year Ended Dollar
August 31, 1994 Shares Amount
Shares sold 35,126,101 $ 351,960,677
Shares issued to share-
holders in reinvestment
of dividends 2,309,056 23,136,748
------------ --------------
Total issued 37,435,157 375,097,425
Shares tendered (15,348,896) (153,795,940)
------------ --------------
Net increase 22,086,261 $ 221,301,485
============ ==============
5. Unfunded Loan Interests:
As of August 31, 1995, the Fund had unfunded loan commitments of
$122,405,057, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded Commitment
Borrower (in thousands)
Jefferson Smurfit Company/
Container Corp. of America $ 2,551
Federated Department Stores 32,098
Gulfstream Corp. 10,192
Marcus Cable Co. 31,500
National Medical Enterprises Inc. 1,950
Northwest Airlines, Inc. 2,649
Overhead Door Corp. 3,000
The Pullman Co., Inc. 1,790
Ralph's Grocery Company 15,950
Tracor Inc. 8,385
UCAR International 9,340
Waters Corp. 3,000
58
<PAGE> 61
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. AUGUST 31, 1995
6. Short-Term Borrowings:
On March 20, 1995, the Fund extended its loan commitment from a
commercial bank. The commitment is for $100,000,000 bearing interest
at the Federal Funds Rate plus 0.75%--2% on the outstanding balance.
The Fund had no borrowings under this commitment during the year
ended August 31, 1995. For the year ended August 31, 1995, facility
and commitment fees aggregated approximately $190,000.
7. Subsequent Event:
The Fund began a quarterly tender offer on September 19, 1995 which
concludes on October 17, 1995.
59
<PAGE> 62
[This page is intentionally left blank.]
60
<PAGE> 63
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
AUTHORIZATION FORM
- - --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase .... shares of Merrill Lynch Senior
Floating Rate Fund, Inc. and establish an Investment Account as described in the
Prospectus.
Basis for establishing an Investment Account:
I enclose a check for $.... payable to Merrill Lynch Financial Data
Services, Inc., as an initial investment (minimum $1,000). (Subsequent
investments $50 or more.) I understand that this purchase will be executed at
the applicable offering price next to be determined after this Application is
received by you.
Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:
<TABLE>
<S> <C> <C> <C> <C>
---------------------------------------- ----------------------------------------
Distribution Elect / / reinvest dividends Elect / / reinvest capital gains
Options One / / pay dividends in cash One / / pay capital gains in cash
---------------------------------------- ----------------------------------------
</TABLE>
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
---------------------
<TABLE>
<S> <C>
(PLEASE PRINT) ----------------------------
Name......................................................... / / / / / / / / / /
First Name Initial Last Name ----------------------------
Name of Co-Owner (if any).................................... Social Security No.
First Name Initial Last Name or Taxpayer Identification No.
Address......................................................
............................................................. ..........................................................
(Zip Code) Date
</TABLE>
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I am
not subject to backup withholding (as discussed in the Prospectus under "Taxes")
either because I have not been notified that I am subject thereto as a result of
a failure to report all interest or dividends, or the Internal Revenue Service
("IRS") has notified me that I am no longer subject thereto. INSTRUCTION: You
must strike out the language in (2) above if you have been notified that you are
subject to backup withholding due to underreporting, and if you have not
received a notice from the IRS that backup withholding has been terminated. The
undersigned authorizes the furnishing of this certification to other Merrill
Lynch-sponsored investment companies.
<TABLE>
<S> <C>
SIGNATURE OF OWNER .................................... SIGNATURE OF CO-OWNER (IF ANY)......................................
</TABLE>
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- - --------------------------------------------------------------------------------
2. FOR DEALER ONLY
Branch, Office Address, Stamp
- - ---- ----
- - ---- ----
This form when completed should be mailed to:
Merrill Lynch Senior Floating Rate Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289.
We guarantee the Shareholder's Signature.
......................................................
Dealer Name and Address
By ........................................................
Authorized Signature of Dealer
<TABLE>
<S> <C>
- - ---------- -------------
/ / / / / / / / / ...................
- - ---------- -------------
Branch-Code F/C No. F/C Last Name
- - ---------- ----------------
/ / / / / / / / / /
- - ---------- ----------------
Dealer's Customer F/C No.
</TABLE>
61
<PAGE> 64
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE
OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE
UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 2
Fee Table.......................... 10
Financial Highlights............... 11
The Fund........................... 12
Investment Objective and
Policies......................... 12
Special Leverage Considerations.... 23
Investment Restrictions............ 25
Purchase of Shares................. 27
Tender Offers...................... 28
Early Withdrawal Charge............ 30
Directors and Officers............. 31
Investment Advisory and
Administrative Arrangements...... 34
Portfolio Transactions............. 36
Dividends and Distributions........ 37
Taxes.............................. 38
Automatic Dividend Reinvestment
Plan............................. 41
Net Asset Value.................... 41
Description of Capital Stock....... 42
Performance Data................... 44
Custodian.......................... 45
Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing
Agent; Shareholder Reports....... 45
Legal Opinions..................... 45
Experts............................ 45
Independent Auditors' Report....... 46
Financial Statements............... 47
Authorization Form................. 61
</TABLE>
Code #10938-1295
Prospectus
- - ---------------------------------------------------
MERRILL LYNCH
SENIOR FLOATING
RATE FUND, INC.
PROSPECTUS
December , 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 65
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- - ---------------------- -------------------
Compass plate, circular Back cover of Prospectus
graph paper and Merrill Lynch
logo including stylized market
bull
<PAGE> 66
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) FINANCIAL STATEMENTS
Independent Auditors' Report
Schedule of Investments as of August 31, 1995.
Statement of Assets and Liabilities as of August 31, 1995.
Statement of Operations for the year ended August 31, 1995.
Statements of Changes in Net Assets for the years ended August 31, 1994 and
1995.
Statement of Cash Flows for the year ended August 31, 1995.
Financial Highlights for the period November 3, 1989 (commencement of
operations) to August 31, 1990 and for the years ended August 31, 1991,
1992, 1993, 1994 and 1995.
(2) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
--------
<C> <C> <S>
(a)(1) -- Articles of Incorporation of Registrant. (a)
(2) -- Articles of Amendment to Articles of Incorporation of Registrant.
(a)
(3) -- Articles of Amendment to Articles of Incorporation of Registrant
(name change). (b)
(b) -- By-Laws of Registrant. (a)
(c) -- None.
(d) -- Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant. (c)
(e) -- None.
(f) -- None.
(g)(1) -- Form of Investment Advisory Agreement between Registrant and
Merrill Lynch Asset Management,L.P. (a)
(2) -- Form of Administration Agreement between Registrant and Merrill
Lynch Asset Management, L.P. (a)
(h)(1) -- Form of Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (a)
(2) -- Form of Selected Dealer Agreement. (a)
(i) -- None.
(j) -- Form of Custody Agreement between Registrant and The Bank of New
York. (a)
(k)(1) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and (Merrill Lynch
Financial Data Services, Inc.) (a)
</TABLE>
C-1
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
--------
<S> <C>
(2) -- Form of Agreement between Merrill Lynch & Co., Inc. and Registrant
relating to use by Registrant of Merrill Lynch name. (a)
(l) -- Opinion of Brown & Wood, counsel to the Registrant.
(m) -- None.
(n) -- Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
(o) -- None.
(p) -- Certificate of Merrill Lynch Asset Management, L.P. (a)
(q) -- None.
(r) -- Financial data schedule.
</TABLE>
- - ------------------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") phase-in requirements.
(b) Filed as an Exhibit to Registrant's Registration Statement on Form N-2
(File No. 33-56391) under the Securities Act of 1933, as amended (the "1933
Act").
(c) Reference is made to Article V, Article VI (Sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed herewith as
Exhibit (a) to the Registration Statement; and to Article II, Article III
(Sections 1, 3, 5, and 17), Article VI, Article VII, Article XII, Article
XIII and Article XIV of the Registrant's By-Laws, previously filed as
Exhibit (b) to the Registration Statement.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibits (h)(1) and (h)(2).
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...................................................... $345,172
Printing (other than stock certificates).......................... 95,000
Fees and expenses of qualifications under state securities laws... 75,000
Legal fees and expenses........................................... 10,000
Accounting fees and expenses...................................... 86,500
NASD fees......................................................... 30,500
--------
Total........................................................ $642,172
========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS
SEPTEMBER 30,
TITLE OF CLASS 1995
--------------------------------------------------------------------- --------------
<S> <C>
Shares of Common Stock, par value $0.10 per share 88,144
</TABLE>
- - ------------------
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch").
C-2
<PAGE> 68
ITEM 29. INDEMNIFICATION.
Reference is made to Article IV of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution Agreement.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940, as amended (the "1940 Act"), may
be concerned, such payments will be made only on the following conditions: (i)
the advances must be limited to amounts used, or to be used, for the preparation
or presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined that he is
entitled to receive from the Registrant by reason of indemnification; and (iii)
(a) such promise must be secured by a surety bond, other suitable insurance or
an equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, of (b) a
majority of a quorum of the Registrant's disinterested, non-party Directors, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that the recipient of the advance ultimately
will be found entitled to indemnification.
In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the 1933 Act,
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission
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<PAGE> 69
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be goverened by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or "MLAM")
acts as investment adviser for the following open-end 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
Balanced Fund for Investment and Retirement, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Inc., Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Institutional Intermediate 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 Puerto Rico Tax-Exempt Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series Trust, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility
Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc.; and the
following closed-end investment companies: Convertible Holdings, Inc. and
Merrill Lynch High Income Municipal Fund, Inc. Fund Asset Management, L.P.
("FAM"), an affiliate of the Investment Adviser, acts as the investment adviser
for the following open-end investment companies: CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc.,
Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch 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 the following closed-end investment companies:
Apex Municipal Fund Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Emerging Tigers Fund Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Muni Assets Fund, Inc., MuniEnhanced Fund,
Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured
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<PAGE> 70
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 Insured Fund II, 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 New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNewYork Holdings, Inc. and WorldWide DollarVest Fund, Inc. The address of
each of these investment companies is P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds for Institutions Series, Merrill
Lynch Institutional Tax-Exempt Fund and Merrill Lynch Institutional Intermediate
Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02110-2646. The
address of the Investment Adviser and FAM is also P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of Merrill Lynch and Merrill Lynch & Co., Inc.
("ML&Co.") is World Financial Center, North Tower, 250 Vesey Street, New York,
New York 10281. The address of Merrill Lynch Financial Data Services, Inc.
("FDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since
September 1, 1993 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Glenn is Executive Vice President and Mr. Richard is Treasurer of all or
substantially all of the investment companies described in the preceding
paragraph. Messrs. Zeikel, Glenn and Richard also hold the same position with
all or substantially all of the investment companies advised by FAM as they do
with those advised by the Investment Adviser. Messrs. Giordano, Harvey, Hewitt,
Kirstein and Monagle are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- - ------------------------- -------------------------- ----------------------------------------
<S> <C> <C>
Merrill Lynch & Co., Limited Partner Financial Services Holding Company;
Inc.................... Limited Partner of FAM
Princeton Services, Inc.
("Princeton General Partner General Partner of FAM
Services")..........
Arthur Zeikel............ President President of FAM; President and Director
of Princeton Services; Director of
Merrill Lynch Funds Distributor, Inc.
("MLFD"); Executive Vice President of
ML&Co.; Executive Vice President of
Merrill Lynch
Terry K. Glenn........... Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director of
Princeton Services; President and
Director of MLFD; Director of
Financial Data Services, Inc.;
President of Princeton Administrators
Vincent R. Giordano...... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
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<PAGE> 71
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- - ------------------------- -------------------------- ----------------------------------------
<S> <C> <C>
Elizabeth Griffin........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Norman R. Harvey......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
N. John Hewitt........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein....... Senior Vice President Senior Vice President, General Counsel
and Secretary of FAM; Senior Vice
President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss.......... Senior Vice President and Senior Vice President and Controller of
Controller FAM; Senior Vice President and
Controller of Princeton Services
Stephen M. M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle, Jr. .. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Richard L. Rufener....... Senior Vice President First Vice President of FAM; First Vice
President Princeton Services
Gerald M. Richard........ Senior Vice President and Senior Vice President and Treasurer of
Treasurer FAM; Senior Vice President and Treasurer
of Princeton Services; Vice President
and Treasurer of MLFD
Ronald L. Welburn........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman.......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder will be maintained at the
offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey 08536
and FDS, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 32. MANAGEMENT SERVICES.
Not Applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend offerings of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement,
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<PAGE> 72
its net asset value per share of Common Stock declines more than 10 percent from
its net asset value per share of Common Stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of Common Stock
increases to an amount greater than its net proceeds as stated in the Prospectus
contained herein.
(b) The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement.
(i) To include any prospectus required by section 10(a)(3) of the
1933 Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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<PAGE> 73
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 7th
day of November, 1995.
MERRILL LYNCH SENIOR FLOATING RATE FUND,
INC.
(Registrant)
By /s/ ARTHUR ZEIKEL
----------------------------------------
(Arthur Zeikel, President)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn or Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his or her behalf, individually and in each capacity stated below, any
amendments to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ------------------------------------- ------------------------------------- -----------------
<C> <C> <S>
/s/ ARTHUR ZEIKEL President (Principal Executive November 7, 1995
- - ------------------------------------- Officer) and Director
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and November 7, 1995
- - ------------------------------------- Accounting Officer)
(Gerald M. Richard)
/s/ RONALD W. FORBES Director November 7, 1995
- - -------------------------------------
(Ronald W. Forbes)
/s/ CYNTHIA A. MONTGOMERY Director November 7, 1995
- - -------------------------------------
(Cynthia A. Montgomery)
/s/ CHARLES C. REILLY Director November 7, 1995
- - -------------------------------------
(Charles C. Reilly)
/s/ KEVIN A. RYAN Director November 7, 1995
- - -------------------------------------
(Kevin A. Ryan)
/s/ RICHARD R. WEST Director November 7, 1995
- - -------------------------------------
(Richard R. West)
</TABLE>
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<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- - ------- --------------------------------------------------------------------- -------
<S> <C> <C> <C>
(l) -- Opinion of Brown & Wood, counsel to the Registrant...................
(n) -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant...........................................................
(r) -- Financial Data Schedule..............................................
</TABLE>
<PAGE> 1
Ex-99.a(1)
ARTICLES OF INCORPORATION
OF
MERRILL LYNCH PRIME FUND, INC.
* * * * *
ARTICLE I
THE UNDERSIGNED, Lawrence H. Kaplan, whose post office address
is c/o Brown & Wood, One World Trade Center, New York, New York 10048,
being at least eighteen (18) years of age,, does hereby act as an
incorporator, under and by virtue of the General Laws of the State of Maryland
authorizing the formation of corporations and with the intention of forming a
corporation.
ARTICLE II
NAME
The name of the Corporation is MERRILL LYNCH PRIME FUND, INC.
(the "Corporation").
ARTICLE III
PURPOSES AND POWERS
The purpose or purposes for which the Corporation is formed
is to act as a closed-end, management investment company under
the federal Investment Company Act of 1940, as amended, and to
<PAGE> 2
exercise and enjoy all of the powers, rights and privileges
granted to, or conferred upon, corporations by the General Laws
of the State of Maryland now or hereafter in force.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the
Corporation in the State of Maryland is c/o The Corporation Trust
Incorporated., 32 South Street, Baltimore, Maryland 21202. The
name of the resident agent of the Corporation in this State is
The Corporation Trust Incorporated, a corporation of this State,
and the post office address of the resident agent is 32 South
Street, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock which the
Corporation shall have authority to issue is Two Hundred Million
(200,000,000) shares, all of one class called Common Stock, of
the par value of Ten Cents ($0.10) per share and of the aggregate
par value of Twenty Million Dollars ($20,000,000).
(2) The Board of Directors may classify and reclassify any
unissued shares of capital stock into one or more additional or
other classes or series as may be established from time to time
by setting or changing in any one or more respects the
2.
<PAGE> 3
designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications
or terms of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the
number of authorized shares of any existing class or series.
(3) Unless otherwise expressly provided in the charter of
the Corporation, including any Articles Supplementary creating
any class or series of capital stock, the holders of each class
or series of capital stock shall be entitled to dividends and
distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and
distributions paid with respect to the various classes or series
of capital stock may vary among such classes and series.
(4) Unless otherwise expressly provided in the charter of
the Corporation, including any Articles Supplementary creating
any class or series of capital stock, on each matter submitted to
a vote of stockholders, each holder of a share of capital stock
of the Corporation shall be entitled to one vote for each share
standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of
all classes and series shall vote together as a single class;
provided, however, that as to any matter with respect to which a
separate vote of any class or series is required by the
Investment Company Act of 1940, as amended, and in effect from
time to time, or any rules, regulations or orders issued
3.
<PAGE> 4
thereunder, or the Maryland General Corporation Law, such
requirement as to a separate vote by that class or series shall
apply in addition to a general vote of all classes and series as
described above.
(5) Notwithstanding any provision of the Maryland General
Corporation Law requiring a greater proportion than a majority of
the votes of all classes or series of capital stock of the
corporation (or of any class or series entitled to vote thereon
as a separate class or series) to take or authorize any action,
the corporation is hereby authorized (subject to the requirements
of the Investment Company Act of 1940, as amended, and in effect
from time to time, and any rules, regulations and orders issued
thereunder) to take such action upon the concurrence of a
majority of the aggregate number of shares of capital stock of
the Corporation entitled to vote thereon (or a majority of the
aggregate number of shares of a class or series entitled to vote
thereon as a separate class or series).
(6) Unless otherwise expressly provided in the charter of
the Corporation, including any Articles Supplementary creating
any class or series of capital stock, in the event of any
liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, the holders of all classes and
series of capital stock of the Corporation shall be entitled,
4.
<PAGE> 5
after payment or provision for payment of the debts and other
liabilities of the Corporation, to share ratably in the remaining
net assets of the Corporation.
(7) Any fractional shares shall carry proportionately all
the rights of a whole share, excepting any right to receive a
certificate evidencing such fractional share, but including,
without limitation, the right to vote and the right to receive
dividends.
(8) All persons who shall acquire capital stock in the
Corporation shall acquire the same subject to the provisions of
the charter and By-Laws of the Corporation. As used in the
charter of the Corporation, the terms "charter" and "Articles of
Incorporation" shall mean and include the Articles of
Incorporation of the Corporation as amended, supplemented and
restated from time to time by Articles of Amendment, Articles
Supplementary, Articles of Restatement or otherwise.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE COR-
PORATION AND OF THE DIRECTORS AND
STOCKHOLDERS
(1) The number of directors of the Corporation shall be
three (3), which number may be increased pursuant to the By-Laws
of the Corporation but shall never be less than three (3). The
5.
<PAGE> 6
names of the directors who shall act until the first annual
meeting or until their successors are duly elected and qualify
are:
Philip L. Kirstein
Robert Harris
Susan B. Baker
(2) The Board of Directors of the Corporation is hereby
empowered to authorize the issuance from time to time of shares
of capital stock, whether now or hereafter authorized, for such
consideration as the Board of Directors may deem advisable,
subject to such limitations as may be set forth in these Articles
of incorporation or in the By-Laws of the corporation or in the
General Laws of the State of Maryland.
(3) Each director and each officer of the Corporation shall
be indemnified by the Corporation to the full extent permitted by
the General Laws of the State of Maryland, subject to the
requirements of the Investment Company Act of 1940, as amended.
No amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided
to directors and officers under this provision in connection with
any act or omission that occurred prior to such amendment or
repeal.
(4) To the fullest extent permitted by the General Laws of
the State of Maryland, subject to the requirements of the
Investment Company Act of 1940, as amended, no director or
officer of the Corporation shall be personally liable to the
6.
<PAGE> 7
Corporation or its security holders for money damages. No
amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided
to directors and officers under this provision in connection with
any act or omission that occurred prior to such amendment or
repeal.
(5) The Board of Directors of the Corporation may make,
alter or repeal from time to time any of the By-Laws of the
Corporation except any particular By-Law which is specified as
not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act of
1940, as amended.
(6) A director elected by the holders of capital stock may
be removed for cause (but not without cause), but only by action
taken by the holders of at least seventy-five percent (75%) of
the shares of capital stock then entitled to vote in an election
to fill that directorship.
ARTICLE VII
DENIAL OF PREEMPTIVE RIGHTS
No shareholder of the Corporation shall by reason of his
holding shares of capital stock have any preemptive or preferen-
tial right to purchase or subscribe to any shares of capital
stock of the Corporation, now or hereafter to be authorized, or
any notes, debentures, bonds or other securities convertible into
7.
<PAGE> 8
shares of capital stock, now or hereafter to be authorized,
whether or not the issuance of any such shares, or notes, deben-
tures, bonds or other securities would adversely affect the
dividend or voting rights of such shareholder; and the Board of
Directors may issue shares of any class of the Corporation, or
any notes, debentures, bonds, other securities convertible into
shares of an class, either whole or in part, to the existing
shareholders.
ARTICLE VIII
DETERMINATION BINDING
Any determination made in good faith, so far as accounting
matters are involved, in accordance with accepted accounting
practice by or pursuant to the direction of the Board of Directors,
as to the amount of assets, obligations or liabilities of
the Corporation, as to the amount of net income of the Corporation
from dividends and interest for any period or amounts at
any time legally available for the payment of dividends, as to
the amount of any reserves or charges set up and the propriety
thereof, as to the time of or purpose for creating reserves or as
to the use, alteration or cancellation of any reserves or charges
(whether or not any obligation or liability for which such
reserves or charges shall have been created, shall have been paid
or discharged or shall be then or thereafter required to be paid
or discharged), as to the price of any security owned by the
8.
<PAGE> 9
Corporation or as to any other matters relating to the issuance,
sale, redemption or other acquisition or disposition of securities
or shares of capital stock of the Corporation, and any
reasonable determination made in good faith by the Board of
Directors as to whether any transaction constitutes a purchase of
securities on "margin", a sale of securities "short", or an
underwriting of the sale of, or a participation in any underwriting
or selling group in connection with the public distribution of,
any securities, shall be final and conclusive, and shall be binding
upon the Corporation and all holders of its capital stock, past,
present and future, and shares of the capital stock of the Corporation
are issued and sold on the condition and understanding, evidenced
by the purchase of shares of capital stock or acceptance of share
certificates, that any and all such determinations shall be binding
as aforesaid. No provision of these Articles of Incorporation
shall be effective to (a) require a waiver of compliance with
any provision of the Securities Act of 1933, as amended, or the
Investment Company Act of 1940, as amended, or of any valid rule,
regulation or order of the Securities and Exchange Commission
thereunder or (b) protect or purport to protect any director or
officer of the Corporation against any liability to the Corporation
or its security holders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of
his office.
9.
<PAGE> 10
ARTICLE IX
PRIVATE PROPERTY OF STOCKHOLDERS
The private property of stockholders shall not be subject to
the payment of corporate debts to any extent whatsoever.
ARTICLE X
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE XI
MERGER, SALE OF ASSETS, LIQUIDATION
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation, a favorable vote
of the holders of at least seventy-five percent (75%) of the
outstanding shares of capital stock of the Corporation entitled
to be voted on the matter shall be required to approve, adopt or
authorize (i) a merger or consolidation or statutory share
exchange of the Corporation with any other corporation, (ii) a
sale of all or substantially all of the assets of the Corporation
(other than in the regular course of its investment activities),
or (iii) a liquidation or dissolution of the Corporation, unless
such action has previously been approved, adopted or authorized
by the affirmative vote of at least two-thirds of the total
number of directors fixed in accordance with the By-Laws of the
10.
<PAGE> 11
Corporation, in which case the affirmative vote of the holders of
a majority of the outstanding shares of capital stock of the
Corporation entitled to vote thereon shall be required.
ARTICLE XII
CONSENT OF STOCKHOLDERS
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation, any action taken
by the written consent of the holders of the outstanding shares
of the capital stock of the Corporation must be taken by
unanimous written consent of the holders of the outstanding
shares of capital stock of the Corporation entitled to be voted
on the matter.
ARTICLE XIII
AMENDMENT
The Corporation reserves the right to amend, alter, change
or repeal any provision contained in these Articles of Incorporation,
in the manner now or hereafter prescribed by statute, including
any amendment which alters the contract rights, as expressly
set forth in the charter, of any outstanding stock and
substantially adversely affects the stockholders' rights and all
rights conferred upon stockholders herein are granted subject to
this reservation. Notwithstanding any other provisions of these
Articles of Incorporation or the By-Laws of the Corporation (and
11.
<PAGE> 12
notwithstanding the fact that a lesser percentage may be
specified by law, these Articles of Incorporation or the By-Laws
of the Corporation), the amendment or repeal of Section (5) of
Article V, Section (1), Section (3), Section (4), Section (5) and
Section (6) of Article VI, Article IX, Article X, Article XI,
Article XII or this Article XIII, of these Articles of
Incorporation shall require the affirmative vote of the holders
of at least seventy-five percent (75%) of the outstanding shares
of capital stock of the Corporation entitled to be voted on the
matter.
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL
LYNCH PRIME FUND, INC. hereby executes the foregoing Articles of
Incorporation and acknowledges the same to be his act and further acknowledges
that, to the best of his knowledge, the matters and facts set forth therein are
true in all material respects under the penalties of perjury.
Dated the 25th day of July 1989.
/s/ LAWRENCE H. KAPLAN
------------------------
Lawrence H. Kaplan
12.
<PAGE> 1
Ex-99.a(2)
MERRILL LYNCH PRIME FUND, INC.
ARTICLES OF AMENDMENT
MERRILL LYNCH PRIME FUND, INC., a Maryland corporation having
its principal office c/o The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202 (hereinafter called the
Corporation), hereby certifies to the State Department of
Assessments and Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by
striking out Article V of the Articles of Incorporation and
inserting in lieu thereof the following:
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock
which the Corporation shall have authority to issue
is one Billion (1,000,000,000) shares, all of one
class called Common Stock, of the par value of Ten
Cents ($0.10) per share and of the aggregate par
value of One Hundred Million Dollars
($100,000,000).
(2) The Board of Directors may classify and
reclassify any unissued shares of capital stock
into one or more additional or other classes or
series as may be established from time to time by
setting or changing in any one or more respects the
designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as
to dividends, qualifications or terms of such
shares of stock and pursuant to such classification
or reclassification to increase or decrease the
number of authorized shares of any existing class
or series.
<PAGE> 2
(3) Unless otherwise expressly provided in the
charter of the Corporation, including any Articles
Supplementary creating any class or series of
capital stock, the holders of each class or series
of capital stock shall be entitled to dividends and
distributions in such amounts and at such times as
may be determined by the Board of Directors, and
the dividends and distributions paid with respect
to the various classes or series of capital stock
may vary among such classes and series.
(4) Unless otherwise expressly provided in the
charter of the Corporation, including any Articles
Supplementary creating any class or series of
capital stock, on each matter submitted to a vote
of stockholders, each holder of a share of capital
stock of the Corporation shall be entitled to one
vote for each share standing in such holder's name
on the books of the Corporation, irrespective of
the class or series thereof, and all shares of all
classes and series shall vote together as a single
class; provided, however, that as to any matter
with respect to which a separate vote of any class
or,series is required by the Investment Company Act
of 1940, as amended, and in effect from time to
time, or any rules, regulations or orders issued
thereunder, or the Maryland General Corporation
Law, such requirement as to a separate vote by that
class or series shall apply in addition to a
general vote of all classes and series as described
above.
(5) Notwithstanding any provision of the Maryland
General Corporation Law requiring a greater
proportion than a majority of the votes of all
classes or series of capital stock of the
corporation (or of any class or series entitled to
vote thereon as a separate class or series) to take
or authorize any action, the Corporation is hereby
authorized (subject to the requirements of the
Investment Company Act of 1940, as amended, and in
effect from time to time, and any rules,
regulations and orders issued thereunder) to take
such action upon the concurrence of a majority of
the aggregate number of shares of capital stock of
the Corporation entitled to vote thereon (or a
majority of the aggregate number of shares of a
class or series entitled to vote thereon as a
separate class or series).
2.
<PAGE> 3
(6) Unless otherwise expressly provided in the
charter of the Corporation, including any Articles
Supplementary creating any class or series of
capital stock, in the event of any liquidation,
dissolution or winding up of the Corporation,
whether voluntary or involuntary, the holders of
all classes and series of capital stock of the
Corporation shall be entitled, after payment or
provision for payment of the debts and other
liabilities of the Corporation, to share ratably in
the remaining net assets of the Corporation.
(7) Any fractional shares shall carry
proportionately all the rights of a whole share,
excepting any right to receive a certificate
evidencing such fractional share, but including,
without limitation, the right to vote and the right
to receive dividends.
(8) All persons who shall atquire capital stock in
the Corporation shall acquire the same subject to
the provisions of the charter and By-Laws of the
Corporation. As used in the charter of the
Corporation, the terms "charter" and "Articles of
Incorporation" shall mean and include the Articles
of Incorporation of the Corporation as amended,
supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary,
Articles of Restatement or otherwise.
SECOND: The board of directors of the Corporation, by
unanimous written consent dated as of October 27, 1989, pursuant
to section 2-408 of the Corporations and Associations Article of
the Annotated Code of Maryland, duly adopted a resolution in
which was set forth the foregoing amendment to the charter,
declaring that such amendment to the charter as proposed was
advisable and directing that it be submitted for action thereon
by the sole stockholder of the Corporation.
3.
<PAGE> 4
THIRD: That the foregoing amendment has been consented to
and authorized by the holder of all the issued and outstanding
stock, entitled to vote, by a written consent given in accordance
with the provisions of Section 2-505 of the Corporations and
Associations Article of the Annotated Code of Maryland, and filed
with the records of stockholders meetings.
FOURTH: The amendment to the charter of the Corporation as
hereinabove set forth has been duly advised by the board of
directors and approved by the sole stockholder of the
corporation.
FIFTH: (a) The total number of shares of stock which the
corporation was heretofore authorized to issue is Two Hundred
Million (200,000,000) shares, all of one class, of the par value
of Ten Cents ($.10) per share and of the aggregate par value of
Twenty Million Dollars ($20,000,000).
(b) The total number of shares of stock is
increased by this amendment to One Billion (1,000,000,000) shares
all of one class, of the par value of Ten Cents ($.10) per share,
and of the aggregate par value of One Hundred Million Dollars
($100,000,000).
4.
<PAGE> 5
IN WITNESS WHEREOF, the Corporation has caused these articles
to be signed in its name and on its behalf by its President and
attested by its Secretary on October 31, 1989.
MERRILL LYNCH PRIME FUND, INC.
By /s/ ARTHUR ZEIKEL
---------------------------------
Arthur Zeikel, President
Attest:
/s/ ROBERT HARRIS
- - ------------------------------
Robert Harris, Secretary
5.
<PAGE> 6
THE UNDERSIGNED, President of MERRILL LYNCH PRIME FUND, INC.,
who executed on behalf of said corporation the foregoing Articles
of Amendment, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said corporation, the
foregoing Articles of Amendment to be the corporate act of said
corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all
material respects, under the penalties of perjury.
/s/ ARTHUR ZEIKEL
----------------------------
Arthur Zeikel, President
6 .
<PAGE> 1
Ex-99.b
BY-LAWS
OF
MERRILL LYNCH PRIME FUND, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the
Corporation shall be in the City of Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal
executive office of the Corporation shall be at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Section 3. Other Offices. The Corporation may have such
other offices in such places as the Board of Directors may from
time to time determine.
ARTICLE II
Meetings of Stockholders
Section 1. Annual Meeting. The Corporation shall not be
required to hold an annual meeting of its stockholders in any
year in which none of the following is required to be acted on by
the holders of the capital stock under the Investment Company Act
of 1940, as amended: (a) election of directors, (b) approval of
the Corporation's investment advisory agreement; (c) ratifica-
tion of the selection of independent public accountants; and (d)
<PAGE> 2
approval of the Corporation's distribution agreement. In the
event that the Corporation shall be required to hold an annual
meeting of stockholders by the Investment Company Act of 1940, as
amended, such meeting shall be held: (a) at a date and time set
by the Board of Directors in accordance with the Investment
Company Act of 1940, as amended, if the purpose of the meeting is
to elect directors or to approve an investment advisory agreement
or distribution agreement; and (b) on a date fixed by the board
of directors during the month of May (i) in the fiscal year
immediately following the fiscal year in which independent
accountants were appointed if the purpose of the meeting is to
ratify the selection of such independent accountants, or (ii) in
any fiscal year if an annual meeting is to be held for any reason
other than as specified in the foregoing. Any stockholders'
meeting held in accordance with the preceding sentence shall for
all purposes constitute the annual meeting of stockholders for
the fiscal year of the Corporation in which the meeting is held.
At any such meeting, the stockholders shall elect directors to
hold the offices of any directors who have held office for more
than one year or who have been elected by the board of directors
to fill vacancies which result from any cause.
Section 2. Special Meetings. Special meetings of the
stockholders, unless otherwise provided by law or by the Articles
of Incorporation, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the
2
<PAGE> 3
written request of the holders of at least 10% of the outstanding
shares of capital stock of the Corporation entitled to vote at
such meeting.
Section 3. Place of Meetings. Meetings of the stockholders
shall be held at such place within the United States as the Board
of Directors may from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of
the place, date and time of the holding of each stockholders'
meeting and, if the meeting is a special meeting, the purpose or
purposes of the special meeting, shall be given personally or by
mail, not less than ten nor more than ninety days before the date
of such meeting, to each stockholder entitled to vote at such
meeting and to each other stockholder entitled to notice of the
meeting. Notice by mail shall be deemed to be duly given when
deposited in the United States mail addressed to the stockholder
at his address as it appears on the records of the Corporation,
with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived
by any stockholder who shall attend such meeting in person or by
proxy, or who shall, either before or after the meeting, submit a
signed waiver of notice which is filed with the records of the
meeting. When a meeting is adjourned to another time and place,
unless the Board of Directors, after the adjournment, shall fix a
new record date for an adjourned meeting, or the adjournment is
for more than one hundred and twenty days after the original
3
<PAGE> 4
record date, notice of such adjourned meeting need not be given
if the time and place to which the meeting shall be adjourned
were announced at the meeting at which the adjournment is taken.
Section 5. Quorum. At all meetings of the stockholders,
the holders of a majority of the shares of stock of the Corporation
entitled to vote at the meeting, present in person or by
proxy, shall constitute a quorum for the transaction of any
business, except as otherwise provided by statute or by the
Articles of Incorporation. In the absence of a quorum no business
may be transacted, except that the holders of a majority of
the shares of stock present in person or by proxy and entitled to
vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by
these By-Laws, until the holders of the requisite amount of
shares of stock shall be so present. At any such adjourned
meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by
proxy, of holders of the number of shares of stock of the Corporation
in excess of a majority thereof which may be required by
the laws of the State of Maryland, the Investment Company Act of
1940, as amended, or other applicable statute, the Articles of
Incorporation, or these By-Laws, for action upon any given matter
shall not prevent action at such meeting upon any other matter or
matters which may properly come before the meeting, if there
4
<PAGE> 5
shall be present thereat, in person or by proxy, holders of the
number of shares of stock of the Corporation required for action
in respect of such other matter or matters.
Section 6. Organization. At each meeting of the stock-
holders, the Chairman of the Board (if one has been designated by
the Board), or in his absence or inability to act, the President,
or in the absence or inability to act of the Chairman of the
Board and the President, a vice President, shall act as chairman
of the meeting. The Secretary, or in his absence or inability to
act, any person appointed by the chairman of the meeting, shall
act as secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all
meetings of the stockholders shall be as determined by the
chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute
or the Articles of Incorporation, each holder of record of shares
of stock of the Corporation having voting power shall be entitled
at each meeting of the stockholders to one vote for every share
of such stock standing in his name on the record of stockholders
of the Corporation as of the record date determined pursuant to
Section 9 of this Article or if such record date shall not have
been so fixed, then at the later of (i) the close of business on
the day on which notice of the meeting is mailed or (ii) the
thirtieth day before the meeting.
5
<PAGE> 6
Each stockholder entitled to vote at any meeting of
stockholders may authorize another person or persons to act for
him by a proxy signed by such stockholder or his
attorney-in-fact. No proxy shall be valid after the expiration
of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of
the stockholder executing it, except in those cases where such
proxy states that it is irrevocable and where an irrevocable
proxy is permitted by law. Except as otherwise provided by
statute, the Articles of Incorporation or these By-Laws, any
corporate action to be taken by vote of the stockholders shall be
authorized by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or
represented by proxy and entitled to vote on such action.
If a vote shall be taken on any question other than the
election of directors, which shall be by written ballot, then
unless required by statute or these By-Laws, or determined by the
chairman of the meeting to be advisable, any such vote need not
be by ballot. On a vote by ballot, each ballot shall be signed
by the stockholder voting, or by his proxy, if there be such
proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors
may set a record date for the purpose of determining stockholders
entitled to vote at any meeting of the stockholders. The record
date, which may not be prior to the close of business on the day
6
<PAGE> 7
the record date is fixed, shall be not more than ninety nor less
than ten days before the date of the meeting of the stockholders.
All persons who were holders of record of shares at such time,
and not others, shall be entitled to vote at such meeting and any
adjournment thereof.
Section 10. Inspectors. The Board may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at
such meeting or any adjournment thereof. If the inspectors shall
not be so appointed or if any of them shall fail to appear or
act, the chairman of the meeting may, and on the request of any
stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath to execute faithfully the duties of
inspector at such meeting with strict impartiality and according
to the best of his ability. The inspectors shall determine the
number of shares outstanding and the voting powers of each, the
number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the result,
and do such acts as are proper to conduct the election or vote
with fairness to all stockholders. On request of the chairman of
the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge,
7
<PAGE> 8
request or matter determined by them and shall execute a certificate
of any fact found by them. No director or candidate for the
office of director shall act as inspector of an election of
directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting.
Except as otherwise provided by statute or the Articles of
Incorporation, any action required to be taken at any meeting of
stockholders, or any action which may be taken at any meeting of
such stockholders, may be taken without a meeting, without prior
notice and without a vote, if the following are filed with the
records of stockholders meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder
entitled to vote on the matter and (ii) a written waiver of any
right to dissent signed by each stockholder entitled to notice of
the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise provided in
the Articles of Incorporation, the business and affairs of the
Corporation shall be managed under the direction of the Board of
Directors. All powers of the Corporation may be exercised by or
under authority of the Board of Directors except as conferred on
or reserved to the stockholders by law or by the Articles of
Incorporation or these By-Laws.
8
<PAGE> 9
Section 2. Number of Directors. The number of directors
shall be fixed from time to time by resolution of the Board of
Directors adopted by a majority of the Directors then in office;
provided, however, that the number of directors shall in no event
be less than three nor more than fifteen except that the Corpo-
ration may have two directors if there is no stock outstanding,
or so long as there are less than three stockholders. Any
vacancy created by an increase in Directors may be filled in
accordance with Section 6 of this Article III. No reduction in
the number of directors shall have the effect of removing any
director from office prior to the expiration of his term unless
such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need
not be stockholders.
Section 3. Election and Term of Directors. Directors shall
be elected annually, by written ballot at a meeting of stock-
holders held for that purpose; provided, however, that if no
meeting of the stockholders of the Corporation is required to be
held in a particular year pursuant to Section 1 of Article II of
these By-Laws, directors shall be elected at the next meeting
held. The term of office of each director shall be from the time
of his election and qualification until the election of directors
next succeeding his election and until his successor shall have
been elected and shall have qualified, or until his death, or
until he shall have resigned, or have been removed as hereinafter
9
<PAGE> 10
provided in these By-Laws, or as otherwise provided by statute or
the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may
resign at any time by giving written notice of his resignation to
the Board or the Chairman of the Board or the President or the
Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the
Corporation may be removed for cause (but not without cause) by
the stockholders by a vote of 66-2/3% of the votes entitled to be
cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether
arising from death, resignation, removal, an increase in the
number of directors or any other cause, shall be filled by a vote
of the majority of the Board of Directors then in office even
though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors,
if after the filling of said vacancy or vacancies, less than
two-thirds of the directors then holding office shall have been
elected by the stockholders of the Corporation. In the event
that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a
10
<PAGE> 11
special meeting of the stockholders shall be held as promptly as
possible and in any event within sixty days, for the purpose of
filling said vacancy or vacancies. Any directors elected or
appointed to fill a vacancy shall hold office only until the next
meeting of stockholders of the Corporation and until a successor
shall have been chosen and qualifies or until his earlier resig-
nation or removal.
Section 7. Place of Meetings. Meetings of the Board may be
held at such place as the Board may from time to time determine
or as shall be specified in the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board
may be held without notice at such time and place as may be
determined by the Board of Directors.
Section 9. Special Meetings. Special meetings of the Board
may be called by two or more directors of the Corporation or by
the Chairman of the Board or the President.
Section 10. Telephone Meetings. Members of the Board of
Directors or of any committee thereof may participate in a
meeting by means of a conference telephone or similar communica-
tions equipment if all persons participating in the meeting can
hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in
a meeting by these means constitutes presence in person at the
meeting.
11
<PAGE> 12
Section 11. Notice of Special Meetings. Notice of each
special meeting of the Board shall be given by the Secretary as
hereinafter provided, in which notice shall be stated the time
and place of the meeting. Notice of each such meeting shall be
delivered to each director, either personally or by telephone or
any standard form of telecommunication, at least twenty-four
hours before the time at which such meeting is to be held, or by
first-class mail, postage prepaid, addressed to him at his residence
or usual place of business, at least three days before the
day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any
special meeting need not be given to any director who shall,
either before or after the meeting, sign a written waiver of
notice which is filed with the records of the meeting or who
shall attend such meeting. Except as otherwise specifically
required by these By-Laws, a notice or waiver of notice of any
meeting need not state the purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less
than two, of the members of the entire Board shall be present in
person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and
except as otherwise expressly required by statute, the Articles
of Incorporation, these By-Laws, the Investment Company Act of
1940, as amended, or other applicable statute, the act of a
majority of the directors present at any meeting at which a
12
<PAGE> 13
quorum is present shall be the act of the Board. In the absence
of a quorum at any meeting of the Board, a majority of the
directors present thereat may adjourn such meeting to another
time and place until a quorum shall be present thereat. Notice
of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the
adjournment and, unless such time and place were announced at the
meeting at which the adjournment was taken, to the other direc-
tors. At any adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at
the meeting as originally called.
Section 14. Organization. The Board may, by resolution
adopted by a majority of the entire Board, designate a Chairman
of the Board, who shall preside at each meeting of the Board. In
the absence or inability of the Chairman of the Board to preside
at a meeting, the President or, in his absence of inability to
act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside
thereat. The Secretary (or, in his absence or inability to act,
any person appointed by the Chairman) shall act as secretary of
the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a
Meeting. Subject to the provisions of the Investment Company Act
of 1940, as amended, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee
13
<PAGE> 14
thereof may be taken without a meeting if all members of the
Board or committee, as the case may be, consent thereto in
writing, and the writings or writing are filed with the minutes
of the proceedings of the Board or committee.
Section 16. Compensation. Directors may receive
compensation for services to the Corporation in their capacities
as directors or otherwise in such manner and in such amounts as
may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of
the Board of Directors to direct that the purchase, sale,
retention and disposal of portfolio securities and the other
investment practices of the Corporation are at all times
consistent with the investment policies and restrictions with
respect to securities investments and otherwise of the
Corporation, as recited in the Prospectus of the Corporation
included in the registration statement of the Corporation
relating to the initial public offering of its capital stock, as
filed with the Securities and Exchange Commission (or as such
investment policies and restrictions may be modified by the Board
of Directors, or, if required, by majority vote of the
stockholders of the corporation in accordance with the Investment
Company Act of 1940, as amended) and as required by the
Investment Company Act of 1940, as amended. The Board however,
may delegate the duty of management of the assets and the
administration of its day to day operations to an individual or
14
<PAGE> 15
corporate management company and/or investment adviser pursuant
to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of
renewals thereof, of the Board of Directors and/or the
stockholders of the Corporation in accordance with the provisions
of the Investment Company Act of 1940, as amended.
ARTICLE IV
Committees
Section 1. Executive Committee. The Board may, by
resolution adopted by a majority of the entire board, designate
an Executive Committee consisting of two or more of the directors
of the corporation, which committee shall have and may exercise
all the powers and authority of the Board with respect to all
matters other than:
(a) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Articles
of Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving
on the Board or on any committee of the Board, including the
Executive Committee;
(d) the approval or termination of any contract with an
investment adviser or principal underwriter, as such terms are
defined in the Investment Company Act of 1940, as amended, or the
15
<PAGE> 16
taking of any other action required to be taken by the Board of
Directors by the Investment Company Act of 1940, as amended;
(e) the amendment or repeal of these By-Laws or the
adoption of new By-Laws;
(f) the amendment or repeal of any resolution of the Board
which by its terms may be amended or repealed only by the Board;
(g) the declaration of dividends and the issuance of
capital stock of the Corporation; and
(h) the approval of any merger or share exchange which does
not require stockholder approval.
The Executive Committee shall keep written minutes of its
proceedings and shall report such minutes to the Board. All such
proceedings shall be subject to revision or alteration by the
Board; provided, however, that third parties shall not be prejudiced
by such revision or alteration.
Section 2. Other Committees of the Board. The Board of
Directors may from time to time, by resolution adopted by a
majority of the whole Board, designate one or more other committees
of the Board, each such committee to consist of two or
more directors and to have such powers and duties as the Board of
Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of
the members of any committee shall be present in person at any
meeting of such committee in order to constitute a quorum for the
transaction of business at such meeting, and the act of a
16
<PAGE> 17
majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or
any two members of any committee may fix the time and place of
its meetings unless the Board shall otherwise provide. In the
absence or disqualification of any member of any committee, the
member or members thereof present at any meeting and not disqualified
from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent
or disqualified member. The Board shall have the power at any
time to change the membership of any committee, to fill all
vacancies, to designate alternate members to replace any absent
or disqualified member, or to dissolve any such committee.
Nothing herein shall be deemed to prevent the Board from
appointing one or more committees consisting in whole or in part
of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any
authority or power of the Board in the management of the business
or affairs of the Corporation.
ARTICLE V
Officers, Agents and Employees
Section 1. Number and Qualifications. The officers of the
Corporation shall be a President, a Secretary and a Treasurer,
each of whom shall be elected by the Board of Directors. The
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Board of Directors may elect or appoint one or more Vice Presidents
and may also appoint such other officers, agents and employees
as it may deem necessary or proper. Any two or more offices
may be held by the same person, except the offices of
President and Vice President, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity.
Such officers shall be elected by the Board of Directors each
year at a meeting of the Board of Directors, each to hold office
for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he
shall have resigned, or have been removed, as hereinafter
provided in these By-Laws. The Board may from time to time
elect, or delegate to the President the power to appoint, such
officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries)
and such agents, as may be necessary or desirable for the business
of the Corporation. Such officers and agents shall have
such duties and shall hold their offices for such terms as may be
prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation
may resign at any time by giving written notice of resignation to
the Board, the Chairman of the Board, President or the Secretary.
Any such resignation shall take effect at the time specified
therein or, if the time when it shall become effective shall not
be specified therein, immediately upon its receipt; and, unless
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otherwise specified therein, the acceptance of such resignation
shall be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any
officer, agent or employee of the Corporation may be removed by
the Board of Directors with or without cause at any time, and the
Board may delegate such power of removal as to agents and
employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract
rights, if any, but the appointment of any person as an officer,
agent or employee of the Corporation shall not of itself create
contract rights.
Section 4. Vacancies. A vacancy in any office, whether
arising from death, resignation, removal or any other cause, may
be filled for the unexpired portion of the term of the office
which shall be vacant, in the manner prescribed in these By-Laws
for the regular election or appointment to such office.
Section 5. Compensation. The compensation of the officers
of the Corporation shall be fixed by the Board of Directors, but
this power may be delegated to any officer in respect of other
officers under his control.
Section 6. Bonds or Other Security. If required by the
Board, any officer, agent or employee of the Corporation shall
give a bond or other security for the faithful performance of his
duties, in such amount and with such surety or sureties as the
Board may require.
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Section 7. President. The President shall be the chief
executive officer of the Corporation. In the absence of the
Chairman of the Board (or if there be none), he shall preside at
all meetings of the stockholders and of the Board Directors. He
shall have, subject to the control of the Board of Directors,
general charge of the business and affairs of the Corporation.
He may employ and discharge employees and agents of the
corporation, except such as shall be appointed by the Board, and
he may delegate these powers.
Section 8. Vice President. Each Vice President shall have
such powers and perform such duties as the Board of Directors or
the President may from time to time prescribe.
Section 9. Treasurer. The Treasurer shall
(a) have charge and custody of, and be responsible for, all
the funds and securities of the Corporation, except those which
the Corporation has placed in the custody of a bank or trust
company or member of a national securities exchange (as that term
is defined in the Securities Exchange Act of 1934, as amended)
pursuant to a written agreement designating such bank or trust
company or member of a national securities exchange as custodian
of the property of the Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) cause all moneys and other valuables to be deposited to
the credit of the Corporation;
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(d) receive, and give receipts for, moneys due and payable,
to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board,
taking proper vouchers therefor; and
(f) in general, perform all the duties incident to the
office of Treasurer and such other duties as from time to time
may be assigned to him by the Board or the President.
Section 10. Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided
for the purpose, the minutes of all meetings of the Board, the
committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock
certificates of the Corporation (unless the seal of the
Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all other
documents to be executed on behalf of the Corporation under its
seal;
(d) see that the books, reports, statements, certificates
and other documents and records required by law to be kept and
filed are properly kept and filed; and
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(e) In general, perform all the duties incident to the
office of Secretary and such other duties as from time to time
may be assigned to him by the Board or the President.
Section 11. Delegation of Duties. In case of the absence
of any officer of the Corporation, or for any other reason that
the Board may deem sufficient, the Board may confer for the time
being the powers or duties, or any of them, of such officer upon
any other officer or upon any director.
ARTICLE VI
Indemnification
Each officer and director of the Corporation shall be
indemnified by the Corporation to the full extent permitted under
the General Laws of the State of Maryland, except that such
indemnity shall not protect any such person against any liability
to the Corporation or any stockholder thereof to which such
person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification
was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, the decision by the
Corporation to indemnify such person must be based upon the
reasonable determination of independent legal counsel or the vote
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of a majority of a quorum of the directors who are neither
"interested persons," as defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended, nor parties to the
proceeding ("non-party independent directors"), after review of
the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office.
Each officer and director of the Corporation claiming
indemnification within the scope of this Article VI shall be
entitled to advances from the Corporation for payment of the
reasonable expenses incurred by him in connection with
proceedings to which he is a party in the manner and to the full
extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall
provide to the Corporation a written affirmation of his good
faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met and a written
undertaking to repay any such advance, if it should ultimately be
determined that the standard of conduct has not been met, and
provided further that at least one of the following additional
conditions is met: (a) the person seeking indemnification shall
provide a security in form and amount acceptable to the Corporation
for his undertaking; (b) the Corporation is insured against losses
arising by reason of the advance; (c) a majority of a quorum of
non-party independent directors, or independent
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legal counsel in a written opinion, shall determine, based on a
review of facts readily available to the Corporation at the time
the advance is proposed to be made, that there is reason to
believe that the person seeking indemnification will ultimately
be found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an
officer or director protecting such person to the full extent
permitted under the General Laws of the State of Maryland, from
liability arising from his activities as officer or director of
the Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation
that protects or purports to protect such person from liability
to the Corporation or to its stockholders to which such officer
or director would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
The Corporation may indemnify, make advances or purchase
insurance to the extent provided in this Article VI on behalf of
an employee or agent who is not an officer or director of the
Corporation.
ARTICLE VII
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon request to have a certificate
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or certificates, in such form as shall be approved by the Board,
representing the number of shares of stock of the Corporation
owned by him, provided, however, that certificates for fractional
shares will not be delivered in any case. The certificates
representing shares of stock shall be signed by or in the name of
the Corporation by the President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer and sealed with the seal of the Corporation.
Any or all of the signatures or the seal on the certificate may
be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon
a certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate shall be issued, it
may be issued by the Corporation with the same effect as if such
officer, transfer agent or registrar were still in office at the
date of issue.
Section 2. Books of Account and Record of Stockholders.
There shall be kept at the principal executive office of the
corporation correct and complete books and records of account of
all the business and transactions of the Corporation. There
shall be made available upon request of any stockholder, in
accordance with Maryland law, a record containing the number of
shares of stock issued during a specified period not to exceed
twelve months and the consideration received by the Corporation
for each such share.
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Section 3. Transfers of Shares. Transfers of shares of
stock of the Corporation shall be made on the stock records of
the Corporation only by the registered holder thereof, or by his
attorney thereunto authorized by power of attorney duly executed
and filed with the Secretary or with a transfer agent or transfer
clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a
duly executed stock transfer power and the payment of all taxes
thereon. Except as otherwise provided by law, the Corporation
shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all
purposes, including, without limitation, the rights to receive
dividends or other distributions, and to vote as such owner, and
the Corporation shall not be bound to recognize any equitable or
legal claim to or interest in any such share or shares on the
part of any other person.
Section 4. Regulations. The Board may make such additional
rules and regulations, not inconsistent with these By-Laws, as it
may deem expedient concerning the issue, transfer and
registration of certificates for shares of stock of the
Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer agents or one or more
transfer clerks and one or more registrars and may require all
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certificates for shares of stock to bear the signature or
signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The
holder of any certificates representing shares of stock of the
Corporation shall immediately notify the Corporation of any loss,
destruction or mutilation of such certificate, and the
Corporation may issue a new certificate of stock in the place of
any certificate theretofore issued by it which the owner thereof
shall allege to have been lost or destroyed or which shall have
been mutilated, and the Board may, in its discretion, require
such owner or his legal representatives to give to the
Corporation a bond in such sum, limited or unlimited, and in such
form and with such surety or sureties, as the Board in its
absolute discretion shall determine, to indemnify the corporation
against any claim that may be made against it on account of the
alleged loss or destruction of any such certificate, or issuance
of a new certificate. Anything herein to the contrary
notwithstanding, the Board, in its absolute discretion, may
refuse to issue any such new certificate, except pursuant to
legal proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and
Distributions. The Board may fix, in advance, a date not more
than ninety days preceding the date fixed for the payment of any
dividend or the making of any distribution or the allotment of
rights to subscribe for securities of the Corporation, or for the
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delivery of evidences of rights or evidences of interests arising
out of any change, conversion or exchange of common stock or
other securities, as the record date for the determination of the
stockholders entitled to receive any such dividend, distribution,
allotment, rights or interests, and in such case only the
stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or
interests.
Section 7. Information to Stockholders and Others. Any
stockholder of the corporation or his agent may inspect and copy
during usual business hours the Corporation's By-Laws, minutes of
the proceedings of its stockholders, annual statements of its
affairs, and voting trust agreements on file at its principal
office.
ARTICLE VIII
Seal
The seal of the Corporation shall be circular in form and
shall bear, in addition to any other emblem or device approved by
the Board of Directors, the name of the Corporation, the year of
its incorporation and the words "Corporate Seal" and "Maryland."
Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
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ARTICLE IX
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of
the Corporation shall end on the 31st day of August.
ARTICLE X
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation
shall be deposited with such banks or other depositories as the
Board of Directors of the Corporation may from time to time
determine.
Section 2. Custodians. All securities and other
investments shall be deposited in the safe keeping of such banks
or other companies as the Board of Directors of the Corporation
may from time to time determine. Every arrangement entered into
with any bank or other company for the safe keeping of the
securities and investments of the Corporation shall contain
provisions complying with the Investment Company Act of 1940, as
amended, and the general rules and regulations thereunder.
ARTICLE XI
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks, notes,
drafts, acceptances, bills of exchange and other orders or
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obligations for the payment of money shall be signed by such
officer or officers or person or persons as the Board of
Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Stock
certificates, bonds or other securities at any time owned by the
Corporation may be held on behalf of the Corporation or sold,
transferred or otherwise disposed of subject to any limits
imposed by these By-Laws and pursuant to authorization by the
Board and, when so authorized to be held on behalf of the
Corporation or sold, transferred or otherwise disposed of, may be
transferred from the name of the Corporation by the signature of
the President or a Vice President or the Treasurer or pursuant to
any procedure approved by the Board of Directors, subject to
applicable law.
ARTICLE XII
Independent Public Accountants
The firm of independent public accountants which shall sign
or certify the financial statements of the Corporation which are
filed with the Securities and Exchange Commission shall be
selected annually by the Board of Directors and, if required by
the provisions of the Investment Company Act of 1940, as amended,
ratified by the stockholders.
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ARTICLE XIII
Annual Statement
The books of account of the Corporation shall be examined by
an independent firm of public accountants at the close of each
annual period of the Corporation and at such other times as may
be directed by the Board. A report to the stockholders based
upon each such examination shall be mailed to each stockholder of
the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the
same appears on the books of the Corporation. Such annual
statement shall also be available at the annual meeting of
stockholders, if any, and, within 20 days after the meeting (or,
in the absence of an annual meeting, within 20 days after the end
of the month of October following the end of the fiscal year), be
placed on file at the Corporation's principal office. Each such
report shall show the assets and liabilities of the Corporation
as of the close of the annual or quarterly period covered by the
report and the securities in which the funds of the Corporation
were then invested. Such report shall also show the
corporation's income and expenses for the period from the end of
the Corporation's preceding fiscal year to the close of the
annual or quarterly period covered by the report and any other
information required by the Investment Company Act of 1940, as
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amended, and shall set forth such other matters as the Board or
such firm of independent public accountants shall determine.
ARTICLE XIV
Amendments
These By-Laws or any of them may be amended, altered or
repealed at any regular meeting of the stockholders or at any
special meeting of the stockholders by a favorable vote of the
holders of at least seventy-five percent (75%) of the outstanding
shares of capital stock of the Corporation entitled to be voted
on the matter, provided that notice of the proposed amendment,
alteration or repeal be contained in the notice of such special
meeting. These By-Laws may also be amended, altered or repealed
by the affirmative vote of a majority of the Board of Directors
at any regular or special meeting of the Board of Directors,
except any particular By-Law which is specified as not subject to
alteration or repeal by the Board of Directors, subject to the
requirements of the Investment Company Act of 1940, as amended.
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Ex-99.g(1)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 12th day of October 1989, by and between
MERRILL LYNCH PRIME FUND, INC., a Maryland corporation
(hereinafter referred to as the "Fund"), and MERRILL LYNCH ASSET
MANAGEMENT, INC., a Delaware corporation (hereinafter referred to
as the "Investment Adviser").
W I T N E S S E T H:
WHEREAS, the Fund intends to engage in business as a
closed-end, non-diversified, management investment company and is
registered as such under the Investment Company Act of 1940, as
amended (hereinafter referred to as 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
Adviser's Act of 1940; 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 an the
terms and conditions hereinafter set forth;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the
covenants hereinafter contained, the Fund and the Investment
Adviser hereby agree as follows:
ARTICLE I
Duties of the Investment Adviser
The Fund hereby employs the Investment Adviser to act as
investment adviser of the Fund and to furnish, or arrange for
affiliates to furnish, the investment advisory services described
below, subject to the polices 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 shall for all purposes
herein be deemed to be independent contractors and shall, unless
otherwise expressly provided or authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed
agents of the Fund.
(a) Administrative Services. The Investment Adviser shall
perform (or arrange for the performance by affiliates of) the
management and administrative services necessary for the
operation of the Fund including administering shareholder
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accounts and handling shareholder relations pursuant to an
Administration Agreement of even date herewith.
(b) Investment Advisory Services. The Investment Adviser
shall provide the Fund with such investment research, advice and
supervision as the latter may from time to time consider
necessary for the proper supervision of the assets of the Fund,
shall 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 or cash, subject always to the restrictions of the
Articles of Incorporation and 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 objectives,
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
3.
<PAGE> 4
been revoked. The Investment Adviser shall take, on behalf of
the Fund, all actions which it deems necessary to implement the
investment policies determined as provided above and, in
particular, to place all orders for the purchase or sale of
portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Investment Adviser
is authorized as the agent of the Fund to give instructions to
the Custodian of the Fund as to deliveries of securities and
payments of cash for the account of the Fund. In connection with
the selection of such brokers or dealers and the placing of such
orders with respect to assets of the Fund, the Investment Adviser
is directed at all times to seek to obtain execution and prices
within the policy guidelines determined by the Board of Directors
and set forth in filings made by the Fund under the Federal
securities laws. Subject to this requirement and the provisions
of the Investment Company Act, the Securities Exchange Act of
1934, as amended, and other applicable provisions of law, the
Investment Adviser may select brokers or dealers with which it or
the Fund is affiliated.
ARTICLE II
Allocation of Charges and Expenses
(a) The Investment Adviser. The Investment Adviser
assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement, and
shall at its own expense, provide the office space, facilities,
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equipment and necessary personnel which it is obligated to
provide under Article I hereof, and shall pay all compensation of
officers of the Fund and all Directors of the Fund who are
affiliated persons of the Investment Adviser.
(b) The Fund. The Fund assumes and shall pay or cause to
be paid all other expenses of the Fund including, without
limitation: taxes, expenses for legal and auditing services,
costs of printing proxies, stock certificates, shareholder
reports, prospectuses, charges of the custodian, any subcustodian
and transfer agent, expenses of portfolio transactions,
Securities and Exchange Commission fees, expenses of registering
the shares under Federal, state and foreign laws, fees and actua
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 is also understood that the Fund will reimburse the
Investment Adviser for its costs 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 expenses assumed by the Investment
Adviser, the Fund shall pay to the Investment Adviser at the end
5.
<PAGE> 6
of each calendar month a fee based on the average daily value of
the net assets of the Fund at the annual rate of 0.95 of 1.0% of
the average daily net assets of the Fund, commencing on the day
following effectiveness hereof, as determined and computed in
accordance with the description of the determination of net asset
value contained in the, Prospectus of the Fund. 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 day prior to such suspension shall
for this purpose be deemed to be the net asset value each
succeeding day 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
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<PAGE> 7
limitations may be raised, lowered or waived from time to time,
the Investment Adviser shall reduce its investment advisory fee
by the extent of such excess and, if required pursuant to any
such laws or regulations, will reimburse the Fund in the amount
of such excess; provided, however, to the extent permitted by
law, there shall be excluded from such expenses the amount of any
interest, taxes, brokerage commissions and extraordinary expenses
(including but not limited to legal claims and liabilities and
litigation costs and any indemnification related thereto) paid or
payable by the Fund. Whenever the expenses of the Fund exceed a
pro rata portion of the applicable annual expense limitations,
the estimated amount of reimbursement under such limitations
shall be applicable as an offset against the monthly payment of
the fee due to the Investment Adviser. Should two or more such
expenses 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
7.
<PAGE> 8
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 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 Board of Directors, officers, employees and
shareholders of the Fund are or may become interested in the
Investment Adviser and its affiliates, as directors, officers,
employees, partners, and shareholders or otherwise and that
directors, officers, employees, partners, and shareholders of the
Investment Adviser and 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.
8.
<PAGE> 9
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 September 30, 1991
and thereafter, but only so long as such continuance is
specifically 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) 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 days' written notice to the
other party. This Agreement shall automatically terminate in the
event of its assignment.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the vote of a majority
of outstanding voting securities of the Fund, and (ii) a majority
of those Directors who are not parties to this Agreement or
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<PAGE> 10
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 construed in accordance with laws of
the State of New York and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws
of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company
Act, the latter shall control.
10.
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH PRIME FUND, INC.
By /s/ ARTHUR ZEIKEL
---------------------
ATTEST: /s/ ROBERT HARRIS
------------------
Secretary
MERRIL LYNCH ASSET MANAGEMENT, INC.
By /s/ TERRY K. GLENN
-----------------------
Attest: /s/ PHILIP L. KIRSTEIN
------------------------
Secretary
11.
<PAGE> 1
Ex-99.g(2)
ADMINISTRATION AGREEMENT
AGREEMENT made this 12th day of October, 1989 by and between
Merrill Lynch Prime Fund, Inc., a Maryland corporation (the
"Fund"), and Merrill Lynch Asset Management, Inc., a Delaware
corporation ("MLAM" or the "Administrator");
W I T N E S S E T H
WHEREAS, the Fund intends to engage in business as a closed-
end, non-diversified, management investment company and is
registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Fund and MLAM are entering into an investment
advisory agreement (the "Investment Advisory Agreement") pursuant
to which MLAM will provide investment advice to the Fund and be
responsible for the portfolio management of the Fund; and
WHEREAS, the Fund desires to retain MLAM to render
administrative services in the manner and on the terms and
conditions hereafter set forth; and
WHEREAS, MLAM desires to be retained to perform services on
said terms and conditions.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter contained, the Fund and MLAM agree as
follows:
1. Duties of the Administrator. The Fund hereby retains
MLAM to act as administrator of the Fund, subject to the
supervision and direction of the Board of Directors of the Fund,
as hereinafter set forth. MLAM shall perform or arrange for the
performance of the administrative services (i.e., services other
than investment advice and related portfolio activities) necessary
for the operation of the Fund and, without limiting the generality
of the foregoing, shall (i) prepare and file reports and other
documents required by U.S. Federal, state and other applicable
laws and regulations and by stock exchanges on which Fund shares
are listed; (ii) prepare proxy materials and periodic reports to
Fund shareholders; (iii) respond to inquiries from Fund
shareholders; (iv) calculate, or arrange for the calculation of,
the net asset value of the Fund's shares (it being understood that
the Fund will reimburse the Administrator for its costs in
providing such accounting services to the Fund); (v) oversee the
performance of administrative and professional services rendered
to the Fund by others, including its custodian, transfer agent,
dividend disbursing agent and shareholder servicing agent, as well
as accounting, auditing and other services; (vi) provide the Fund
with the services of persons competent to perform such
administrative and clerical functions as are necessary to provide
2.
<PAGE> 3
effective operation of the Fund, and (vii) provide the Fund with
administrative office and data processing facilities.
2. Expenses of the Administrator. MLAM assumes and shall
pay for maintaining the staff and personnel necessary to perform
its obligations under this Agreement, and shall at its own
expense, provide office space, facilities, equipment and necessary
personnel which it is obligated to provide under paragraph 1
hereof, except that the Fund shall pay the expenses of legal
counsel retained by MLAM as may be necessary or appropriate for
the MLAM's performance of its duties and responsibilities under
this Agreement. All other expenses of the Fund shall be paid as
set forth in the Investment Advisory Agreement.
3. Compensation of the Administrator. For the services
rendered to the Fund by MLAM pursuant to this Agreement, the Fund
shall pay to the Administrator a monthly fee at an annual rate of
0.25 of 1% of the Fund's average daily net assets as determined
and computed in accordance with the description of the
determination of net asset value contained in the Prospectus of
the Fund. Such fee shall be payable in arrears on the last day of
each calendar month for services performed hereunder during such
month. If the Fund's initial registration statement is declared
effective by the Securities and Exchange Commission after the
beginning of a month or this agreement terminates prior to the end
of a month, such fee shall be prorated according to the proportion
which such portion of the month bears to the full month.
3.
<PAGE> 4
4. Limitation of Liability of the Administrator.
Indemnification.
(a) The Administrator shall not be liable to the Fund for
any error of judgment or mistake of law or for any loss arising
out of any act or omission by the Administrator in the performance
of its duties hereunder. Nothing herein contained shall be
construed to protect the Administrator against any liability to
the Fund, its shareholders or any sub-investment adviser to which
the Administrator shall otherwise be subject by reasons of willful
misfeasance, bad faith, or gross negligence in the performance of
its duties, or by reckless disregard of its obligations and duties
hereunder.
(b) The Administrator may, with respect to questions of law,
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 any action taken or omitted by it
in good faith in conformity with such advice or opinion.
(c) The Fund agrees to indemnify and hold harmless the
Administrator from and against all charges, claims, expenses
(including legal fees) and liabilities reasonably incurred by the
Administrator in connection with the performance of its duties
hereunder, except such as may arise from the Administrator's
willful misfeasance, bad faith, gross negligence in the
performance of its duties or by reckless disregard of its
4.
<PAGE> 5
obligations and duties hereunder. Such expenses shall be paid by
the Fund in advance of the final disposition of such matter upon
invoice by the Administrator and receipt by the Fund of an
undertaking from the Administrator to repay such amounts if it
shall ultimately be established that the Administrator is not
entitled to indemnification hereunder by virtue of the
Administrator's willful misfeasance, bad faith, gross negligence
in the performance of its duties or by reckless disregard of its
obligations and duties hereunder.
(d) As used in this Paragraph 4, the term "Administrator"
shall include any affiliates of the Administrator performing
services for the Fund contemplated hereby and directors, officers,
agents and employees of the Administrator and such affiliates.
5. Activities of the Administrator. The services of the
Administrator under this Agreement are not to be deemed exclusive,
and the Administrator and any person controlled by or under common
control with the Administrator shall be free to render similar
services to others.
6. Duration and Termination of this Agreement. This
Agreement shall become effective as of the date first above
written and shall remain in force until terminated as provided
herein. This Agreement may be terminated at any time, without the
payment of any penalty, by the Fund or the Administrator, on sixty
days' written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment.
5.
<PAGE> 6
7. Amendments of this Agreement. This Agreement may be
amended by the parties hereto only if such amendment is
specifically approved by the Board of Directors of the Fund and
such amendment is set forth in a written instrument executed by
each of the parties hereto.
8. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State
of New York as at the time in effect-and the applicable provisions
of the 1940 Act. To the extent that the applicable law of the
State of New York, or any of the provisions herein, conflict with
the applicable provisions of the 1940 Act, the latter shall
control.
9. Counterparts. This Agreement may be executed by the
parties hereto in counterparts and if executed in more than one
counterpart the separate instruments shall constitute one
agreement.
6.
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH PRIME FUND, INC.
By: /s/ ARTHUR ZEIKEL
----------------------
Attest:
By /s/ ROBERT HARRIS
------------------
Secretary
MERRILL LYNCH ASSET MANAGEMENT, INC.
By: /s/ TERRY K. GLENN
-----------------------
Attest:
By /s/ PHILIP L. KIRSTEIN
-----------------------
Secretary
7.
<PAGE> 1
Ex-99.h(1)
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 12th day of October 1989, between
MERRILL LYNCH PRIME FUND, INC., a Maryland corporation (the
"Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware
corporation (the "Distributor").
W I T N E S S E T H
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as a
closed-end, non-diversified, management investment company and it
is affirmatively in the interest of the Fund to offer its shares
for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either direct-
ly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Fund's shares in order to promote the growth of the Fund
and facilitate the distribution of its shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund
hereby appoints the Distributor as the principal underwriter and
distributor of the Fund to sell shares of common stock of the
<PAGE> 2
Fund (sometimes herein referred to as the "shares") to the public
and hereby agrees during the term of this Agreement to sell
shares of the Fund to the Distributor on the terms and conditions
herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the shares, except that:
(a) The Fund may, on written notice to the Distributor,
from time to time designate other principal underwriters and
distributors of its shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell shares in the areas so designated shall termi-
nate, but this Agreement shall remain otherwise in full effect
until terminated in accordance with the other provisions hereof.
(b) The exclusive rights granted to the Distributor to
purchase shares from the Fund shall not apply to shares of the
Fund issued in connection with the merger or consolidation of any
other investment company or personal holding company with the
Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any
such company by the Fund.
2.
<PAGE> 3
(c) Such exclusive rights also shall not apply to shares
issued by the Fund pursuant to reinvestment of dividends or
capital gains distributions.
Section 3. Purchase of Shares from the Fund.
(a) Prior to the continuous offering of the shares, com-
mencing on a date agreed on by the Fund and the Distributor, it
is contemplated that the Distributor will solicit subscriptions
for shares during a subscription period which shall last for such
period as may be agreed upon by the parties hereto. The sub-
scriptions will be payable within five business days after the
termination of the subscription period, at which time the Fund
will commence operations.
(b) After the Fund commences operations, the Fund will
commence an offering of its shares and thereafter the Distributor
shall have the right to buy from the Fund the shares needed, but
not more than the shares needed (except for clerical errors in
transmission) to fill unconditional orders for shares of the Fund
placed with the Distributor by investors or securities dealers.
The price which the Distributor shall pay for the shares so
purchased from the Fund shall be the net asset value, determined
as set forth in Section 3(d) hereof.
(c) The shares are to be resold by the Distributor to
investors at net asset value, as set forth in Section 3(d) here-
of, or to securities dealers having agreements with the Distri-
3.
<PAGE> 4
butor upon the terms and conditions set forth in Section 7 hereof.
(d) The net asset value of shares of the Fund shall be
determined by the Fund or any agent of the Fund in accordance
with the method set forth in the prospectus of the Fund and
guidelines established by the Board of Directors.
(e) The Fund shall have the right to suspend the sale of
its shares at times when repurchase is suspended pursuant to the
conditions set forth in Section 4(b) hereof. The Fund shall also
have the right to suspend the sale of its shares if trading on
the New York Stock Exchange shall have been suspended, if a
banking moratorium shall have been declared by Federal or New
York authorities, or if there shall have been some other event,
which, in the judgment of the Fund, makes it impracticable or
inadvisable to sell the shares.
(f) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for shares received by the Distributor. Any order may be
rejected by the Fund; provided, however, that the Fund will not
arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of shares. The Fund (or its
agent) will confirm orders upon their receipt, will make appro-
priate book entries and, upon receipt by the Fund (or its agent)
of payment therefor, will deliver deposit receipts or certifi-
cates for such shares pursuant to the instructions of the Distri-
4.
<PAGE> 5
butor. Payment shall be made to the Fund in New York Clearing
House funds. The Distributor agrees to cause such payment and
such instructions to be delivered promptly to the Fund (or its
agent).
Section 4. Repurchase of Shares by the Fund.
(a) Any of the outstanding shares may be tendered for
repurchase pursuant to a tender offer made by the Fund, and the
Fund agrees to repurchase the shares so tendered in accordance
with the requirements of the Securities Exchange Act of 1934, as
amended, and the rules thereunder and the applicable tender offer
provisions set forth in the prospectus of the Fund. The price to
be paid to repurchase the shares shall be equal to the net asset
value calculated in accordance with the provisions of Section
3(d) hereof, less the Early Withdrawal Charge (as defined in the
prospectus of the Fund), if any, set forth in the prospectus of
the Fund. All payments by the Fund hereunder shall be made in
the manner set forth below.
The Fund shall pay the total amount of the repurchase price
as defined in the above paragraph pursuant to the instructions of
the Distributor or return the tendered shares promptly following
the termination or withdrawal of the tender offer.
The proceeds of any repurchase of shares shall be paid by the
Fund as follows: (i) any applicable Early Withdrawal Charge
shall be paid to the Distributor and (ii) the balance shall be
5
<PAGE> 6
paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus.
(b) Repurchases of shares pursuant to a tender offer or
payment may be suspended at such times as may be determined by
the Board of Directors of the Fund as set forth in the prospectus
of the Fund.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of
all information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of shares of the Fund, and this shall include, upon
request by the Distributor, one certified copy of all financial
statements prepared for the Fund by independent auditors. The
Fund shall make available to the Distributor such number of
copies of its prospectus as the Distributor shall reasonably
request.
(b) The Fund shall take, from time to time, but subject to
the necessary approval of the shareholders, all necessary action
to fix the number of authorized shares and such steps as may be
necessary to register the same under the Securities Act of 1933,
as amended (the "Securities Act"), to the end that there will be
available for sale such number of shares as the Distributor
reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its shares
6
<PAGE> 7
for sale under the securities laws of such states as the Distri-
butor and the Fund may approve. Any such qualification may be
withheld, terminated or withdrawn by the Fund at any time in its
discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by
the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and
effort to effect sales of shares of the Fund, but shall not be
obligated to sell any specific number of shares. The services of
the Distributor to the Fund hereunder are not to be deemed exclu-
sive and nothing herein contained shall prevent the Distributor
from entering into like arrangements with other investment com-
panies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the shares of the Fund, the Distributor
shall use its best efforts in all respects duly to conform with
the requirements of all Federal and state laws relating to the
sale of such securities. Neither the Distributor nor any se-
lected dealer nor any other person is authorized by the Fund to
7.
<PAGE> 8
those contained in the registration statement or related prospec-
tus and any sales literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be neces-
sary to comply with the requirements of the National Association
of Securities Dealers, Inc. (the "NASD"), as such requirements
may from time to time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice
("selected dealers") for the sale of the shares; provided, that
the Fund shall approve the forms of agreements with dealers.
Shares sold to selected dealers shall be for resale by such
dealers only at net asset value determined as set forth in
Section 3(d) hereof. The form of agreement with selected dealers
to be used during the subscription period described in Section
3(a) is attached hereto as Exhibit A and the initial form of
agreement with selected dealers to be used in the continuous
offering of the shares is attached hereto as Exhibit B.
(b) Within the United States, the Distributor shall offer
8.
<PAGE> 9
and sell shares only to such selected dealers as are members in
good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the
Fund, including fees and disbursements of its counsel and audi-
tors, in connection with the preparation and filing of any re-
quired registration statements and/or prospectuses under the
Investment Company Act and the Securities Act, and all amendments
and supplements thereto, and in connection with any fees and
expenses incurred with respect to any filings with the NASD and
preparing and mailing annual and interim reports and proxy mate-
rials to shareholders (including but not limited to the expense
of setting in type any such registration statements, prospec-
tuses, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses and annual and
interim reports have been prepared and set in type, the
Distributor shall bear the costs and expenses of printing and
distributing any copies thereof which are to be used in
connection with the offering of shares to selected dealers or
investors pursuant to this Agreement. The Distributor shall bear
the costs and expenses of preparing, printing and distributing
any other literature used by the Distributor or furnished by it
9.
<PAGE> 10
for use by selected dealers in connection with the offering of
the shares for sale to the public and any expenses of advertising
incurred by the Distributor in connection with such offering.
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the shares for sale pursuant to this Agreement, and, if
necessary or advisable in connection therewith, of qualifying the
Fund as a broker or dealer, in such states of the United States
or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5(c) hereof and the cost and
expenses payable to each such state for continuing qualification
therein until the Fund decides to discontinue such qualification
pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any shares, which may be based on
the Securities Act, or on any other statute or at common law, on
the ground that the registration statement or related prospectus,
as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue
statement of a material fact or omits to state a material fact
10.
<PAGE> 11
required to be stated therein or necessary in order to make the
statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with,
information furnished to the Fund in connection therewith by or
on behalf of the Distributor; provided, however, that in no case
(i) is the indemnity of the Fund in favor of the Distributor and
any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any
liability to the Fund or its shareholders to which the
Distributor or any such controlling persons would otherwise be
subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Fund to be liable under its indemnity
agreement contained in this paragraph with respect to any claim
made against the Distributor or any such controlling persons.,
unless the Distributor or such controlling persons, as the case
may be, shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after
the Distributor or such controlling persons shall have received
notice of such service on any designated agent), but failure to
notify the Fund of any such claim shall not relieve it from any
liability which it may have to the person against whom such
11.
<PAGE> 12
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled
to participate at its own expense in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any
such liability, but if the Fund elects to assume the defense,
such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the
Fund elects to assume the defense of any such suit and retain
such counsel, the Distributor or such controlling person or
persons, defendant or defendants in the suit, shall bear the fees
and expenses, as incurred, of any additional counsel retained by
them, but, in case the Fund does not elect to assume the defense
of any such suit, it will reimburse the Distributor or such
controlling person or persons, defendant or defendants in the
suit, for the reasonable fees and expenses, as incurred, of any
counsel retained by them. The Fund shall promptly notify the
Distributor of the commencement of any litigation or proceedings
against it or any of its officers or Directors in connection with
the issuance or sale of any of the shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Directors and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense, as incurred, described in the foregoing
indemnity contained in subsection (a) of this Section, but only
12.
<PAGE> 13
with respect to statements or omissions made in reliance upon,
and in conformity with, information furnished to the Fund in
writing by or on behalf of the Distributor for use in connection
with the registration statement or related prospectus, as from
time to time amended, or the annual or interim reports to
shareholders. In case any action shall be brought against the
Fund or any person so indemnified, in respect of which indemnity
may be sought against the Distributor, the Distributor shall have
the rights and duties given to the Fund, and the Fund and each
person so indemnified shall have the rights and duties given to
the Distributor by the provisions of subsection (a) of this
Section 9.
Section 10. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until September 30, 1991 and
thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Directors, 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 Directors or by vote of a majority
of the outstanding voting securities of the Fund, or by the
13.
<PAGE> 14
Distributor, on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
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.
Section 11. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Directors, or by the vote of a majority
of outstanding voting securities of the Fund, and (ii) by the
vote of a majority of those Directors of the Fund 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.
Section 12. Governing Law. The provisions of this Agree-
ment shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
14.
<PAGE> 15
extent that the applicable law 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.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH PRIME FUND, INC.
By
---------------------------------
ATTEST:
----------------
Secretary
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------
ATTEST:
----------------
Secretary
15.
<PAGE> 1
Ex-99.h(2)
EXHIBIT A
MERRILL LYNCH PRIME FUND, INC.
SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
FOR SUBSCRIPTION PERIOD
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Prime Fund, Inc., a Maryland
corporation (the "Fund"), pursuant to which it acts as the
distributor for the sale of shares of common stock, par value
$0.10 per share (herein referred to as "shares"), of the Fund,
and as such has the right to distribute shares of the Fund for
resale. The Fund is a closed-end investment company registered
under the Investment Company Act of 1940, as amended, and its
shares being offered to the public are registered under the
Securities Act of 1933, as amended. Such shares and certain of
the terms on which they are being offered are more fully
described in the enclosed Prospectus. You have received a copy
of the Distribution Agreement (the "Distribution Agreement")
between ourself and the Fund and reference is made herein to
certain provisions of such Distribution Agreement. This
Agreement relates solely to the subscription period described in
Section 3(a) of such Distribution Agreement. Subject to the
foregoing, as principal, we offer to sell to you, as a member of
the Selected Dealers Group, shares of the Fund upon the following
terms and conditions:
1. The subscription period referred to in Section 3(a) of
the Distribution Agreement will continue through October 27,
1989. The subscription period may be extended upon agreement
between the Fund and the Distributor. Subject to the provisions
of such Section and the conditions contained herein, we will sell
to you on the fifth business day following the termination of the
subscription period, or such other date as we may advise (the
"Closing Date"), such number of shares as to which you have
placed orders with us not later than 5:00 P.M. on the second full
business day preceding the Closing Date.
2. In all sales of these shares to the public you shall
act as dealer for your own account, and in no transaction shall
you have any authority to act as agent for the Fund, for us or
for any other member of the Selected Dealers Group.
<PAGE> 2
3. With respect to each sale of shares by you to the
public, the Distributor shall pay you, from its own assets, a fee
at the rate of 2.5% of the amount purchased. If shares sold by
you remain outstanding after one year from the date of their
original purchase, the Distributor will compensate you at an
annual rate, paid quarterly" equal to 0.25% of the average daily
net asset value of shares sold by you and remaining outstanding.
4. You shall not place orders for any of the shares unless
you have already received purchase orders for such shares at the
applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. All orders are subject to
acceptance by the Distributor or the Fund in the sole discretion
of either. The minimum initial and subsequent purchase require-
ments are as set forth in the Prospectus, as amended from time to
time.
5. You agree that you will not offer or sell any of the
shares except under circumstances that will result in compliance
with the applicable Federal and state securities laws and that in
connection with sales and offers to sell shares you will furnish
to each person to whom any such sale or offer is made a copy of
the Prospectus (as then amended or supplemented) and will not
furnish to any person any information relating to the shares of
the Fund which is inconsistent in any respect with the
information contained in the Prospectus (as then amended or
supplemented) or cause any advertisement to be published in any
newspaper or posted in any public place without our consent and
the consent of the Fund. You further agree that you shall not
make a market in the Fund's shares while the Fund is making a
public offering of such shares.
6. Payment for shares purchased by you is to be made by
certified or official bank check at the office of Merrill Lynch
Funds Distributor, Inc., Box 9011, Princeton, New Jersey 08543-
9011, on such date as we may advise, in New York Clearing House
funds payable to the order of Merrill Lynch Funds Distributor,
Inc. against delivery by us of non-negotiable share deposit
receipts ("Receipts") issued by Financial Data Services, Inc., as
shareholder servicing agent, acknowledging the deposit with it of
the shares so purchased by you. You agree that as promptly as
practicable after the delivery of such shares you will issue
appropriate written transfer instructions to the Fund or to the
shareholder servicing agent as to the purchasers to whom you sold
the shares.
7. No person is authorized to make any representations
concerning shares of the Fund except those contained in the
current Prospectus of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental
2.
<PAGE> 3
to such Prospectus. In purchasing shares through us you shall
rely solely on the representations contained in the Prospectus
and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's
Prospectus, periodic reports and proxy solicitation material are
our sole responsibility and not the responsibility of the Fund,
and you agree that the Fund shall have no liability or
responsibility to you in these respects unless expressly assumed
in connection therewith.
8. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus at or
prior to the time of offering or sale and you agree thereafter to
deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You
further agree to endeavor to obtain Proxies from such purchasers.
Additional copies of the Prospectus, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to
you in reasonable quantities upon request.
9. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of the shares entirely.
Each party hereto has the right to cancel this Agreement upon
notice to the other party.
10. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
11. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association, including in
particular, the provisions of Article III, Sections 8, 24, 25 and
36 of such Rules, to the extent applicable.
12. Upon application to us, we will inform you as to the
states in which we believe the shares have been qualified for
sale under, or are exempt from the requirements of, the respec-
tive securities laws of such states, but we assume no responsi-
bility or obligation as to your right to sell shares in any
jurisdiction. we will file with the Department of State in New
3.
<PAGE> 4
York a Further State Notice with respect to the shares, if neces-
sary.
13. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
14. You agree that you will not sell any shares of the Fund
to any account over which you exercise discretionary authority.
15. This Agreement shall terminate at the close of business
on the Closing Date, unless earlier terminated, provided, how-
ever, this Agreement shall continue after termination for the
purpose of settlement of accounts hereunder.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
------------------------------
By:
-------------------------------------
Address:
--------------------------------
-----------------------------------------
Date:
-----------------------------------
4.
<PAGE> 5
EXHIBIT B
MERRILL LYNCH PRIME FUND, INC.
SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Prime Fund, Inc., a Maryland
corporation (the "Fund"), pursuant to which it acts as the
distributor for the sale of shares of common stock, par value
$0.10 per share (herein referred to as the "shares"), of the
Fund, and as such has the right to distribute shares of the Fund
for resale. The Fund is a closed-end investment company
registered under the Investment Company Act of 1940, as amended,
and its shares being offered to the public are registered under
the Securities Act of 1933, as amended. You have received a copy
of the Distribution Agreement (the "Distribution Agreement")
between ourself and the Fund and reference is made herein to
certain provisions of such Distribution Agreement. The term
"Prospectus" as used herein refers to the prospectus on file with
the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the
Securities Act of 1933, as amended. As principal, we offer to
sell to you, as a member of the Selected Dealers Group, shares of
the Fund upon the following terms and conditions:
1. In all sales of these shares to the public you shall
act as dealer for your own account, and in no transaction shall
you have any authority to act as agent for the Fund, for us or
for any other member of the Selected Dealers Group.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus of the Fund. The procedure
relating to the handling of orders shall be subject to Section 5
hereof and instructions which we or the Fund shall forward from
time to time to you. All orders are subject to acceptance or
rejection by the Distributor or the Fund in the sole discretion
of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus of the
Fund.
3. With respect to each sale of shares by you to the
public, the Distributor shall pay you, from its own assets, a fee
at the rate of 2.5% of the amount purchased. If shares sold by
<PAGE> 6
you remain outstanding after one year from the date of their
original purchase, the Distributor will compensate you at an
annual rate, paid quarterly, equal to 0.25% of the average daily
net asset value of shares sold by you and remaining outstanding.
4. You shall not place orders for any of the shares unless
you have already received purchase orders for such shares at the
applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. You agree that you will not
offer or sell any of the shares except under circumstances that
will result in compliance with the applicable Federal and state
securities laws and that in connection with sales and offers to
sell shares you will furnish to each person to whom any such sale
or offer is made a copy of the Prospectus (as then amended or
supplemented) and will not furnish to any person any information
relating to the shares of the Fund, which is inconsistent in any
respect with the information contained in the Prospectus (as then
amended or supplemented) or cause any advertisement to be
published in any newspaper or posted in any public place without
our consent and the consent of the Fund. You further agree that
you shall not make a market in the Fund's shares while the Fund
is making either a public offering of or a tender offer to
purchase its shares.
5. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Fund for shares of the Fund to be
resold by us to you subject to the applicable terms and condi-
tions governing the placement of orders by us set forth in Sec-
tion 3 of the Distribution Agreement, and (ii) to tender shares
directly to the Fund or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
6. You shall not withhold placing orders received from
your customers so as to profit yourself as a result of such
withholding: e.g., by a change in the "net asset value" from
that used in determining the offering price to your customers.
7. No person is authorized to make any representations
concerning shares of the Fund except those contained in the
current Prospectus of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental
to such Prospectus. In purchasing shares through us you shall
rely solely on the representations contained in the Prospectus
and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's
Prospectus, periodic reports and proxy solicitation material are
our sole responsibility and not the responsibility of the Fund,
and you agree that the Fund shall have no liability or
2.
<PAGE> 7
responsibility to you in these respects unless expressly assumed
in connection therewith.
8. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus at or
prior to the time of offering or sale and you agree thereafter to
deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You
further agree to endeavor to obtain proxies from such purchasers.
Additional copies of the Prospectus, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to
you in reasonable quantities upon request.
9. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of the shares entirely.
Each party hereto has the right to cancel this Agreement upon
notice to the other party.
10. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
11. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association, including in
particular, the provisions of Article III, Sections 8, 24, 25 and
36 of such Rules, to the extent applicable.
12. Upon application to us, we will inform you as to the
states in which we believe the shares have been qualified for
sale under, or are exempt from the requirements of, the respec-
tive securities laws of such states, but we assume no responsi-
bility or obligation as to your right to sell shares in any
jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the shares, if neces-
sary.
13. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
3.
<PAGE> 8
14. Your first order placed pursuant to this Agreement for
the purchase of shares of the Fund will represent your acceptance
of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
----------------------------------------
By:
-----------------------------------------------
Address:
------------------------------------------
---------------------------------------------------
Date:
---------------------------------------------
4.
<PAGE> 1
Ex-99.j
CUSTODY AGREEMENT
Agreement made as of this 12th day of October, 1989,
between MERRILL LYNCH PRIME FUND, INC.
a 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
(hereinafter called the "Fund"), and THE BANK OF NEW YORK, a
New York corporation authorized to do a banking business, hav-
ing its principal office and place of business at 48 Wall
Street, New York, New York 10015 (hereinafter called the
"Custodian").
W I T N E S S E T H
that for and in consideration of the mutual promises
hereinafter set forth the Fund and the Custodian agree as fol-
lows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:
1. "Authorized Person" shall be deemed to include any
person, whether or not such person is an officer or employee
of the Fund, duly authorized by the Board of Directors of the
Fund to give Oral Instructions and Written instructions on
behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as 'may be
received by the Custodian from time to time.
2. "Book-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for United States and
federal agency securities, its successor or successors and its
nominee or nominees.
3. "Call Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and payment of the exercise
price, as specified therein, to purchase from the writer
thereof the specified underlying Securities.
<PAGE> 2
4. "Certificate" shall mean any notice, instruction, or
other instrument in writing, authorized or required by this
Agreement to be given to the Custodian which is actually
received by the Custodian and signed on behalf of the Fund by
any two Officers.
5. "Clearing Member" shall mean a registered
broker-dealer which is a clearing member under the rules of
O.C.C. and a member of a national securities exchange
qualified to act as a custodian for an investment company, or
any broker-dealer reasonably believed by the Custodian to be
such a clearing member.
6. "Collateral Account" shall mean a segregated account
so denominated which is specifically allocated to a Series and
pledged to the Custodian as security for, and in consideration
of, the Custodian's issuance of (a) any Put Option guarantee
letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII
herein.
7. "Covered Call option" shall mean an exchange trade
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.
8. "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 identi-
fied in a certified copy of a resolution of the Fund's Board
of Directors specifically approving deposits therein by the
Custodian.
9. "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.
10. "Futures Contract" shall mean a Financial Futures
Contract and/or Stock Index Futures Contracts.
11. "Futures Contract Option" shall mean an option with
respect to a Futures Contract.
12. "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
- 2 -
<PAGE> 3
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 commis-
sion merchant or a Clearing Member (a "Margin Account Agree-
ment"), 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.
13. "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.
14. "O.C.C." shall mean the Options Clearing Corpora-
tion, a clearing agency registered under Section 17A of the
Securities Exchange Act of 1934, its successor or successors,
and its nominee or nominees.
15. "Officers" shall be deemed to include the President,
any Vice President, the Secretary, the Treasurer, the Control-
ler, 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 B or such other
Certificate as may be received by the Custodian from time to
time.
16. "Option" shall mean a Call option, Covered Call Op-
tion, Stock Index Option and/or a Put Option.
17. "Oral Instructions" shall mean verbal instructions
actually received by the Custodian from an Authorized Person
or from a person reasonably believed by the Custodian to be an
Authorized Person.
- 3 -
<PAGE> 4
18. "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.
19. "Reverse Repurchase Agreement" shall mean an agree-
ment pursuant to which the Fund sells Securities and agrees to
repurchase such Securities at a described or specified date
and price.
20. "Security" shall be deemed to include, without
limitation, Money Market Securities, Call Options, Put Op-
tions, Stock Index Options, Stock Index Futures Contracts,
Stock Index Futures Contract options, Financial Futures
Contracts, Financial Futures Contract options, Reverse
Repurchase Agreements, agreements for interest rate swaps,
caps, floors, collars or similar arrangements, 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
and industrial bonds and industrial development bonds), bonds,
debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments
representing rights to receive, purchase, sell or subscribe
for the same, or evidencing or representing any other rights
or interest therein, or any property or assets and agreements
representing corporate loans and interests therein as defined
from time to time in the Fund's prospectus or statement of
additional information.
21. "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 recorda-
tion or otherwise, within the custody account in which certain
Securities and/or other assets of the Fund specifically al
located 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.
22. "Series" shall mean the various portfolios, if any,
of the Fund as described from time to time in the current and
effective prospectus for the Fund. If the Fund does not have
Series then the references to Series are deemed to mean the
Fund.
23. "Shares" shall mean the shares of common stock of
the Fund, each of which is in the case of a Fund having Series
allocated to a particular Series.
- 4 -
<PAGE> 5
24. "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.
25. "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.
26. "Written Instructions" shall mean written communica-
tions actually received by the Custodian from an Authorized
Person or from a person reasonably believed by the Custodian
to be an Authorized Person by telex or any other such system
whereby the receiver of such communications is able to verify
by codes or otherwise with a reasonable degree of certainty
the identity of the sender of such communication.
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
- 5 -
<PAGE> 6
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
Securities, and deliveries and returns of securities col-
lateral. Prior to a deposit of Securities specifically al-
located to a Series in the Depository, the Fund shall deliver
to the Custodian a certified resolution of the Board of Direc-
tors 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 al-
located 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 confirma-
tions 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
6
<PAGE> 7
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 sum-
mary, on a per Series basis, of all transfers to or from the
account of the Fund for a Series, either hereunder or with any
co-custodian or sub-custodian appointed in accordance with
this Agreement during said day. Where Securities are
transferred to the account of the Fund for a Series, the
Custodian shall also by book-entry or otherwise identify as
belonging to such Series a quantity of Securities in a
fungible bulk of Securities registered in the name of the
Custodian (or its nominee) or shown on the Custodian's account
on the books of the Book-Entry System or the Depository. At
least monthly and from time to time, the Custodian shall
furnish the Fund with a detailed statement, on a per Series
basis, of the Securities and 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
- 7 -
<PAGE> 8
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 due or payable;
(b) Present for payment and collect the amount pay-
able upon such Securities which are called, but only if either
(i) the Custodian receives a written notice of such call, or
(ii) notice of such call appears in one or more of the
publications listed in Appendix C annexed hereto, which may be
amended at any time by the Custodian without the prior
notification or consent of the Fund;
(c) Present for payment and collect the amount pay-
able upon all Securities which mature;
(d) Surrender Securities in temporary form for
definitive Securities;
(e) Execute, as custodian, any . necessary declara-
tions 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; and
(f) Hold directly, or through the Book-Entry System
or the Depository with respect to Securities there in
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.
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, authoriza-
tions, 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;
- 8 -
<PAGE> 9
(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 con-
nection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation,
or the exercise of any conversion privilege and receive and
hold hereunder specifically allocated to such Series any cash
or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate to any
protective committee, reorganization committee or other person
in connection with the reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets of any
corporation, and receive and hold hereunder specifically al-
located 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 pay-
able 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 posses-
sion 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, Op-
tions, or Futures Contract Options by making payments or
deliveries specified in Certificates received by the Custodian
in connection with any such purchase, sale, writing, settle-
ment 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
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<PAGE> 10
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 com-
mission 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 notwithstand-
ing the foregoing, payments to or deliveries from the Margin
Account, and parents with respect to Securities to which a
Margin Account relates, shall be made in accordance with the
terms and conditions of the Margin Account Agreement.
Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this
Agreement to the contrary, make payment for any Futures
Contract, Option, or Futures Contract option for which such
instruments or such certificates are available only against
the delivery to the Custodian of such instrument or such
certificate, and deliver any Future 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, Oral Instructions or Written 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 settle-
ment; (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 or person to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the
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<PAGE> 11
Fund, pay to the broker or person 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, Oral Instructions or Written 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, Oral Instructions or Written
Instructions, specifying with respect to each such sale: (a)
the Series to which such securities were specifically al-
located; (b) the name of the issuer and the title of the
Security; (c) the number of shares or principal amount sold,
and accrued interest, if any; (d) the date of sale; (e) the
sale price per unit; (f ) the total amount payable to the Fund
upon such sale; (g) the name of the broker through whom or the
person to whom the sale was made, and the name of the clearing
broker, if any; and (h) the name of the broker or person to
whom the Securities are to be delivered. The Custodian shall
deliver the Securities specifically allocated to such Series
to the broker or person specified in the Certificate upon 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, Oral Instructions or Written 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 Clear-
ing 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 or the
- 11 -
<PAGE> 12
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 pay-
able 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 Op-
tion, the stock index to which such Option relates and the
number of Stock Index Options sold; (d) the date of sale; (e)
the sale price; (f) the date of settlement; (g) the total
amount payable to the Fund upon such sale; and (h) the name of
the Clearing Member through whom the sale was made. The
Custodian shall consent to the delivery of the Option sold by
the Clearing Member which previously supplied the confirmation
described in preceding paragraph 1 of this Article with
respect to such Option against payment to the Custodian of the
total amount payable to the Fund, provided that the same
conforms to the total amount payable as set forth in such
Certificate.
3. Promptly after the exercise by the Fund of any Call
Option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall deliver to the Custodian a Certificate specify-
ing 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 specify-
ing 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
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<PAGE> 13
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 op-
tion 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 al-
located; (b) the type of Stock Index Option (put or call); (c)
the number of Options being exercised (d) the stock index to
which such Option relates; (e) the expiration date; (f) the
exercise price, (g) the total amount to be received by the
Fund in connection with such exercise; and (h) the Clearing
Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Covered Call Option: (a) the
Series for which such Covered Call Option was written; (b) the
name of the issuer and the title and number of shares for
which the Covered Call Option was written and which underlie
the same; (c) the expiration date; (d) the exercise price; (e)
the premium to be received by the Fund; (f) the date such
Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received.
The Custodian shall deliver or cause to be delivered, in
exchange for receipt of the premium specified in the
Certificate with respect to such Covered Call option, such
receipts as are required in accordance with the customs
prevailing among Clearing Members dealing in Covered Call Op-
tions 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 Op-
tion.
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
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<PAGE> 14
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 is-
suer 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 pay-
able to the Fund upon such delivery. Upon the return an 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 specify-
ing 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 Securi-
ties, 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 Securi-
ties specifically allocated to such Series to be deposited
into the Collateral Account for such Series. The Custodian
shall, after making the deposits into the Collateral Account
specified in the Certificate, issue a Put Option guarantee
letter substantially in the form utilized by the Custodian on
the date hereof, and deliver the same to the Clearing Member
specified in the Certificate against receipt of the premium
specified in said Certificate. Notwithstanding the foregoing,
the Custodian shall be under no obligation to issue any Put
Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and
described in the preceding paragraph is exercised, the Fund
shall promptly deliver to the Custodian a Certificate specify-
ing: (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 al-
located 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
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<PAGE> 15
Series, if any, to be withdrawn from the Senior Security Ac-
count. 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 Securi-
ties, and shall make the withdrawals specified in such
Certificate.
10. Whenever the Fund writes a Stock Index Option, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Stock Index Option: (a) the
Series for which such Stock Index Option was written; (b)
whether such Stock Index Option is a put or a call; (c) the
number of options written, (d) the stock index to which such
option relates; (e) the expiration date; (f) the exercise
price; (g) the Clearing Member through whom such Option was
written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in
the Senior Security Account for such Series; (j) the amount of
cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the
Collateral Account for such Series; and (k) the amount of cash
and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in a Margin Account,
and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium
specified in the Certificate, make the deposits, if any, into
the Senior Security Account specified in the Certificate, and
either (1) deliver such receipts, if any, which the Custodian
has specifically agreed to issue, which are in accordance with
the customs prevailing among Clearing Members in Stock Index
options and make the deposits into the Collateral Account
specified in the Certificate, or (2) make the deposits into
the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to such Stock Index Op-
tion: (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
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<PAGE> 16
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 Ac-
count 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 posi-
tion as a writer of an Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to the
option being purchased: (a) that the transaction is a Closing
Purchase Transaction; (b) the Series for which the Option was
written; (c) the name of the issuer and the title and number
of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and
the number of Options held; (d) the exercise price; (e) the
premium to be paid by the Fund; (f) the expiration date; (g)
the type of Option (put or call) ; (h) the date of such
purchase; (i) the name of the Clearing Member to whom the
premium is to be paid; and (j) the amount of cash and/or the
amount and kind' of Securities, if any, to be withdrawn from
the Collateral Account, a specified Margin Account, or the
Senior Security Account for such Series. Upon the Custodian's
payment of the premium and the return and/or cancellation of
any receipt issued pursuant to paragraphs 6, 8 or 10 of this
Article with respect to the option being liquidated through
the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously imposed
restrictions on the Securities underlying the Call Option.
13. Upon the expiration, exercise, or consummation of a
closing Purchase Transaction with respect to, any Option
purchased or written by the Fund and described in this
Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3
Article III herein, and upon the return and/or cancellation of
any receipts issued by the Custodian, shall rake such
withdrawals from the Collateral Account, and the Margin Ac-
count and/or the Senior Security Account as may be specified
in a Certificate received in connection with such expiration,
exercise, or consummation.
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<PAGE> 17
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 com-
mission, 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.
(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
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<PAGE> 18
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 I 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 ac-
cordance 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 opt on
purchased; (d) the. expiration date; (e) the exercise price;
(f) the dates of purchase and settlement; (g) the amount of
premium to be paid by the Fund upon such purchase; (h) the
name of the broker or futures commission merchant through whom
such option was purchased; and (i) the name of the broker, or
futures commission merchant, to whom payment is to be made.
The Custodian shall pay out of the moneys specifically al-
located 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 Op-
tion purchased by the Fund pursuant to paragraph 1 hereof, the
Fund shall promptly deliver to the Custodian a Certificate
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<PAGE> 19
specifying with respect to each such sale: (a) 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 pay-
able 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 Op-
tion 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 Securi-
ties 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 pay-
ments, 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 condi-
tions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract option,
the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Futures Contract option: (a)
the Series for which such Futures Contract Option was written;
(b) the type of Futures Contract Option (put or call); (c) the
type of Futures Contract and such other information as may be
necessary to identify the 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
- 19 -
<PAGE> 20
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 al-
located; (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 commis-
sion 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
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 Op-
tion described in this Article in order to liquidate its posi-
tion as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specify-
ing 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;
- 20 -
<PAGE> 21
(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 withdraw-
als, 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 op-
tion 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 withdraw-
als 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 ac-
cordance 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
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
- 21 -
<PAGE> 22
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, is-
sued 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 a Reverse Repurchase
Agreement with respect to Securities and money held by the
Custodian hereunder, the Fund shall deliver to the Custodian a
Certificate or in the event such Reverse Repurchase Agreement
is a Money Market Security, a Certificate, Oral Instructions,
or Written 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
- 22 -
<PAGE> 23
connection with such Reverse Repurchase Agreement. The
Custodian shall, upon receipt of the total amount payable to
the Fund specified in the Certificate, Oral Instructions, or
written Instructions make the delivery to the broker or
dealer, and the deposits, if any, to the Senior Security Ac-
count, specified in such Certificate, Oral Instructions, or
Written Instructions.
2. Upon the termination of a Reverse Repurchase Agree-
ment 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, Oral Instructions, or Written 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 termina-
tion; (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 Securi-
ties 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, Oral Instructions, or Written Instructions,
make the payment to the broker or dealer, and the withdrawals,
if any, from the Senior Security Account, specified in such
Certificate, Oral Instructions, or Written 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
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 col-
lateral 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
- 23 -
<PAGE> 24
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 Securi-
ties: (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
Custodian into, or withdrawn from, a Senior Securities Ac-
count, 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.
- 24 -
<PAGE> 25
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 Custodians 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 busi-
ness 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 Ac-
count specifying the amount of cash and/or the amount and kind
of Securities held therein. No later than the close of busi-
ness next succeeding the delivery to the Fund of such state-
ment, the Fund shall furnish to the Custodian a Certificate or
Written Instructions 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 Custodiants
obligation with respect to any outstanding Put Option
guarantee letter or similar document, the Fund shall promptly
specify in a Certificate the additional cash and/or Securities
to be deposited in such Collateral. Account to eliminate such
deficiency.
- 25 -
<PAGE> 26
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, certi-
fied 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 I distributions on a daily basis and authorizing
the Custodian to rely on Oral Instructions, Written Instruc-
tions or a certificate setting forth the date of the declara-
tion 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, Written 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 al-
located 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.
- 26 -
<PAGE> 27
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. Except as provided hereinafter, 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 Certificate
specifying:
(a) A resolution by the Board of Directors of the
Fund directing the Transfer Agent to redeem
such Shares as have been accepted for redemp-
tion by the Fund pursuant to a tender offer or
otherwise and an opinion of counsel in form and
substance satisfactory to the Custodian with
respect to any such tender offer.
(b) 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, Oral Instructions, or Written 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
(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
- 27 -
<PAGE> 28
for such Series payable on demand and shall bear interest from
the date incurred at a rate per annum (based on a 360-day year
for the actual number of days involved) equal to 1/2% over
custodian's prime commercial lending rate in effect from time
to time, such rate to be adjusted on the effective date of any
change in such prime commercial lending rate but in no event
to be less than 6% per annum. In addition, the Fund hereby
agrees that the Custodian shall have a continuing lien and
security interest in and to any property specifically al-
located 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 posses-
sion 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.
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 borrow-
ing, 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 col-
lateral and the executed promissory note, if any, against
delivery by the lending bank of the total amount of the loan
payable, provided that the same conforms to the total amount
payable as set forth in the Certificate. The Custodian may,
at the option of the lending bank, keep such collateral in its
possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such
Securities as additional collateral as may be specified in a
Certificate to collateralize further any transaction described
- 28 -
<PAGE> 29
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
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, neither the
Custodian nor its nominee shall be liable for any loss or dam-
age, 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. 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, misfeasance 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;
- 29 -
<PAGE> 30
(e) The legality of any loan of portfolio Securi-
ties, 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 obliga-
tion to see that any broker, dealer or financial institution
to which portfolio Securities of the Fund are lent pursuant to
Article XIV 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 termina-
tion 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.
- 30 -
<PAGE> 31
However, upon receipt of a Certificate from the Fund of an
overdue amount on Securities held in the Depository the
custodian shall make a claim against the Depository on behalf
of the Fund, except that the Custodian shall not be under any
obligation to appear in, prosecute or defend any action suit
or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or
liability, unless indemnity satisfactory to it against all
expense and liability be furnished as often as may be
required.
5. The Custodian shall not be under any duty or obliga-
tion 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 obliga-
tion 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 satisfac-
tion of reimbursement of its costs and expenses in connection
with any such action.
7. The Custodian may appoint one or more banking
institutions as Depository or Depositories, as Sub-Custodian
or Sub-Custodians, or as Co-Custodian or Co-Custodians includ-
ing, 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 obliga-
tion (a) to ascertain whether any Securities at any time
delivered to, or held by it, 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 al-
located to such Series. Unless and until the Fund instructs
the Custodian by a Certificate to apportion any loss, damage,
- 31 -
<PAGE> 32
liability or expense among the Series in a specified manner,
the Custodian shall also be entitled to charge against any
money held by it for the account of a Series such Series' pro
rata share (based on such Series net asset value at the time
of the charge to the aggregate net asset value of all Series
at that time) of the amount of any loss, damage, liability or
expense, including counsel fees, for which it shall be
entitled to reimbursement under the provisions of this Agree-
ment. 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 and any Written 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 or Written Instruc-
tions 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 Instruc-
tions or Written Instructions are given to the Custodian. The
Fund agrees that the fact that such confirming instructions
are not received by the Custodian shall in no way affect the
validity of the transactions or enforceability of the transac-
tions hereby authorized by the Fund. The Fund agrees that the
Custodian shall incur no liability to the Fund in acting upon
Oral Instructions or Written Instructions given to the
Custodian hereunder concerning such transactions provided such
instructions reasonably appear to have been received from an
Authorized Person.
11. The Custodian shall be entitled to rely upon any
instrument, instruction or notice received by the Custodian
and reasonably believed by the Custodian to be given in ac-
cordance 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 require, 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
- 32 -
<PAGE> 33
regulations. The Fund, or the Fund's authorized representa-
tives, shall have access to such books and records during the
custodian's normal business hours. Upon the reasonable
request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's
authorized representative, and the Fund shall reimburse the
Custodian its expenses of providing such copies. Upon reason-
able request of the Fund, the Custodian shall provide in hard
copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by
the Custodian on a computer disc, or are similarly maintained,
and the Fund shall reimburse the Custodian for its expenses of
providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report
obtained by the Custodian on the system of internal accounting
control of the Book-Entry System, the Depository, or O.C.C.,
and with such reports on its own systems of internal account-
ing control as the Fund may reasonably request from time to
time.
14. Subject to the foregoing provisions of this Agree-
ment, the Custodian may deliver and receive Securities, and
receipts with respect to such Securities, and arrange for pay-
ments 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.
15. The Custodian shall have no duties or
responsibilities whatsoever except such duties and
responsibilities as are specifically set forth in this Agree-
ment, and no covenant or obligation shall be implied in this
Agreement against the Custodian.
ARTICLE XVI
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it
shall be accompanied by a copy of a resolution of the Board of
Directors of the Fund, certified by the Secretary or any As-
sistant 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
- 33 -
<PAGE> 34
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 suc-
cessor 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 Agree-
ment.
ARTICLE XVII
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed
by two of the present Officers of the Fund under its corporate
seal, setting forth the names and the signatures of the
present Authorized Persons. The Fund agrees to furnish to the
Custodian a new Certificate in similar form in the event that
any such present Authorized Person ceases to be an Authorized
Person or in the event that other or additional Authorized
Persons are elected or appointed. Until such new Certificate
shall be received, the Custodian shall be fully protected in
acting under the provisions of this Agreement upon Oral
Instructions or signatures of the present Authorized Persons
as set forth in the last delivered Certificate.
2. Annexed hereto as Appendix B is a Certificate signed
by two of the present Officers of the Fund under its corporate
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
any such present Officer ceases to be an Officer of the Fund,
or in the event that other or additional Officers are elected
34
<PAGE> 35
or appointed. Until such new Certificate shall be received,
the Custodian shall be fully protected in acting under the
provisions of this Agreement upon the signatures of the offic-
ers as set forth in the last delivered Certificate.
3. 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 10015, or at such other
place as the Custodian 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
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.
5. 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.
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 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.
7. This Agreement shall be 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 shall, together, constitute only one
instrument.
- 35 -
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective corporate Offic-
ers, thereunto duly authorized and their respective corporate
seals to be hereunto affixed, as of the day and year first
above written.
MEERRILL LYNCH PRIME
FUND, INC.
[SEAL] By: /s/ Arthur Zeikel
------------------
Asset:
/s/ ROBERT HARRIS
- - -------------------
THE BANK OF NEW YORK
[SEAL] By: [SIG]
------------------------
Attest:
[SIG]
- - -------------------
- 36 -
<PAGE> 37
APPENDIX A
I, of MERRILL LYNCH PRIME FUND, INC.
a Maryland corporation do hereby certify that:
The following individuals have been duly authorized by
the Board of Directors of the Fund in conformity with the
Fund's Articles. of incorporation and By-Laws to give oral
Instructions and Written Instructions on behalf of the Fund,
and the signatures set forth opposite their respective names
are their true and correct signatures:
Name Signature
- - -------------------------- ------------------------
<PAGE> 38
APPENDIX B
I, and I, of
MERRILL LYNCH PRIME FUND, INC. a Maryland corporation (the
"Fund"), do hereby certify that:
The following individuals serve in the following posi-
tions with the Fund and each has been duly elected or ap-
pointed 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 cor-
rect signatures:
Name Position Signature
- - -------------- ---------------- ---------------
<PAGE> 39
APPENDIX C
I, an Assistant 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
<PAGE> 40
EXHIBIT A
CERTIFICATION
The undersigned, hereby certifies
that he is the duly elected and acting of MERRILL
LYNCH PRIME FUND, 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 , 1989, 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 , 1989, (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 securi-
ties 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 ray hand and the
seal of MERRILL LYNCH PRIME FUND, INC. as of the day of
, 1989.
------------------------------
[SEAL]
<PAGE> 41
EXHIBIT B
CERTIFICATION
The undersigned, ,hereby certifies
that he is the duly elected and acting of MERRILL
LYNCH PRIME FUND, 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 , 1989, 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 ,1989, (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 Agree-
ment, to the contrary to deposit in the Depository, as
defined in the Custody Agreement, all securities eligible
for deposit therein, regardless of the Series to which
the same are. specifically allocated, and to utilize the
Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in
connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and
returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of MERRILL LYNCH PRIME FUND, INC. as of the day of
,1989.
-----------------------------
[SEAL]
<PAGE> 42
EXHIBIT C
CERTIFICATION
The undersigned, ,hereby certifies
that he is the duly elected and acting of
MERRILL LYNCH PRIME FUND, 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 , 1989, 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 , 1989, (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 Agree-
ment, 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 MERRIIL LYNCH PRIME FUND, INC. , 1989.
---------------------------------
[SEAL]
<PAGE> 1
Ex-99.k(1)
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the 12th day of October 1989 by and
between MERRILL LYNCH PRIME FUND, INC., a Maryland corporation
(the "Fund"), and FINANCIAL DATA SERVICES, INC., a New Jersey
Corporation ("FDS").
WITNESSETH:
WHEREAS, the Fund wishes to appoint FDS to be the Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund on, and subject to, the terms and provisions of this
Agreement, and FDS is desirous of accepting such appointment on,
and subject to, such terms and provisions:
NOW, THEREFORE, in consideration of mutual covenants con-
tained in this Agreement, the Fund and FDS agree as follows:
1. Appointment of FDS as Transfer Agent, Dividend Dis-
bursing Agent and Shareholder Servicing Agent.
(a) The Fund hereby appoints FDS to act as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund on, and subject to, the terms and provisions of this
Agreement.
(b) FDS hereby accepts the appointment as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund, and agrees to act as such on, and subject to, the terms and
provisions of the Agreement.
2. Definitions.
(a) In this Agreement:
(I) The term "Act" means the Investment Company Act
of 1940, as amended from time to time, and any rule or
regulation thereunder;
(II) The term "Account" means any account of a Share-
holder, or, if the shares are held in an account in the name
of MLPF&S for benefit of an identified customer, such ac-
<PAGE> 2
count, including a Plan Account, any account under a plan (by
whatever name referred to in the Prospectus) pursuant to the
Self-Employed Individuals Retirement Act of 1962 ("Keogh Act
Plan") and any plan (by whatever name referred to in the
Prospectus) in conjunction with Section 401 of the Internal
Revenue Code ("Corporation Master Plan")
(III) The term "application" means an application made
by a Shareholder or prospective Shareholder respecting the
opening of an Account;
(IV) The term "MLFD" means Merrill Lynch Funds
Distributor, Inc., a Delaware corporation;
(V) The term "MLPF&S" means Merrill Lynch, Pierce,
Fenner & Smith Incorporated, a Delaware corporation;
(VI) The term "Officer's Instruction" means an
instruction in writing given on behalf of the Fund to FDS,
and signed on behalf of the Fund by the President, any Vice
President, the Secretary or the Treasurer of the Fund;
(VII) The term "Prospectus" means the Prospectus of
the Fund, as from time to time in effect;
(VIII) The term "Shares" means shares of Common Stock
of the Fund; and
(IX) The term "Shareholder" means the holder of
record of Shares.
3. Duties of FDS as Transfer Agent, Dividend Disbursing
Agent and Shareholder servicing Agent.
(a) Subject to the succeeding provisions of the Agreement,
FDS hereby agrees to perform the following functions as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund;
(I) Issuing, transferring and redeeming Shares;
(II) Opening, maintaining, servicing and closing
Accounts;
(III) Acting as agent of the Fund and/or MLPF&S,
maintaining such records as may permit the imposition of such
early withdrawal charges as may be described in the
Prospectus, including such reports as may be reasonably
requested by the Fund with respect to such Shares as may be
subject to an early withdrawal charge;
2.
<PAGE> 3
(IV) Upon the repurchase pursuant to a tender of
Shares subject to such an early withdrawal charge,
calculating and deducting from the tender offer proceeds
thereof the amount of such charge in the manner set forth in
the Prospectus.
(V) Processing tender offers;
(VI) Examining and approving legal transfers;
(VII) Replacing lost, stolen or destroyed certificates
representing Shares, in accordance with, and subject to,
procedures and conditions adopted by the Fund;
(VIII) Furnishing such confirmations of transactions
relating to their Shares as required by applicable law;
(IX) Acting as agent for the Fund and/or MLPF&S,
furnishing such appropriate periodic statements relating to
Accounts, together with additional enclosures, including
appropriate income tax information and income tax forms duly
completed, as required by applicable law;
(X) Acting as agent for the Fund and/or MLPF&S,
mailing annual, semi-annual and quarterly reports prepared by
or on behalf of the Fund, and mailing new Prospectuses on
their issue to Shareholders as required by applicable law;
(XI) Furnishing such periodic statements of trans-
actions effected by FDS, reconciliations, balances and
summaries as the Fund may reasonably request;
(XII) Maintaining such books and records relating to
transactions effected by FDS as are required by the Act, or
by any other applicable provision of law, rule or regulation,
to be maintained by the Fund or its transfer agent with
respect to such transactions, and preserving, or causing to
be preserved any such books and records for such periods as
may be required by any such law, rule or regulation and as
may be agreed on from time to time between FDS and the Fund.
In addition, FDS agrees to maintain and preserve master files
and historical computer tapes on a daily basis in multiple
separate locations a sufficient distance apart to insure
preservation of at least one copy of such information;
(XIII) Withholding taxes on non-resident alien
Accounts, preparing and filing U.S. Treasury Department Form
1099 and other appropriate forms as required by applicable
law with respect to dividends and distributions; and
3.
<PAGE> 4
(XIV) Reinvesting dividends for full and fractional
shares and disbursing cash dividends, as applicable.
(b) FDS agrees to act as proxy agent in connection with the
holding of annual, if any, and special meetings of Shareholders,
mailing such notices, proxies and proxy statements in connection
with the holding of such meetings as may be required by applicable
law, receiving and tabulating votes cast by proxy and
communicating to the Fund the results of such tabulation accom-
panied by appropriate certificates, and preparing and furnishing
to the Fund certified lists of Shareholders as of such date, in
such form and containing such information as may be required by
the Fund.
(c) FDS agrees to deal with, and answer in a timely manner,
all correspondence and inquires relating to the functions of FDS
under this Agreement with respect to Accounts.
(d) FDS agrees to furnish to the Fund such information and
at such intervals as is necessary for the Fund to comply with the
registration and/or the reporting requirements (including
applicable escheat laws) of the Securities and Exchange Commis-
Sion, Blue Sky authorities or other governmental authorities.
(e) FDS agrees to provide to the Fund such information as
may reasonably be required to enable the Fund to reconcile the
number of outstanding Shares between FDS's records and the account
books of the Fund.
(f) Notwithstanding anything in the foregoing provisions of
this paragraph, FDS agrees to perform its functions thereunder
subject to such modification (whether in respect of particular
cases or in any particular class of cases) as may from time to
time be contained in an officer's Instruction.
4. Compensation.
The charges for services described in this Agreement, in-
cluding "out-of-pocket" expenses, will be set forth in the Sche-
dule of Fees attached hereto.
5. Right of Inspection.
FDS agrees that it will in a timely manner make available to,
and permit, any officer, accountant, attorney or authorized agent
of the Fund to examine and make transcripts and copies (including
photocopies and computer or other electronically information storage
media and print-outs) of any and all of its books and records
which relate to any transaction or function performed by MLFDS
under or pursuant to this Agreement.
4.
<PAGE> 5
6. Confidential Relationship.
FDS agrees that it will, on behalf of itself and its officers
and employees, treat all transactions contemplated by this
Agreement, and all information germane thereto, as confidential
and not to be disclosed to any person (other than the Shareholder
concerned, or the Fund, or as may be disclosed in the examination
of any books or records by any person lawfully entitled to examine
the same) except as may be authorized by the Fund by way of an
officer's Instruction.
7. Indemnification.
The Fund shall indemnify and hold FDS harmless from any loss,
costs, damage and reasonable expenses, including reasonable
attorney's fees (provided that such attorney is appointed with the
Fund's consent, which consent shall not be unreasonably withheld),
incurred by it resulting from any claim, demand, action, or suit
in connection with the performance of its duties hereunder, pro-
vided that this indemnification shall not apply to actions or
omissions of FDS in cases of willful misconduct, failure to act in
good faith or negligence by FDS, it's officers, employees or
agents, and further provided, that prior to confessing any claim
against it which may be subject to this indemnification, FDS shall
give the Fund reasonable opportunity to defend against said claim
in its own name or in the name of FDS. An action taken by FDS on
any Officer's Instruction reasonably believed by it to have been
properly executed shall not constitute willful misconduct, failure
to act in good faith or negligence under this Agreement.
5. Regarding FDS.
(a) FDS hereby agrees to hire, purchase, develop and
maintain such dedicated personnel, facilities, equipment, soft-
ware, resources and capabilities as may be reasonably determined
by the Fund to be necessary for the satisfactory performance of
the duties and responsibilities of FDS. FDS warrants and
represents that its officers and supervisory personnel charged
with carrying out its functions as Transfer Agent, Dividend Dis-
bursing Agent and Shareholder Servicing Agent for the Fund possess
the special skill and technical knowledge appropriate for that
purpose. FDS shall at all times exercise due care and diligence
in the performance of its functions as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund.
FDS agrees that, in determining whether it has exercised due care
and diligence, its conduct shall be measured by the standard
applicable to persons possessing such special skill and technical
knowledge.
5.
<PAGE> 6
(b) FDS warrants and represents that it is duly authorized
and permitted to act as Transfer Agent, Dividend Disbursing Agent,
and Shareholder Servicing Agent under all applicable laws and that
it will immediately notify the Fund of any revocation of such
authority or permission or of the commencement of any proceeding
or other action which may lead to such revocation.
9. Termination.
(a) This Agreement shall become effective as of the date
first above written and shall thereafter continue from year to
year. This Agreement may be terminated by the Fund or FDS
(without penalty to the Fund or FDS) provided that the terminating
party gives the other patty written notice of such termination at
least sixty (60) days in advance, except that the Fund may
terminate this Agreement immediately on written notice to FDS if
the authority or permission of FDS to act as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent has been
revoked or if any proceeding or other action which the Fund
reasonably believes will lead to such revocation has been com-
menced.
(b) Upon termination of this Agreement, FDS shall deliver
all unissued and canceled stock certificates representing Shares
remaining in its possession, and all Shareholder records, books,
stock ledgers, instruments and other documents (including compu-
terized or other electronically stored information) made or accu-
mulated in the performance of its duties as Transfer Agent, Dis-
bursing Agent and Shareholder Servicing Agent for the Fund along
with a certified locator document clearly indicating the complete
contents therein, to such successor as may be specified in a
notice of termination or Officer's Instruction; and the Fund
assumes all responsibility for failure thereafter to produce any
paper, record or documents so delivered and identified in the
locator document, if and when required to be produced.
10. Amendment.
Except to the extent that the performance by FDS or its
functions under this Agreement may from time to time be modified
by an Officer's Instruction, this Agreement may be amended or
modified only by further written Agreement between the parties.
11. Governing Law.
This Agreement shall be governed by the laws of the State of
New Jersey.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective duly authorized offi-
cers and their respective corporate seals hereunto duly affixed
and attested, as of the day and year above written.
MERRILL LYNCH PRIME FUND, INC.
By /s/ ARTHUR ZEIKEL
----------------------------
ATTEST:
/s/ ROBERT HARRIS
- - -------------------
Secretary
FINANCIAL DATA SERVICES, INC.
By /s/ ROBERT C. DOAN
----------------------------
ATTEST:
[SIG]
- - ----------------------
Secretary
7.
<PAGE> 1
EX.99-K(2)
LICENSE AGREEMENT RELATING TO USE OF NAME
AGREEMENT made as of the day of October, 1989, by, between MERRILL
LYNCH & CO., INC. ("ML&Co.") a Delaware corporation and MERRILL LYNCH PRIME
FUND, INC., a Maryland corporation (the "Fund");
W I T N E S S E T H :
WHEREAS, ML&Co. was incorporated under the laws of the State of Delaware
on March 27, 1973 under the corporate name "Merrill Lynch & Co., Inc." and has
used such name at all times thereafter;
WHEREAS, ML&Co. was duly qualified as a foreign corporation under the
laws of the State of New York April 25, 1973 and has remained so qualifed at
all times thereafter;
WHEREAS, the Fund was incorporated under the laws of the State of Maryland
on July 27, 1989; and
WHEREAS, the Fund desires to qualify as a foreign corporation under the
laws of the State of New York and the State of New Jersey, respectively, and
has requested ML&Co. to give its consent to the use of the name "Merrill Lynch"
in the Fund's corporate name.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and of the covenants
hereinafter contained, ML&Co. and the Fund hereby agree as follows:
1. ML&Co. hereby grants the Fund a non-exclusive license to use the
words "Merrill Lynch" in its corporate name.
2. ML&Co. hereby consents to the qualification of the Fund as a
foreign corporation under the laws of the State of New York and the State of
New Jersey, respectively, with the words "Merrill Lynch" in its corporate name
and agrees to execute such formal consents as may be necessary in connection
with such filing.
3. The non-exclusive license hereinabove referred to has been given
and is given by ML&Co. on the condition that it may at any time, in its sole
and absolute discretion, withdraw the non-exclusive license to the use of the
words "Merrill Lynch" in the name of the Fund; and, as soon as practicable
after receipt by the Fund of written notice of the withdrawal of such
non-exclusive license, and in no event later than ninety days thereafter, the
Fund will change its name so that such name will not thereafter include the
words "Merrill Lynch" or any variation thereof.
4. ML&Co. reserves and shall have the right to grant to any other
company, including without limitation, any other investment company, the right
to use the words "Merrill Lynch" or variations
2.
<PAGE> 3
thereof in its name and no consent or permission of the Fund shall be
necessary; but, if required by an applicable law of any state, the Fund will
forthwith grant all requisite consents.
5. The Fund will not grant to any other company the right to use a
name similar to that of the Fund or ML&Co. without the written consent of
ML&Co.
6. Regardless of whether the Fund should hereafter change its name and
eliminate the words "Merrill Lynch" or any variation thereof from such name,
the Fund hereby grants to ML&Co. the right to cause the incorporation of other
corporations or the organization of voluntary associations which may have names
similar to that of the Fund or to that to which the Fund may change its name
and to own all or any portion of the shares of such other coporations or
associations and to enter into contractual relationships with such other
corporations or associations, subject to any requisite approval of a majority
of the Fund's shareholders and the Securities and Exchange Commission and
subject to the payment of a reasonable amount to be determined at the time of
use, and the Fund agrees to give and execute any such formal consents or
agreements as may be necessary in connection therewith.
7. This Agreement may be amended at any time by a writing signed by
the parties hereto.
3.
<PAGE> 4
MERRILL LYNCH & CO., INC.
By __________________________________
Vice President
MERRILL LYNCH PRIME FUND, INC.
By __________________________________
President
4.
<PAGE> 1
Ex-99.p
CERTIFICATE OF SOLE STOCKHOLDER
Merrill Lynch Asset Management, Inc., the holder of 10,000
shares of common stock, par value $0.10 per share, of Merrill
Lynch Prime Fund, Inc., a Maryland corporation (the "Fund"), does
hereby confirm to the Fund its representation that it purchased
such shares for investment purposes, with no present intention of
redeeming or reselling any portion thereof, and does further agree
that if it redeems any portion of such shares prior to the
amortization of the Fund's organizational expenses, the proceeds
thereof will be reduced by the proportionate amount of the
unamortized organizational expenses which the number of shares
being redeemed bears to the number of shares initially purchased.
MERRILL LYNCH ASSET MANAGEMENT, INC.
By /s/ ROBERT HARRIS
------------------------------
Dated: October 19, 1989
<PAGE> 1
Brown & Wood
One World Trade Center
New York, New York 10048-0557
Telephone: (212) 839-5300
Facsimile: (212) 839-5599
November 3, 1995
Merrill Lynch Senior Floating Rate
Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch Senior Floating Rate Fund,
Inc., a Maryland corporation (the "Fund"), in connection with the registration
of 100,000,000 shares of common stock, par value $0.10 per share (the "Common
Stock"), under the Securities Act of 1933, as amended, pursuant to a
registration statement on Form N-2 to be filed with the Securities and Exchange
Commission on the date hereof (the "Registration Statement").
As counsel for the Fund, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Common Stock.
In addition, we have examined and are familiar with the Articles of
Incorporation of the Fund, as amended, the By-Laws of the Fund and such other
documents as we have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Common Stock,
upon issuance and sale in the manner referred to in the Registration Statement
for consideration not less than the
<PAGE> 2
par value thereof, will be legally issued, fully paid and non-assessable shares
of common stock of the Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus
constituting a part thereof.
Very truly yours,
/s/ Brown & Wood
-------------------------------
2
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.:
We consent to the use in this Registration Statement on Form N-2 of our report
dated October 16, 1995 and to the references to us under the captions "Experts"
and "Financial Highlights" both of which appear in the Prospectus, which is a
part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 2, 1995
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<NAME> MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
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