<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1995
SECURITIES ACT FILE NO. 33-54655
INVESTMENT COMPANY ACT FILE NO. 811-07203
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ PRE-EFFECTIVE AMENDMENT NO. 1
/ / POST-EFFECTIVE AMENDMENT NO.
AND/OR
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/ AMENDMENT NO. 1
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ARTHUR ZEIKEL
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
MARK B. GOLDFUS, ESQ.
FUND ASSET MANAGEMENT, L.P.
P.O. BOX 9011
PRINCETON, N.J. 08543-9011
FRANK P. BRUNO, ESQ.
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING BEING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT PRICE(1) FEE(2)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par value).... 100,000 shs. $10.00 $1,000,000 $344.83
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</TABLE>
(1) Estimated solely for the purposes of calculating the filing fee.
(2) $344.83 previously paid.
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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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* FORMERLY, MUNILEVERAGE FUND, INC.
<PAGE> 2
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
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<S> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover Page.................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages... Inside Front and Outside Back Cover Pages
3. Fee Table and Synopsis...................... Fee Table
4. Financial Highlights........................ Not Applicable
5. Plan of Distribution........................ Purchase of Shares
6. Selling Shareholders........................ Not Applicable
7. Use of Proceeds............................. Use of Proceeds
8. General Description of the Registrant....... The Fund; Investment Objective and Policies
9. Management.................................. Investment Advisory and Administrative
Arrangements; Directors and Officers
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
<CAPTION>
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
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; Other
Investment 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; Purchase of
Shares; Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing
Agent; Experts
21. Brokerage Allocation and Other Practices.... Portfolio Transactions
22. Tax Status.................................. Taxes
23. Financial Statements........................ Statement of Assets, Liabilities and Capital
PART C--OTHER INFORMATION
</TABLE>
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 MARCH 10, 1995
PROSPECTUS
APRIL , 1995
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
COMMON STOCK
------------------------
Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is a newly
organized, continuously offered, non-diversified, closed-end management
investment company seeking to provide shareholders with as high a level of
current income exempt from Federal income taxes as is consistent with its
investment policies and prudent investment management. The Fund seeks to achieve
its investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations the interest on which is exempt from
Federal income taxes in the opinion of bond counsel to the issuer. The Fund
intends to maintain at least 75% of its total assets in municipal obligations
which are rated investment grade or, if unrated, are considered by Fund Asset
Management, L.P. (the "Investment Adviser") to be of comparable quality. THE
FUND MAY INVEST UP TO 25% OF ITS TOTAL ASSETS IN MUNICIPAL OBLIGATIONS WHICH ARE
RATED BELOW INVESTMENT GRADE OR, IF UNRATED, ARE CONSIDERED BY THE INVESTMENT
ADVISER TO BE OF COMPARABLE QUALITY. The Fund may invest in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Fund to an alternative minimum tax. At times, the Fund may seek
to hedge its portfolio through the use of options and futures transactions.
There can be no assurance that the investment objective of the Fund will be
realized.
The Fund is designed primarily for long-term investors and should not be
considered a vehicle for trading purposes. The address of the Fund is 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800. This Prospectus sets forth concisely information about the Fund
that a prospective investor ought to know before purchasing shares. Investors
are advised to read this Prospectus carefully and retain it for future
reference. (Continued on next page)
------------------------
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 COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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PRICE TO SALES PROCEEDS TO
PUBLIC(1) LOAD(2) FUND(3)
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<S> <C> <C> <C>
Per Share................................. $10.00 None $10.00
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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 is initially $10.00 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, Pierce, Fenner & Smith Incorporated) 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 (i) organizational expenses of
the Fund, estimated to be $ , which will be amortized over a
five-year period and charged as expenses against the income of the Fund or
(ii) prepaid registration fees, in the amount of $ , which will be
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
(Continued from previous page)
Shares of Common Stock of the Fund will be offered at $10.00 per share
without a front-end sales charge (but may be subject to an "Early Withdrawal
Charge" as described herein) during a subscription offering period expected to
end on April , 1995, unless extended. On the fifth business day after the
conclusion of this subscription offering period, the subscriptions will be
payable, the Common Stock will be issued and the Fund will commence operations.
After the completion of the subscription offering period, the Fund expects to
engage in a continuous offering of its Common Stock at a price equal to the next
determined net asset value per share without a front-end sales charge. Shares
may be purchased directly from Merrill Lynch Funds Distributor, Inc. (the
"Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(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 during the subscription and
continuous offering periods is $1,000 and the minimum subsequent purchase in the
continuous offering is $50. 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 make 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. In the event that tender offers are not made, however,
shareholders may find that their shares of Common Stock are not marketable. 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, which will be paid to the Distributor. See "Early
Withdrawal Charge."
Within approximately six months after completion of the subscription
offering of Common Stock described herein, the Fund intends to offer shares of
preferred stock representing up to approximately 35% of the Fund's capital.
There can be no assurance, however, that preferred stock representing such
percentage of the Fund's capital will actually be issued. INVESTORS SHOULD NOTE
THE SPECIAL RISKS ASSOCIATED WITH THE LEVERAGING OF THE COMMON STOCK. SEE "RISKS
AND SPECIAL CONSIDERATIONS OF LEVERAGE" AND "DESCRIPTION OF CAPITAL STOCK."
The issuance of the preferred stock will result in leveraging of the Common
Stock. Although the terms of the preferred stock offering will be determined by
the Fund's Board of Directors, it is anticipated that the preferred stock will
pay dividends that will be adjusted over either relatively short-term periods
(generally seven to 28 days) or medium-term periods (up to five years) and that
the dividend rate will be based upon prevailing interest rates for debt
obligations of comparable maturity. The proceeds of the preferred stock offering
will be invested in longer-term obligations in accordance with the Fund's
investment objective. Because under normal market conditions, obligations with
longer maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread inherent in the
difference between the short-term and medium-term rates paid by the Fund and the
longer-term rates received by the Fund will provide holders of Common Stock with
a potentially higher yield.
2
<PAGE> 5
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 Municipal Strategy Fund, Inc. (the "Fund")
is a newly organized, continuously offered,
non-diversified, closed-end management investment
company. See "The Fund."
THE OFFERING 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"), will solicit
subscriptions for Common Stock of the Fund during a
period expected to end on April , 1995, unless
extended. On the fifth business day after the conclusion
of this subscription period, the subscriptions will be
payable, the Common Stock will be issued and the Fund
will commence operations. The public offering price of
the Common Stock during the subscription offering will
be $10.00 per share without a front-end sales charge
(although in certain cases an Early Withdrawal Charge
may apply as described herein).
After the completion of the initial subscription
offering, the Fund expects to engage in a continuous
offering of its Common Stock at a price equal to the
next determined net asset value per share without a
front-end sales charge (although in certain cases an
Early Withdrawal Charge may apply as described herein).
The minimum initial purchase during the subscription and
continuous offering periods is $1,000 and the minimum
subsequent purchase in the continuous offering is $50.
The Fund reserves the right to waive or modify the
initial and subsequent minimum investment requirements
at any time. See "Purchase of Shares."
INVESTMENT OBJECTIVE
AND POLICIES The investment objective of the Fund is to provide
shareholders with as high a level of current income
exempt from Federal income taxes as is consistent with
its investment policies and prudent investment
management. The Fund will seek to achieve its investment
objective by investing primarily in a portfolio of
long-term, investment grade municipal obligations the
interest on which, in the opinion of bond counsel to the
issuer, is exempt from Federal income taxes. The Fund
intends to maintain at least 75% of its total assets in
municipal obligations which are rated investment grade
or, if unrated, are considered by the Investment Adviser
to be of comparable quality. The Fund may invest up to
25% of its total assets in municipal obligations which
are rated below investment grade or, if unrated, are
considered by the Investment Adviser to be of comparable
quality. Such lower quality municipal obligations (also
commonly referred to as "junk bonds") are frequently
traded only in markets where the number of potential
purchasers and sellers, if any, is very limited. See
"Investment Objective and Policies."
3
<PAGE> 6
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 make 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.
Although the Board of Directors currently intends to
make quarterly tender offers for the Common Stock, it is
under no obligation to do so and no assurance can be
given that in 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.
LEVERAGE The Fund anticipates that it will be substantially
invested in longer-term municipal obligations within
approximately three months after completion of the
subscription offering of Common Stock described herein.
To leverage the Common Stock, the Fund intends to offer
shares of preferred stock within six months after
completion of the subscription offering representing up
to approximately 35% of the Fund's capital. There can be
no assurance, however, that preferred stock representing
such percentage of the Fund's capital will actually be
issued. The issuance of the preferred stock will result
in the leveraging of the Common Stock. Although the
terms of the preferred stock offering will be determined
by the Fund's Board of Directors, it is anticipated that
the preferred stock will pay dividends that will be
adjusted over either relatively short-term periods
(generally seven to 28 days) or medium- term periods (up
to five years) and that the dividend rate will be based
upon prevailing interest rates for debt obligations of
comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in
accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock
will be borne by the Fund and will reduce the net asset
value of the Common Stock. Additionally, under certain
circumstances, when the Fund is required to allocate
taxable income to holders of preferred stock, it is
anticipated that the terms of the preferred stock will
require the Fund to make an additional distribution to
such holders in an amount approximately equal to the tax
liability resulting from such allocation and such
additional distribution (such amount, an "Additional
Distribution").
The use of leverage by the Fund creates an opportunity
for increased net income, but, at the same time, creates
special risks. Because under normal market conditions
obligations with longer maturities produce higher yields
than short-term and medium-term obligations, the
Investment Adviser believes that
4
<PAGE> 7
the spread inherent in the difference between the
short-term and medium-term rates (and any Additional
Distribution) paid by the Fund and the longer-term rates
received by the Fund will provide holders of Common
Stock with a potentially higher yield. Investors should
note, however, that leverage creates certain risks for
holders of Common Stock, including higher volatility of
both the net asset value and market value of the Common
Stock. Since any decline in the value of the Fund's
investments will be borne entirely by holders of Common
Stock, the effect of leverage in a declining market
would result in a greater decrease in net asset value
than if the Fund were not leveraged, which would likely
be reflected in a decline in the market price for shares
of Common Stock. Additionally, fluctuations in the
dividend rates on, and the amount of taxable income
allocable to, the preferred stock will affect the yield
to holders of Common Stock. See "Risks and Special
Considerations of Leverage." Upon issuance of the
preferred stock, holders of the Common Stock will
receive all net income of the Fund remaining after
payment of dividends (and any Additional Distribution)
on the preferred stock and will generally be entitled to
a pro rata share of net realized capital gains. Upon any
liquidation of the Fund, the holders of shares of
preferred stock will be entitled to receive liquidating
distributions (expected to equal the original purchase
price per share of preferred stock plus any accumulated
and unpaid dividends thereon and any accumulated and
unpaid Additional Distribution) before any distribution
is made to holders of Common Stock. See "Description of
Capital Stock-- Preferred Stock." Until the preferred
stock is issued, the Common Stock will not be leveraged,
and the special leverage considerations described herein
will not apply.
Holders of preferred stock, voting as a separate class,
will be entitled to elect two of the Fund's Directors,
and holders of common and preferred stock, voting
together as a single class, will be entitled to elect
the remaining Directors. If at any time dividends on the
Fund's preferred stock were to be in arrears in an
amount equal to two full years of dividend payments, the
holders of all outstanding shares of preferred stock,
voting as a separate class, would be entitled to elect a
majority of the Fund's Directors. The holders of
preferred stock will also vote separately on certain
other matters as required under the Fund's Articles of
Incorporation and the Investment Company Act of 1940, as
amended (the "1940 Act"), and Maryland law but otherwise
will have equal voting rights with holders of Common
Stock (one vote per share) and will vote together with
holders of Common Stock as a single class. See
"Description of Capital Stock--Preferred Stock--Voting
Rights."
There can be no assurance that the Fund will be able to
realize a higher net return on its investment portfolio
than the then current dividend rate (and any Additional
Distribution) on the preferred stock. Changes in certain
factors could cause the relationship between the
short-term and medium-term dividend rates (and any
Additional Distribution) paid by the Fund on the
preferred stock
5
<PAGE> 8
and the long-term rates received by the Fund on its
investment portfolio to change so that such short-term
and medium-term rates (and any Additional Distribution)
may substantially increase relative to rates on the
long-term obligations in which the Fund may be invested.
Under such conditions, the Fund's leveraged capital
structure would result in a greater decline in the net
asset value of the Common Stock and a greater decrease
in the current yield paid to holders of Common Stock
than if the Fund were not leveraged. The Fund will have
the authority to redeem the preferred stock for any
reason and may redeem all or part of the preferred stock
if it anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to
holders of the Common Stock than that obtainable if the
Common Stock were unleveraged for any significant amount
of time or in order to maintain asset coverage required
by the 1940 Act and any nationally recognized rating
agency rating the preferred stock. The leveraging of the
Common Stock would be eliminated during any period that
preferred stock is not outstanding.
Prior to the time it offers the preferred stock, the
Fund intends to apply for ratings on such stock from one
or more nationally recognized rating agencies. The Fund
believes that obtaining a rating for the preferred stock
will enhance the marketability of the preferred stock
and thereby reduce the dividend rate on the preferred
stock from that which the Fund would be required to pay
if the preferred stock were not rated.
INVESTMENT ADVISER Fund Asset Management, L.P. is the Fund's investment
adviser (the "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 0.75 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 many other investment
companies, it is similar to that paid by other
continuously offered closed-end funds. The Investment
Adviser is an affiliate of Merrill Lynch Asset
Management, L.P. ("MLAM"), which is owned and controlled
by Merrill Lynch & Co., Inc. ("ML & Co."). The
Investment Adviser or MLAM acts as the investment
adviser to more than 100 other registered management
investment companies. The Investment Adviser also offers
portfolio management and portfolio analysis services to
individuals and institutions. As of February 28, 1995,
the Investment Adviser and MLAM had a total of
approximately $168.2 billion in investment company and
other portfolio assets under management (approximately
$29.8 billion of which were invested in municipal
securities), including accounts of certain affiliates of
the Investment Adviser. See "Investment Advisory and
Administrative Arrangements."
6
<PAGE> 9
DISTRIBUTIONS The Fund intends to pay dividends monthly and to
distribute substantially all of its net investment
income to holders of Common Stock. From and after
issuance of the preferred stock, monthly distributions
to holders of Common Stock will consist of substantially
all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the
preferred stock. It is expected that the Fund will
commence paying dividends to holders of Common Stock
within approximately 90 days from the date of this
Prospectus. Net capital gains, if any, will be
distributed at least annually to holders of Common Stock
and, after issuance of the preferred stock, on a pro
rata basis to holders of Common Stock and preferred
stock. When capital gains or other taxable income is
allocated to holders of preferred stock under certain
circumstances, it is anticipated that the terms of the
preferred stock will require the Fund to make an
Additional Distribution. The Fund is not permitted to
declare any cash dividend or other distribution on its
Common Stock unless asset coverage (as defined in the
1940 Act) with respect to the Fund's preferred stock is
at least 200%. If the Fund issues preferred stock
representing 35% of its capital after the time of
issuance, its asset coverage with respect to the
preferred stock will be approximately 285%. If the
Fund's ability to make distributions on its Common Stock
is limited, this could under certain circumstances
impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment
company, which would have adverse tax consequences for
holders of Common Stock. See "Taxes."
AUTOMATIC DIVIDEND
REINVESTMENT PLAN All dividend and capital gains distributions will be
automatically reinvested in additional shares of Common
Stock of the Fund unless a shareholder elects to receive
cash. Shareholders whose shares are held in the name of
a broker or nominee should contact such broker or
nominee to confirm that they may participate in the
Fund's dividend reinvestment plan. See "Automatic
Dividend Reinvestment Plan."
7
<PAGE> 10
RISK FACTORS AND SPECIAL CONSIDERATIONS
As a newly organized entity, the Fund has no operating history. See "The
Fund." 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.
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 net asset value of the Fund's shares of Common Stock will fluctuate
with interest rate changes as well as with price changes of the Fund's portfolio
securities, and these fluctuations are likely to be greater in the case of a
fund having a leveraged capital structure, as contemplated for the Fund. See
"Risks and Special Considerations of Leverage."
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 intends to invest at least 75% of its total assets in municipal
obligations that are rated in the investment grade rating categories by Standard
& Poor's Ratings Group, Moody's Investors Service, Inc. or Fitch Investors
Service, Inc. or, if not rated, are considered to be of comparable quality by
the Investment Adviser. Obligations rated in the lowest investment-grade
category have certain speculative characteristics. Additionally, the Fund may
invest up to 25% of its total assets in municipal obligations which are rated
below investment grade or, if not rated, considered by the Investment Adviser to
be of comparable quality. These securities are regarded as predominantly
speculative and investments therein entail certain risks. See "Investment
Objective and Policies." The Fund may invest in certain tax-exempt securities
classified as "private activity bonds" that may subject certain investors in the
Fund to the alternative minimum tax. See "Taxes--General."
The Fund will be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized rating agencies which may issue
ratings for the preferred stock. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed by
the 1940 Act. It is not anticipated that these covenants or guidelines will
impede the Investment Adviser from managing the Fund's portfolio in accordance
with the Fund's investment objective and policies.
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments which may be characterized as
derivatives. These investments include various types of options transactions and
futures and options thereon. Such investments also may consist of non-municipal
tax-exempt securities and indexed securities, including inverse securities. The
Fund has express limitations on the percentage of its assets that may be
committed to certain of such investments. Other of such investments have
8
<PAGE> 11
no express quantitative limitations, although they may be made solely for
hedging purposes, not for speculation, and may in some cases require limitations
as to the type of permissible counter-party to the transaction. Investments in
indexed securities, including inverse securities, subject the Fund to the risks
associated with changes in the particular indices, which may include reduced or
eliminated interest payments and losses of invested principal. For a further
discussion of the risks associated with these investments, see "Investment
Objective and Policies", "Investment Objective and Policies--Other Investment
Policies-- Indexed and Inverse Floating Obligations", "--Call Rights" and
"Investment Objective and Policies-- Options and Futures Transactions."
Subject to its investment restrictions, the Fund is authorized to engage in
options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security which is the subject of the hedge and the inability to close futures
transactions under certain conditions. Because of the anticipated leveraged
nature of the Common Stock, hedging transactions will result in a larger impact
on the net asset value of the Common Stock than would be the case if the Common
Stock were not leveraged. OTC options and assets used to cover OTC options
written by the Fund are considered by the staff of the Securities and Exchange
Commission to be illiquid. The illiquidity of such options or assets may prevent
a successful sale of such options or assets, result in a delay of sale, or
reduce the amount of proceeds that might be otherwise realized. See "Investment
Objective and Policies--Options and Futures Transactions." The Fund intends to
apply for ratings of the preferred stock from one or more nationally recognized
rating agencies. In order to obtain these ratings, the Fund may be required to
limit its use of hedging techniques in accordance with the specified guidelines
of such rating agencies.
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. 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 Plan Fees................................. None
Early Withdrawal Charge (as a percentage of original purchase 3.0% during the first year,
price or net asset value at the time of repurchase)(a)........ decreasing 1.0% annually
thereafter to 0.0% after the
third year
ANNUAL EXPENSES (as a percentage of net assets attributable to
common shares)(b)(c)
Investment Advisory Fee......................................... 0.75%
Administrative Fee.............................................. 0.25%
Shareholder Servicing Fee....................................... %
Interest Payments on Borrowed Funds............................. None
Other Expenses.................................................. %
Total Annual Expenses............................................... %
</TABLE>
- ---------------
(a) See "Early Withdrawal Charge"--page 28.
(b) The expenses set forth in this table do not include expenses associated with
preferred stock, since the costs associated with preferred stock could not
be determined at the date of this Prospectus. See "Risks and Special
Considerations of Leverage"--page 20.
(c) See "Investment Advisory and Administrative Arrangements"--page 31.
<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, (1) total annual expenses of % and (2) a 5%
annual return throughout the periods and (3) tender at the end
of the period................................................. $ * $ * $ $
An investor would pay the following expenses on a $1,000
investment assuming no tender at the end of the period........ $ $ $ $
</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 first fiscal year on an annualized basis.
The Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by the
Securities and Exchange Commission regulations. Also, the Example does not take
into account the issuance of any preferred stock by the Fund. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATES OF RETURN,
AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE. Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and repurchases directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Tender Offers."
10
<PAGE> 13
THE FUND
Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is a newly
organized, continuously offered, non-diversified, closed-end management
investment company. The Fund was incorporated under the laws of the State of
Maryland on July 13, 1994, and has registered under the 1940 Act. The Fund's
principal office is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and its telephone number is (609) 282-2800.
USE OF PROCEEDS
Assuming all shares of Common Stock currently registered are sold in the
initial offering, it is estimated that the net proceeds from the sale of the
Common Stock offered hereby will be $ , after payment of
organizational and offering expenses by the Fund, and will be invested in
accordance with the Fund's investment objective and policies as soon as
practicable after the closing of the subscription offering of Common Stock, but
in no event, under normal market conditions, longer than six months from such
closing date. Pending such investment, it is anticipated that the proceeds will
be invested in short-term, tax-exempt securities. See "Investment Objective and
Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of current income exempt from Federal income taxes as is consistent
with its investment policies and prudent investment management. The Fund seeks
to achieve its investment objective by investing primarily in a portfolio of
long-term, investment grade municipal obligations, the interest on which is
exempt from Federal income taxes in the opinion of bond counsel to the issuer.
The investment objective of the Fund is a fundamental policy that may not be
changed without a vote of a majority of the Fund's outstanding voting
securities, as defined below under "Investment Restrictions." There can be no
assurance that the investment objective of the Fund will be realized. At times
the Fund may seek to hedge its portfolio through the use of futures transactions
and options to reduce volatility in the net asset value of its shares of Common
Stock.
The Fund, at all times, except during temporary defensive periods, will
invest at least 80% of its total assets in a portfolio of obligations issued by
or on behalf of states, territories and possessions of the United States and
their political subdivisions, agencies or instrumentalities paying interest
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income taxes ("Municipal Bonds"). The Fund, at all times, except during
temporary defensive periods, will maintain at least 75% of its total assets in
Municipal Bonds rated investment grade by a nationally recognized statistical
rating organization or, if unrated, are considered to be of comparable quality
by the Investment Adviser. Additionally, the Fund may invest up to 25% of its
total assets in Municipal Bonds which are rated below investment grade by a
nationally recognized statistical rating organization or, if unrated, are
considered to be of comparable quality by the Investment Adviser. Such lower
quality Municipal Bonds are frequently traded only in markets where the number
of potential purchasers and sellers, if any, is very limited. The Fund may
invest in certain tax-exempt securities classified as "private activity bonds"
(in general, bonds that benefit non-governmental entities) that may subject
certain investors in the Fund to an alternative minimum tax. The Fund will not
invest more than 25% of its total assets (taken at market value) in Municipal
Bonds whose issuers are located in the same state.
11
<PAGE> 14
The Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions which are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the 1940 Act. Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term Municipal Bonds. Certain Non-Municipal
Tax-Exempt Securities may be characterized as derivative instruments.
Non-Municipal Tax-Exempt Securities will be considered "Municipal Bonds" for
purposes of the Fund's investment objective and policies.
Investment in shares of Common Stock of the Fund offers several benefits.
The Fund offers investors the opportunity to receive income exempt from Federal
income taxes by investing in a professionally managed portfolio comprised
primarily of investment grade Municipal Bonds. The Fund also relieves the
investor of the burdensome administrative details involved in managing a
portfolio of Municipal Bonds. Additionally, the Investment Adviser will seek to
enhance the yield on the Common Stock by leveraging the Fund's capital structure
through the issuance of preferred stock. The benefits are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the advisory fee, administrative fee and
operational costs. Additionally, the use of leverage involves certain expenses
and special risk considerations. See "Risks and Special Considerations of
Leverage."
The investment grade Municipal Bonds in which the Fund will invest are
those Municipal Bonds rated at the date of purchase in the four highest rating
categories of Standard & Poor's Ratings Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's") or Fitch Investors Service, Inc. ("Fitch") or, if
unrated, are considered to be of comparable quality by the Investment Adviser.
In the case of long-term debt, the investment grade rating categories are AAA
through BBB for S&P, Aaa through Baa for Moody's and AAA through BBB for Fitch.
In the case of short-term notes, the investment grade rating categories are
SP-1+ through SP-3 for S&P, MIG-1 through MIG-4 for Moody's and F-1+ through F-3
for Fitch. In the case of tax-exempt commercial paper, the investment grade
rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for
Moody's and F-1+ through F-3 for Fitch. Obligations ranked in the fourth highest
rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-4 and Prime-3 for Moody's;
and BBB, F-3 and F-3 for Fitch), while considered "investment grade," have
certain speculative characteristics. There may be sub-categories or gradations
indicating relative standing within the rating categories set forth above. See
Appendix I to this Prospectus for a description of S&P's, Moody's and Fitch's
ratings of Municipal Bonds. In assessing the quality of Municipal Bonds with
respect to the foregoing requirements, the Investment Adviser will take into
account the nature of any letters of credit or similar credit enhancement to
which particular Municipal Bonds are entitled and the creditworthiness of the
financial institution which provided such credit enhancement.
As noted above, the Fund may invest up to 25% of its assets in Municipal
Bonds which are rated below investment grade or, if unrated, are considered to
be of comparable quality by the Investment Adviser. These high yield bonds are
commonly referred to as "junk bonds" and are regarded as predominantly
speculative as to the issuer's ability to make payments of principal and
interest. Consequently, although such bonds can be expected to provide higher
yields, they may be subject to greater market price fluctuations and risk of
loss of principal than lower yielding, higher rated fixed income securities.
Such securities are particularly vulnerable to adverse changes in the issuer's
industry and in general economic conditions. Issuers of high yield bonds may
12
<PAGE> 15
be highly leveraged and may not have available to them more traditional methods
of financing. The risk of loss due to default by the issuer is significantly
greater for the holders of these bonds because such securities may be unsecured
and may be subordinated to other creditors of the issuer. In addition, while the
high yield bonds in which the Fund may invest normally will not include
securities which, at the time of investment, are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after the Fund purchases a particular security, in which case the Fund may
experience losses and incur costs.
High yield bonds frequently have call or redemption features that permit an
issuer to repurchase such bond from the Fund, which may decrease the net
investment income to the Fund and dividends to shareholders in the event that
the Fund is required to replace a called security with a lower yielding
security. The Fund may have difficulty disposing of certain high yield bonds
because there may be a thin trading market for such securities. Reduced
secondary market liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations are generally available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Board of Directors and the Investment Adviser will take into
account in assessing the quality of such bonds not only the credit-worthiness of
the issuer of such bonds but also the credit-worthiness of the financial
institutions.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank. The VRDOs in which the Fund will invest are
tax-exempt obligations in the opinion of counsel to the issuer which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand on the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest on a short notice period not to exceed
seven days. Participating VRDOs provide the Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility that
because of default or insolvency, the demand feature of VRDOs or Participating
VRDOs may not be honored. The Fund has been advised by its counsel that the Fund
should be entitled to treat the income received on Participating VRDOs as
interest from tax-exempt obligations.
The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. The
net asset value of the shares of common stock of a closed-end investment
company, such as the Fund, 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. Prices of longer-term securities generally fluctuate
more in response to interest rate changes than do short-term or medium-term
securities. These changes in net asset value are likely to be greater in the
case of a fund having a leveraged capital structure, as proposed for the Fund.
See "Risks and Special Considerations of Leverage."
13
<PAGE> 16
On a temporary basis, the Fund may invest in short-term, tax-exempt
securities, short-term U.S. Government securities, repurchase agreements or
cash. Such securities or cash will not exceed 20% of its total assets except
during interim periods pending investment of the net proceeds of public
offerings of the Fund's securities and temporary defensive periods when, in the
opinion of the Investment Adviser, prevailing market or economic conditions
warrant. The Fund does not ordinarily intend to realize significant interest
income not exempt from Federal income tax.
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 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 MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refinancing of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to finance various privately operated facilities, including
pollution control facilities. For purposes of this Prospectus, such obligations
are Municipal Bonds if the interest paid thereon is exempt from Federal income
tax, even though such bonds may be "private activity bonds" as discussed below.
Also, for purposes of this Prospectus, Non-Municipal Tax-Exempt Securities as
discussed above will be considered Municipal Bonds.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special obligation" bonds. General obligation
bonds are secured by the issuer's pledge of faith, credit and taxing power for
the payment of principal and interest. Revenue or special obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as from the user of the facility being financed.
Industrial development bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the issuer of
such bonds. The payment of the principal and interest on such industrial
development bonds depends solely on the ability of the user of the facility
financed by the bonds to meet its financial obligations and the pledge, if any,
of real and personal property so financed as security for such payment.
Municipal Bonds may also include "moral obligation" bonds which are normally
issued by special purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of such bonds becomes a
moral commitment but not a legal obligation of the state or municipality in
question.
14
<PAGE> 17
The Fund may purchase Municipal Bonds classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities which are classified as "private
activity bonds" may subject certain investors in the Fund to an alternative
minimum tax. There is no limitation on the percentage of the Fund's assets that
may be invested in Municipal Bonds which may subject certain investors to an
alternative minimum tax. See "Taxes--General." Also included within the general
category of Municipal Bonds are participation certificates issued by government
authorities or entities to finance the acquisition or construction of equipment,
land and/or facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively referred to as "lease obligations") relating to such equipment,
land or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the issuer's unlimited taxing power is
pledged, a lease obligation frequently is backed by the issuer's covenant to
budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses which
provide that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of financing
that has not yet developed the depth of marketability associated with more
conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5%
of the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to
33 1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise, to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known as
"leveraging") create an opportunity for greater total return since the Fund will
not be required to sell portfolio securities to purchase tendered shares 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.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Municipal Bonds on a delayed delivery basis or when-issued
basis at fixed purchase or sale terms. These transactions arise when securities
are purchased or sold by the Fund with payment and delivery taking place in the
future. The purchase will be recorded on the date the Fund enters into the
commitment, and the value of the obligation will thereafter be reflected in the
calculation of the Fund's net asset value. The value of the obligation on the
delivery day may be more or less than its purchase price. A separate account of
the Fund will be established with its custodian consisting of cash, cash
equivalents or liquid Municipal Bonds having a market value at all times at
least equal to the amount of the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in Municipal
Bonds the return on which is based on a particular index of value or interest
rates. For example, the Fund may invest in Municipal
15
<PAGE> 18
Bonds that pay interest based on an index of Municipal Bond interest rates or
based on the value of gold or some other product. The principal amount payable
upon maturity of certain Municipal Bonds also may be based on the value of an
index. To the extent the Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index. Also, the Fund may invest in so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically vary inversely with a short-term floating rate (which
may be reset periodically by a dutch auction, a remarketing agent, or by
reference to a short-term tax-exempt interest rate index). The Fund may purchase
in the secondary market synthetically-created inverse floating rate bonds
evidenced by custodial or trust receipts. Generally, interest rates on inverse
floating rate bonds will decrease when short-term rates increase, and will
increase when short-term rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates at
a rate which is a multiple (typically two) of the rate at which fixed-rate,
long-term, tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities generally will be
more volatile than the market values of fixed-rate tax-exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase inverse
floating obligations with shorter-term maturities or which contain limitations
on the extent to which the interest rate may vary. The Investment Adviser
believes that indexed and inverse floating obligations represent a flexible
portfolio management instrument for the Fund which allows the Investment Adviser
to vary the degree of investment leverage relatively efficiently under different
market conditions.
Call Rights. The Fund may purchase a Municipal Bond issuer's right to call
all or a portion of such
Municipal Bond for mandatory tender for purchase (a "Call Right"). A holder of a
Call Right may exercise such right to require a mandatory tender for the
purchase of related Municipal Bonds, subject to certain conditions. A Call Right
that is not exercised prior to the maturity of the related Municipal Bond will
expire without value. The economic effect of holding both the Call Right and the
related Municipal Bond is identical to holding a Municipal Bond as a
non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract, to repurchase the security at a mutually agreed
upon time and price, thereby determining the yield during the term of the
agreement. The Fund may not invest in repurchase agreements maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 10% of the Fund's net assets. In the event of default
by the seller under a repurchase agreement, the Fund may suffer time delays and
incur costs or possible losses in connection with the disposition of the
underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
The treatment of purchase and sale contracts is less certain. However, it is
likely that income from such arrangements also will not be considered tax-exempt
interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts. While the Fund's use of hedging strategies is
16
<PAGE> 19
intended to reduce the volatility of the net asset value of Common Stock, the
net asset value of the Common Stock will fluctuate. There can be no assurance
that the Fund's hedging transactions will be effective. In addition, because of
the anticipated leveraged nature of the Common Stock, hedging transactions will
result in a larger impact on the net asset value of the Common Stock than would
be the case if the Common Stock was not leveraged. Furthermore, the Fund will
only engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in interest rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the preferred stock from one or more rating agencies,
the Fund may be required to limit its use of hedging techniques in accordance
with the specified guidelines of such rating agencies.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and risks
associated therewith. The investment policies with respect to the hedging
transactions of the Fund are not fundamental policies and may be modified by the
Board of Directors of the Fund without the approval of the Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Municipal Bonds it owns, thereby giving the holder of
the option the right to buy the underlying security covered by the option from
the Fund at the stated exercise price until the option expires. The Fund writes
only covered call options, which means that so long as the Fund is obligated as
the writer of a call option, it will own the underlying securities subject to
the option. The Fund may not write covered call options on underlying securities
in an amount exceeding 15% of the market value of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as a writer continues. Covered call options serve as a partial hedge
against a decline in the price of the underlying security. The Fund may engage
in closing transactions in order to terminate outstanding options that it has
written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put expires. The
amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be sold in
a closing sale transaction; profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option
plus the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale of
an identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund will not purchase options on securities if, as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
17
<PAGE> 20
Financial Futures Contracts and Options. The Fund is authorized to
purchase and sell certain financial futures contracts ("financial futures
contracts") and options thereon solely for the purpose of hedging its
investments in Municipal Bonds against declines in value and to hedge against
increases in the cost of securities it intends to purchase. A financial futures
contract obligates the seller of a contract to deliver and the purchaser of a
contract to take delivery of the type of financial instrument covered by the
contract or, in the case of index-based futures contracts, to make and accept a
cash settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or in
part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge against
an increase in the cost of securities intended to be purchased because such
appreciation may be offset, in whole or in part, by an increase in the value of
the position in the futures contracts.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately 5%
of the contract amount must be deposited with the broker. This amount is known
as initial margin. Subsequent payments to and from the broker, called variation
margin, are made on a daily basis as the price of the futures contract
fluctuates making the long and short positions in the futures contract more or
less valuable.
The Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of
40 large tax-exempt issues, and purchase and sell put and call options on such
futures contracts for the purpose of hedging Municipal Bonds which the Fund
holds or anticipates purchasing against adverse changes in interest rates. The
Fund also may purchase and sell financial futures contracts on U.S. Government
securities and purchase and sell put and call options on such futures contracts
for such hedging purposes. With respect to U.S. Government securities, currently
there are financial futures contracts based on long-term U.S. Treasury bonds,
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts and options, such as
financial futures contracts and options on other municipal bond indices which
may become available, if the Investment Adviser should determine that there is
normally sufficient correlation between the prices of such futures contracts and
the Municipal Bonds in which the Fund invests to make such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC option
transactions are two-party contracts with prices and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or with affiliates of such banks or dealers which
have capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million or any other bank or dealer having
capital of at least $150 million or whose obligations are guaranteed by an
entity having capital of at least $150 million. OTC options and
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<PAGE> 21
assets used to cover OTC options written by the Fund are considered by the staff
of the Securities and Exchange Commission to be illiquid. The illiquidity of
such options or assets may prevent a successful sale of such options or assets,
result in a delay of sale, or reduce the amount of proceeds that might otherwise
be realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts and movements in the price of the security which is
the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of such security. There is a risk of imperfect correlation where
the securities underlying futures contracts have different maturities, ratings,
geographic compositions or other characteristics than the security being hedged.
In addition, the correlation may be affected by additions to or deletions from
the index which serves as a basis for a financial futures contract. Finally, in
the case of futures contracts on U.S. Government securities and options on such
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and Municipal Bonds
may be adversely affected by economic, political, legislative or other
developments which have a disparate impact on the respective markets for such
securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, the Fund may purchase and
sell futures contracts and options thereon (i) for bona fide hedging purposes,
without regard to the percentage of the Fund's assets committed to margin and
option premiums, and (ii) for non-hedging purposes if, immediately thereafter,
the sum of the amount of initial margin deposits on the Fund's existing futures
positions and option premiums entered into for non-hedging purposes do not
exceed 5% of the market value of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any such
transactions. Margin deposits may consist of cash or securities acceptable to
the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
short-term, high-grade, fixed-income securities in a segregated account with the
Fund's custodian so that the amount so segregated plus the amount of initial and
variation margin held in the account of its broker equals the market value of
the futures contract, thereby ensuring that the use of such futures contract is
unleveraged.
Although certain risks are involved in options and futures transactions,
the Investment Adviser believes that, because the Fund will engage in options
and futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions. The
Fund may be restricted in engaging in options and futures transactions due to
the requirement that less than 30% of its gross income in each taxable year be
derived from the sale or other disposition of securities held for less than
three months. See "Taxes--Tax Treatment of Options and Futures Transactions."
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<PAGE> 22
The volume of trading in the exchange markets with respect to Municipal
Bond options may be limited, and it is impossible to predict the amount of
trading interest that may exist in such options. In addition, there can be no
assurance that viable exchange markets will continue.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures transaction. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with which the Fund has an open position in an option or futures
contract.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices have in the past moved beyond the daily limit on a number of
consecutive trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a futures contract is held by the Fund or move
in a direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in the
value of portfolio securities. As a result, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to time
and may not necessarily be engaging in hedging transactions when movements in
interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately six months after the completion of the subscription
offering of shares of Common Stock, the Fund intends to offer shares of
preferred stock representing up to approximately 35% of the Fund's capital.
There can be no assurance, however, that preferred stock representing such
percentage of the Fund's capital will actually be issued. The issuance of the
preferred stock will result in the leveraging of the Common Stock. Although the
terms of the preferred stock offering will be determined by the Fund's Board of
Directors, it is anticipated that the preferred stock will pay dividends that
will be adjusted over either relatively short-term periods (generally seven to
28 days) or medium-term periods (up to five years) and that the dividend rate
will be based upon prevailing interest rates for debt obligations of comparable
maturity. The proceeds of the preferred stock offering will be invested in
longer-term obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne by the Fund
and will
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<PAGE> 23
reduce the net asset value of the Common Stock. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to holders
of preferred stock, it is anticipated that the terms of the preferred stock will
require the Fund to make an additional distribution to such holders in an amount
approximately equal to the tax liability resulting from such allocation and such
additional distribution (such amount, an "Additional Distribution"). Because
under normal market conditions, obligations with longer maturities produce
higher yields than short-term and medium-term obligations, the Investment
Adviser believes that the spread inherent in the difference between the
short-term and medium-term rates (and any Additional Distributions) paid by the
Fund as dividends on the preferred stock and the longer-term rates received by
the Fund will provide holders of Common Stock with a potentially higher yield.
Utilization of leverage, however, involves certain risks to the holders of
Common Stock. For example, issuance of the preferred stock may result in higher
volatility of the net asset value of the Common Stock and potentially more
volatility in the market value of the Common Stock. In addition, fluctuations in
the short-term and medium-term dividend rates on, and the amount of taxable
income allocable to, the preferred stock will affect the yield to holders of
Common Stock. So long as the Fund, taking into account the costs associated with
the preferred stock and the Fund's operating expenses, is able to realize a
higher net return on its investment portfolio than the then current dividend
rate (and any Additional Distribution) of the preferred stock, the effect of
leverage will be to cause holders of Common Stock to realize a higher current
rate of return than if the Fund were not leveraged. Similarly, since a pro rata
portion of the Fund's net realized capital gains on its investment assets are
generally payable to holders of Common Stock, if net capital gains are realized
by the Fund, the effect of leverage will be to increase the amount of such gains
distributed to holders of Common Stock. However, short-term, medium-term and
long-term interest rates change from time to time as does their relationship to
each other (i.e., the slope of the yield curve) depending upon such factors as
supply and demand forces, monetary and tax policies and investor expectations.
Changes in such factors could cause the relationship between short-term,
medium-term and long-term rates to change (i.e., to flatten or to invert the
slope of the yield curve) so that short-term and medium-term rates may
substantially increase relative to the long-term obligations in which the Fund
may be invested. To the extent that the current dividend rate (and any
Additional Distribution) on the preferred stock approaches the net return on the
Fund's investment portfolio, the benefit of leverage to holders of Common Stock
will be reduced, and if the current dividend rate (and any Additional
Distribution) on the preferred stock were to exceed the net return on the Fund's
portfolio, the Fund's leveraged capital structure would result in a lower
current yield to holders of Common Stock than if the Fund were not leveraged.
Similarly, since both the costs associated with the issuance of preferred stock
and any decline in the value of the Fund's investments (including investments
purchased with the proceeds from any preferred stock offering) will be borne
entirely by holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value to holders of
Common Stock than if the Fund were not leveraged.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended. See
"Taxes." The Fund intends, however, to take all measures necessary to continue
to make Common Stock dividend payments. If the Fund's current investment income
were not sufficient to meet dividend requirements on either the Common Stock or
the preferred stock, it could be necessary for the Fund to liquidate certain of
its investments. In addition, the Fund will have the authority to redeem the
preferred stock for any reason and may redeem all or part of the preferred stock
if (i) it anticipates that the Fund's leveraged capital structure
21
<PAGE> 24
will result in a lower rate of return for any significant amount of time to
holders of the Common Stock than that obtainable if the Common Stock were
unleveraged, (ii) the asset coverage for the preferred stock declines below
200%, either as a result of a decline in the value of the Fund's portfolio
investments or as a result of the repurchase of Common Stock in tender offers,
or (iii) in order to maintain the asset coverage guidelines established by
nationally recognized rating agencies rating the preferred stock. Redemption of
the preferred stock or insufficient investment income to make dividend payments
may reduce the net asset value of the Common Stock and require the Fund to
liquidate a portion of its investments at a time when it may be disadvantageous,
in the absence of such extraordinary circumstances, to do so.
Until the preferred stock is issued, the Fund's Common Stock will not be
leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Common Stock
cannot be fully achieved until the proceeds of the offering of preferred stock
have been invested in long-term Municipal Bonds. In addition, the leveraging of
the Common Stock would be eliminated during any period that preferred stock is
not outstanding.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term or medium-term rates or other
change in 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. The Fund also may attempt to reduce the degree to
which it is leveraged by redeeming preferred stock pursuant to the provisions of
the Fund's Articles Supplementary establishing the rights and preferences of the
preferred stock or otherwise purchasing shares of preferred stock. Purchases and
redemptions of preferred stock, whether through redemptions, on the open market
or in negotiated transactions, are subject to limitations under the 1940 Act. If
market conditions subsequently change, the Fund may sell previously unissued
shares of preferred stock or shares of preferred stock that the Fund previously
issued but later repurchased or redeemed.
The Fund intends to apply for ratings of the preferred stock from one or
more nationally recognized rating agencies. In order to obtain these ratings,
the Fund may be required to maintain portfolio holdings meeting specified
guidelines of such rating agencies. These guidelines may impose asset coverage
requirements that are more stringent than those imposed by the 1940 Act. It is
not anticipated that these guidelines will impede the Investment Adviser from
managing the Fund's portfolio in accordance with the Fund's investment objective
and policies.
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 the original purchase price of the outstanding shares
of preferred stock plus any accumulated and unpaid dividends thereon and any
accumulated and unpaid Additional Distribution). 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. Under the Fund's
proposed capital structure, assuming the sale of shares of preferred stock
representing approximately 35% of the Fund's capital, the net asset value of the
Fund's portfolio is expected to be approximately 285% of the liquidation value
of the Fund's preferred stock. To the extent possible, the Fund
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<PAGE> 25
intends to purchase or redeem shares of preferred stock from time to time to
maintain coverage of preferred stock of at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and,
prior to issuance of the 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 the 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 outstanding shares
of 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. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided that the Fund may invest in
securities directly or indirectly secured by real estate or interests
therein or issued by companies that invest in real estate or interests
therein, and the Fund may purchase and sell financial futures contracts and
options thereon.
3. Issue senior securities or borrow money, except as permitted by
Section 18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
5. Make loans to other persons, except that the Fund may purchase
Municipal Bonds and other debt securities in accordance with its investment
objective, policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed by
the Board of Directors, provide that the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings
23
<PAGE> 26
mentioned in investment restriction (3) above or except as may be necessary
in connection with transactions in financial futures contracts and options
thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on Municipal Bonds, U.S.
Government obligations and related indices or otherwise in connection with
bona fide hedging activities and may purchase and sell Call Rights to
require mandatory tender for the purchase of related Municipal Bonds.
e. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
f. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Securities subject to this
restriction and to restriction (e) above shall not together exceed 15% of
the Fund's total assets.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. 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 transactions will be purchases from or sales to
Merrill Lynch of securities in transactions in which it acts as principal. An
exemptive order has been obtained which permits the Fund to effect principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities subject to conditions set forth in such order. The Fund may consider
in the future requesting an order permitting other principal transactions with
Merrill Lynch, but there can be no assurance that such application will be made
and, if made, that such order would be granted.
PURCHASE OF SHARES
SUBSCRIPTION OFFERING
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
the Investment Adviser, MLAM and Merrill Lynch, acts as the distributor of
shares of Common Stock of the Fund.
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<PAGE> 27
The Distributor, and other securities dealers which have entered into
selected dealer agreements with the Distributor, including Merrill Lynch, will
solicit subscriptions for shares of the Fund during a period expected to end on
April , 1995. The subscription period may be extended for up to an additional
30 days upon agreement between the Fund and the Distributor. On the fifth
business day after the conclusion of the subscription period, the subscriptions
will be payable, the shares will be issued and the Fund will commence
operations. The subscription offering may be terminated by the Fund or the
Distributor any time, in which event no shares will be issued (and, therefore,
the Fund will not commence operations, no amounts will be payable by subscribers
and any payments by subscribers will be refunded in full without interest) or a
limited number of shares will be issued.
The public offering price of the shares during the subscription offering is
$10.00 without a front-end sales charge (although in certain cases an Early
Withdrawal Charge may apply as described herein). The minimum initial purchase
for shares of Common Stock during the subscription offering is $1,000.
The proceeds per share to the Fund from the sale of all shares sold during
the subscription period will be $10.00. As set forth below, the Distributor may
make payments to Merrill Lynch or other selected dealers from its own assets.
Due to the administrative complexities associated with the subscription
offering, administrative errors may result in the Distributor or 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 Common Stock will not be subject to any investment restriction
and may be resold pursuant to this Prospectus.
CONTINUOUS OFFERING
After completion of the subscription offering, the Fund expects to engage
in a continuous offering of its shares of Common Stock through the Distributor
and other securities dealers which have entered into selected dealer agreements
with the Distributor, including Merrill Lynch. During the continuous offering,
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 during the continuous offering is $1,000 and
the minimum subsequent purchase is $50.
To permit the Fund to invest the net proceeds from the sale of its shares
of Common Stock in an orderly manner, the Fund may delay the commencement of the
continuous offering of its shares of Common Stock or, from time to time, suspend
the sale of its shares of Common Stock, except for sales to existing holders of
Common Stock and dividend reinvestments.
The Fund is offering its shares of Common Stock during the continuous
offering at a public offering price equal to the next determined net asset value
per share without a front-end sales charge (although in certain cases an Early
Withdrawal Charge may apply as described herein). The applicable offering price
for purchase orders is based on the net asset value of the Fund next determined
after receipt of the purchase order by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York time), which includes orders
received after the determination of net asset value 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 New York Stock Exchange on the day
the order is placed with the Distributor, provided the order is received by the
Distributor prior to 30 minutes after the
25
<PAGE> 28
close of business on the New York Stock Exchange on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the New York Stock Exchange, 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 to the general public 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.
The Distributor compensates Merrill Lynch and other selected dealers at a
rate of 3.0% of amounts subscribed for during the subscription period or
purchased during the continuous offering. If the shares remain outstanding after
one year from the date of their original purchase, the Distributor will
compensate Merrill Lynch and such dealers at an annual rate equal to 0.25% of
the value of Fund shares sold by Merrill Lynch and such dealers and remaining
outstanding. These amounts do not represent an expense to the Fund and its
shareholders since the 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 net 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").
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholder's name will be opened
automatically, without charge, 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"). The Board of Directors presently intends to make Tender Offers on a
quarterly basis, commencing with the second quarter of Fund operations. 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 "Investment Objective
and Policies--Other Investment Policies--Borrowings."
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<PAGE> 29
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, 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 the Fund's holders of 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.
Furthermore, if the Fund borrows to finance the making of Tender Offers,
interest on such borrowing will 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 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, including any preferred stock. 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, including any preferred
stock, being reduced below the asset coverage requirement set forth in the 1940
Act or, with respect to preferred stock, the asset coverage requirements of any
nationally recognized statistical rating agency rating the preferred stock.
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, including any preferred stock,
to maintain the required asset coverage. See "Risks and Special Considerations
of Leverage--Portfolio Management and Other 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.
27
<PAGE> 30
The Fund is seeking 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. If issued, the Fund expects that the exemption will be 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 Directors may consider
is the listing of the Fund's Common Stock 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 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.
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 addition, the Early Withdrawal
Charge is not imposed on shares derived from reinvestments of dividends or
28
<PAGE> 31
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%
</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
$12.00 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 $6,000), 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 $2.00 per share. Therefore, $4,000
of the $6,000 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the second year after purchase).
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 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
ARTHUR ZEIKEL (62)--President and Director(1)(2)--President and Chief
Investment Officer of the Investment Adviser (which term, as used herein,
includes the Investment Adviser's corporate predecessors) since 1977; President
of MLAM (which term, as used herein, includes MLAM's corporate predecessors)
since 1977 and Chief Investment Officer since 1976; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of ML & Co. since 1990; Executive Vice President of Merrill Lynch
since 1990 and a Senior Vice President thereof from 1985 to 1990; Director of
the Distributor.
29
<PAGE> 32
RONALD W. FORBES (54)--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 (42)--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, 1985-1989; Assistant Professor, Graduate School of
Business Administration, the University of Michigan, 1979-1985; Director, UNUM
Corporation.
CHARLES C. REILLY (63)--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 since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association; Director, Small Cities CableVision.
KEVIN A. RYAN (63)--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder, current Director and Professor at the Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University from 1982 until 1994; Formerly taught on the
faculties of the University of Chicago, Stanford University and The Ohio State
University.
RICHARD R. WEST (57)--Director(2)--482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance, 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), Alexander's
Inc. (real estate company), Bowne & Co., Inc. (financial printer), Smith Corona
(manufacturer of typewriters and word processors) and Re Capital Corp.
(reinsurance holding company).
TERRY K. GLENN (54)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of the
Distributor since 1986 and Director thereof since 1991.
VINCENT R. GIORDANO (50)--Senior Vice President(1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993; Vice President of MLAM from 1980 to 1984.
DONALD C. BURKE (34)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1981 to
1990.
KENNETH A. JACOB (43)--Vice President(1)(2)--Vice President of MLAM since
1984.
GERALD M. RICHARD (45)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Treasurer of the Distributor
since 1984 and Vice President since 1981.
30
<PAGE> 33
MARK B. GOLDFUS (48)--Secretary(1)(2)--Vice President of the Investment
Adviser and MLAM since 1985.
- ------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee, officer or member of the
advisory board of one or more investment companies for which the Investment
Adviser or MLAM acts as investment adviser.
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors, and
the remaining Directors will be elected by all holders of capital stock, voting
as a single class. See "Description of Capital Stock."
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser an
annual fee of $2,000 per year plus $400 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings. The
Fund also compensates members of its Audit Committee, which consists of all of
the Directors not affiliated with the Investment Adviser, at a rate of $1,000
per meeting attended. The Chairman of the Audit Committee receives an additional
fee of $1,000 per year.
The following table sets forth compensation to be paid by the Fund to the
non-interested Directors projected through the end of the Fund's first fiscal
year and for the calendar year ended December 31, 1994 the aggregate
compensation paid by all investment companies advised by the Investment Adviser
and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-interested
Directors.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM FUND FUND EXPENSE DIRECTORS
- ---------------------------------------------- ------------ -------------------- ----------------
<S> <C> <C> <C>
Ronald W. Forbes(1)........................... $6,600 None $157,400
Cynthia A. Montgomery(1)...................... $6,600 None $125,533
Charles C. Reilly(1).......................... $6,600 None $278,900
Kevin A. Ryan(1).............................. $6,600 None $157,400
Richard R. West(1)............................ $7,600 None $296,900
</TABLE>
- ---------------
(1) In addition to the Fund, the Directors serve on the boards of other FAM/MLAM
Advised Funds as follows: Mr. Forbes (24 boards); Ms. Montgomery (24
boards); Mr. Reilly (41 boards); Mr. Ryan (24 boards); and Mr. West (41
boards).
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM and is owned and controlled
by ML & Co., a financial services holding company. The Investment Adviser will
provide the Fund with investment advisory and management services. The
Investment Adviser or MLAM acts as the investment adviser for over 100 other
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio
31
<PAGE> 34
analysis services to individuals and institutions. As of February 28, 1995, the
Investment Adviser and MLAM had a total of approximately $168.2 billion in
investment company and other portfolio assets under management (approximately
$29.8 billion of which were invested in municipal securities), including
accounts of certain affiliates of the Investment Adviser. The principal business
address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
The Investment Advisory Agreement with the Investment Adviser (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 (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund.
Vincent R. Giordano and Kenneth A. Jacob, for whom biographical information
is set forth above under "Directors and Officers," are the portfolio managers
for the Fund.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.75 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). 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. 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,
charges of any auction agent and broker-dealers in connection with preferred
stock of the Fund, expenses of registering shares of common stock and preferred
stock under Federal and state securities laws, fees and expenses with respect to
any issuance of preferred stock 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 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.
32
<PAGE> 35
The Investment Adviser may pay a portion of the fee received pursuant to the
Administration Agreement to its affiliate, Merrill Lynch, for administrative
services rendered in connection with any preferred stock of the Fund. 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 other
continuously offered, closed-end funds.
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 continue in effect for a period of two years from
the date of execution and will remain in effect from year to year thereafter if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contracts 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 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 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 U.S. Government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time
33
<PAGE> 36
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. 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 for the Common Stock 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 of
Common Stock 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.
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 brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the best
price and execution, securities firms 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.
The securities in which the Fund primarily will invest are traded 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 except that, pursuant to an exemptive order
obtained by the Investment Adviser, the Fund may engage in principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities. See "Investment Restrictions." An affiliated person of the Fund may
serve as its broker in over-the-counter transactions conducted on an agency
basis.
The Fund may also make loans to tax-exempt borrowers in individually
negotiated transactions with the borrower. Because an active trading market may
not exist for such securities, the prices that the Fund may pay
34
<PAGE> 37
for these securities or receive on their resale may be lower than that for
similar securities with a more liquid market.
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 action, for defensive or other reasons, appears
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 after the Fund's
portfolio is invested in accordance with its investment objective, 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.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends
from such net investment income will be declared and paid monthly to holders of
Common Stock. It is expected that the Fund will commence paying dividends to
holders of Common Stock within approximately 90 days of the date of this
Prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of Common Stock normally will consist of substantially
all net investment income remaining after the payment of dividends on the
preferred stock (including any Additional Distribution). All net realized long-
or short-term capital gains, if any, will be distributed at least annually to
holders of Common Stock and, after issuance of the preferred stock, pro rata to
holders of Common Stock and preferred stock. 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, including any Additional
Distribution, 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 equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid dividends
thereon and any accumulated but unpaid Additional Distribution). This limitation
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 "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 may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
35
<PAGE> 38
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, in any taxable year in
which it distributes at least 90% of its taxable net income and 90% of its
tax-exempt 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 such income.
The Fund intends to qualify to pay "exempt-interest dividends" as defined
in Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60 days
after the close of its taxable year. Exempt-interest dividends may be treated by
shareholders as items of interest excludable from their gross income under Code
Section 103(a). Exempt-interest dividends are included, however, in determining
the portion, if any, of a person's Social Security and railroad retirement
benefits subject to Federal income taxes. The Fund will inform shareholders
annually as to the portion of the Fund's distributions that constitutes
"exempt-interest dividends." Interest on indebtedness incurred or continued to
purchase or carry Fund shares is not deductible for Federal income tax purposes.
Each shareholder is advised to consult a tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Code Section 103(a) if such
shareholder would be treated as a "substantial user" or "related person" under
Code Section 147(a) with respect to property financed with the proceeds of an
issue of "industrial development bonds" or "private activity bonds," if any,
held by the Fund.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
will be considered ordinary income for Federal income tax purposes.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Distributions by the Fund, whether from exempt-interest income, ordinary
income or capital gains, will not be eligible for the dividends received
deduction allowed to corporations under the Code. Under the Revenue
Reconciliation Act of 1993, all or a portion of the Fund's gain from the sale or
redemption of tax-exempt obligations purchased at a market discount will be
treated as ordinary income rather than capital gain. This rule may increase the
amount of ordinary income dividends received by shareholders. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are held
as a capital asset). Any loss upon the sale or exchange of Fund shares held for
six months or less will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. In addition, such loss
will be disallowed to the extent of any exempt-interest dividends received by
the shareholder. If the Fund pays a dividend in January which was
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declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend or distribution
will be treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
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 exempt-interest income and 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 such year that was paid to such class. Consequently, when 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, the Fund
will designate dividends paid as exempt-interest dividends in a manner that
allocates such dividends 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. Capital gain dividends will
similarly be allocated between the two classes in proportion to the total
dividends paid to each class during the taxable year, or otherwise as required
by applicable law. When capital gain or other taxable income is allocated to
holders of preferred stock pursuant to the allocation rules described above, the
terms of the preferred stock may require the Fund to make an additional
distribution to or otherwise compensate such holders for the tax liability
resulting from such allocation.
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 required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid the imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will apply
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference" which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund intends to
purchase such "private activity bonds" and will report to shareholders within 60
days after its taxable year-end the portion of its dividends declared during the
year which constitutes an item of tax preference for alternative minimum tax
purposes. The Code further provides that corporations are subject to an
alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation's "adjusted
current earnings" (which more closely reflects a corporation's economic income).
Because an exempt-interest dividend paid by the Fund will be included in
adjusted current earnings, a corporate shareholder may be required to pay an
alternative minimum tax on exempt-interest dividends paid by the Fund.
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The Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases may affect an individual investor's after-tax return from
an investment in the Fund as compared with such investor's return from taxable
investments.
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. Upon any failure to
meet the asset coverage requirements 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
taxable and tax-exempt interest 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 currently contemplates issuing may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code and therefore not eligible for the dividends-paid
deduction. The Fund intends to issue preferred stock that counsel advises will
not result in the payment of a preferential dividend and may seek a private
letter ruling from the Internal Revenue Service to that effect. If the Fund
ultimately relies solely on a legal opinion when 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. In this case,
dividends on the Common Stock would not be exempt from Federal income taxes.
Additionally, the Fund would be subject to the alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan which have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the Fund's
shares) could be viewed as a taxable distribution. If the discount is viewed as
a taxable distribution, it is also possible that the taxable character of this
discount would be allocable to all the shareholders, including shareholders who
do not participate in the dividend reinvestment plan. Thus, shareholders who do
not participate in the dividend reinvestment plan might be required to report as
ordinary income a portion of their distributions equal to their allocable share
of the discount.
The foregoing description relates only to Federal income taxes; investors
should consult with their tax advisers as to the availability of any exemptions
from state or local taxes.
Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on certain ordinary income dividends and on 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
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<PAGE> 41
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.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident 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. Non-resident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative minimum tax net operating loss deduction and the
deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of
alternative minimum taxable income in excess of $2,000,000. The Environmental
Tax is imposed for taxable years beginning after December 31, 1986, and before
January 1, 1996. The Environmental Tax is imposed even if the corporation is not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeds its minimum tax liability. The Code provides,
however, that a RIC, such as the Fund, is not subject to the Environmental Tax.
However, exempt-interest dividends paid by the Fund that create alternative
minimum tax preferences for corporate shareholders (as described above) may
subject corporate shareholders of the Fund to the Environmental Tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is available
to the Fund or an exception applies, such options and financial futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each option
or financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year and any gain or loss attributable to Section
1256 contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in financial futures contracts and related
options. Under Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain closing transactions in financial
futures contracts or related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an option or financial futures contract.
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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 in the shareholder's hands 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 non-tendering
holders of Common Stock in connection 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 an exchange, the proceeds received will be treated as a
taxable dividend, 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, as well as a remote risk that the remaining
shareholders may be considered to have received a deemed distribution.
STATE AND LOCAL TAXES
The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in an exemption for such dividends under the income or
other tax laws of any state or local taxing authority. Shareholders are advised
to consult their own tax advisers concerning state and local tax matters.
------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions on the Common Stock of the
Fund are reinvested automatically in full and fractional shares of Common Stock
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."
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NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
P.M., New York time), on each day during which the New York Stock Exchange is
open for trading. For purposes of determining the net asset value of a share of
Common Stock, the value of the securities held by the Fund plus any cash or
other assets (including interest accrued but not yet received) minus all
liabilities (including accrued expenses) and the aggregate liquidation value of
the outstanding shares of preferred stock is divided by the total number of
shares of Common Stock outstanding at such time. Expenses, including the fees
payable to the Investment Adviser, are accrued daily.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in the over-the-counter markets. In determining net
asset value, the Fund utilizes the valuations of portfolio securities furnished
by a pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. Municipal Bonds for which quotations are
not readily available are valued at fair market value on a consistent basis as
determined by the pricing service using a matrix system to determine valuations.
The procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Board of Directors.
The Board of Directors has determined in good faith that the use of a pricing
service is a fair method of determining the valuation of portfolio securities.
Obligations with remaining maturities of 60 days or less are valued at amortized
cost, unless this method no longer produces fair valuations. Positions in
futures contracts are valued at closing prices for such contracts established by
the exchange on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption. Within
approximately six months after completion of the offering of Common Stock
described herein, the Fund intends to reclassify an amount of unissued Common
Stock as preferred stock and at that time to offer shares of preferred stock
representing up to approximately 35% of the Fund's capital.
COMMON STOCK
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Holders of Common Stock are entitled to share pro rata in the
net assets of the Fund available for distribution to holders of Common Stock
upon liquidation of the Fund. Holders of Common Stock are entitled to one vote
for each share held.
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. See "Preferred Stock" below.
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The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of Common Stock of the Fund for $100,000. As of the
date of this Prospectus, the Investment Adviser owned 100% of the outstanding
shares of Common Stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
PREFERRED STOCK
It is anticipated that the Fund's shares of preferred stock will be issued
in one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of Common
Stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distributions of assets of the Fund or the payment of
dividends. Holders of Common Stock have no preemptive right to purchase any
shares of preferred stock that might be issued. It is anticipated that the net
asset value per share of the preferred stock will equal its original purchase
price per share plus accumulated dividends per share.
The Fund's Board of Directors has indicated its intention to authorize an
offering of shares of preferred stock (representing up to approximately 35% of
the Fund's capital) within approximately six months after completion of the
offering of Common Stock, subject to market conditions and to the Board's
continuing to believe that leveraging the Fund's capital structure through the
issuance of preferred stock is likely to achieve the benefits to the holders of
Common Stock described in the Prospectus. Although the terms of the preferred
stock, including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Directors (subject to
applicable law and the Fund's Articles of Incorporation), the initial series of
preferred stock will be structured to carry either a relatively short-term
dividend rate, in which case periodic redetermination of the dividend rate will
be made at relatively short intervals (generally seven or 28 days), or a
medium-term dividend rate, in which case periodic redetermination of the
dividend rate will be made at intervals of up to five years. In either case,
such redetermination of the dividend rate will be made through an auction or
remarketing procedure. Additionally, under certain circumstances, when the Fund
is required to allocate taxable income to holders of the preferred stock, it is
anticipated that the terms of the preferred stock will require the Fund to make
an Additional Distribution (as defined in "Risks and Special Considerations of
Leverage--Effects of Leverage") to such holders. The Board also has indicated
that it is likely that the liquidation preference, voting rights and redemption
provisions of the preferred stock will be as stated below. The Fund's Articles
of Incorporation, as amended, together with any Articles Supplementary, is
referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of Common Stock. After payment of the
full amount of the liquidating distribution to which they are entitled, the
preferred stockholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any other corporation or corporations or a sale of all or substantially
all of the assets of the Fund will not be deemed to be a liquidation,
dissolution or winding up of the Fund.
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<PAGE> 45
Voting Rights. Except as otherwise indicated in this Prospectus and except
as otherwise required by applicable law, holders of shares of preferred stock
will have equal voting rights with holders of shares of Common Stock (one vote
per share) and will vote together with holders of Common Stock as a single
class.
In connection with the election of the Fund's directors, holders of shares
of preferred stock, voting as a separate class, will be entitled to elect two of
the Fund's directors, and the remaining directors will be elected by all holders
of capital stock, voting as a single class. So long as any preferred stock is
outstanding, the Fund will have not less than five directors. If at any time
dividends on shares of the Fund's preferred stock shall be unpaid in an amount
equal to two full years' dividends thereon, the holders of all outstanding
shares of preferred stock, voting as a separate class, will be entitled to elect
a majority of the Fund's directors until all dividends in default have been paid
or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue (other than the preferred stock authorized by the
Articles Supplementary creating such preferred stock), or increase the
authorized or issued aggregate stated capital amount of (other than the
preferred stock authorized by the Articles Supplementary creating such preferred
stock), any class or series of stock ranking prior to or on a parity with any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation, or increase the authorized amount of
preferred stock or (ii) amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to adversely affect any of
the contract rights expressly set forth in the Charter of holders of preferred
stock.
Redemption Provisions. It is anticipated that shares of preferred stock
generally will be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal to
their liquidation preference plus accumulated but unpaid dividends to the date
of redemption upon the occurrence of certain specified events, such as the
failure of the Fund to maintain asset coverage requirements for the preferred
stock specified by the rating agencies which issue ratings on the preferred
stock. It is anticipated that the Charter will prohibit the sale or transfer of
preferred stock to any affiliate of the Fund or the Investment Adviser, except
for an affiliate that may be acting as a broker-dealer in connection with the
preferred stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A director may be removed from office
with or without cause but only by vote of the holders of at least 66 2/3% of the
votes entitled to be voted on the matter. A director elected by all the holders
of capital stock may be removed only by action of such holders, and a director
elected by the holders of preferred stock may be removed only by action of such
holders.
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<PAGE> 46
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66 2/3% of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations,
(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least 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 the proposed issuance of the
preferred stock, it is anticipated that the approval, adoption or authorization
of the foregoing would also require the favorable vote of at least a majority of
the Fund's shares of preferred stock then entitled to be voted, voting as a
separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter, voting
as a single class (or a majority of such shares if the amendment was previously
approved, adopted or authorized by at least two-thirds of the total number of
Directors fixed in accordance with the by-laws), and, assuming preferred stock
is issued, the affirmative vote of at least a majority of outstanding shares of
preferred stock of the Fund, voting as a separate class. Such a vote also would
satisfy a separate requirement in the 1940 Act that the change be approved by
the shareholders. Shareholders of an open-end investment company may require the
company to redeem their shares of common stock at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of a
redemption. All redemptions will be made in cash. If the Fund is converted to an
open-end investment company, it could be required to liquidate portfolio
securities to meet requests for redemption. Conversion to an open-end investment
company would also require redemption of all outstanding shares of preferred
stock and would require changes in certain of the Fund's investment policies and
restrictions, such as those relating to the issuance of senior securities and
the borrowing of money.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of shareholders generally.
Reference should be made to the Charter 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 on its
Common Stock 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 distribution over a stated period and dividing
the product by the average per share net value. The Fund also may quote annual
total return and aggregate total return performance data.
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<PAGE> 47
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 value of such investment at the end of the period.
The calculation of yield and total return does not reflect the imposition
of any Early Withdrawal Charges 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 further performance. The Fund's
yield is expected to fluctuate, and its total return will vary depending on
market conditions, the Municipal Bonds 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 and tax-equivalent yield to
yield data published by Lipper Analytical Services, Inc. or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News & World
Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and
Fortune Magazine. Yield comparisons should not be considered representative of
the Fund's yield and tax-equivalent yield or relative performance for any future
period.
CUSTODIAN
The Fund's securities and cash are held under a custody agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT
The transfer agent, dividend disbursing agent and shareholder servicing
agent for the shares of Common Stock of the Fund is 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:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, Florida 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 800-637-3863.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
will be passed on for the Fund by Brown & Wood, One World Trade Center, New
York, New York 10048-0557. Brown & Wood will
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rely as to matters of Maryland law on the opinion of Galland, Kharasch, Morse &
Garfinkle, P.C., Canal Square, 1054 31st Street, N.W., Washington, D.C.
20007-4492.
EXPERTS
, 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. The statement of assets, liabilities and
capital of the Fund included in this Prospectus has been so included in reliance
on the report of such independent auditors, given on their authority as experts
in auditing and accounting.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Merrill Lynch Municipal Strategy Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital of
Merrill Lynch Municipal Strategy Fund, Inc. as of April , 1995. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of Merrill Lynch
Municipal Strategy Fund, Inc. as of April , 1995 in conformity with generally
accepted accounting principles.
April , 1995
47
<PAGE> 50
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
APRIL , 1995
<TABLE>
<S> <C>
ASSETS
Cash......................................................................... $100,000
Prepaid registration fees (Note 1)...........................................
Deferred organization expenses (Note 1)......................................
--------
Total assets............................................................ $
LIABILITIES
Accrued expenses (Note 1)....................................................
--------
NET ASSETS........................................................................ $100,000
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares authorized; 10,000
shares issued and outstanding (Note 1)...................................... $ 100
Paid in Capital in excess of par............................................. 99,900
--------
Total Capital--Equivalent to $10.00 net asset value per share of common
stock (Note 1)........................................................ $100,000
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on July
13, 1994 as a closed-end, non-diversified management investment company and has
had no operations other than the sale to Fund Asset Management, L.P. of an
aggregate of 10,000 shares of Common Stock for $100,000 on April , 1995.
Prepaid registration fees are charged to income as the related shares are
issued. Deferred organization costs will be amortized on a straight-line basis
over a five-year period beginning with the commencement of operations of the
Fund.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged Fund Asset Management, L.P. (the "Investment Adviser")
to provide investment advisory and administrative services to the Fund. The
Investment Adviser will receive a monthly fee for advisory services, at an
annual rate equal to 0.75 of 1% of the average daily net assets of the Fund and
a monthly fee for administrative services, at an annual rate equal to 0.25 of 1%
of the average daily net assets of the Fund.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.
48
<PAGE> 51
APPENDIX I
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Con. (. . .)--Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
49
<PAGE> 52
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Short-term Notes and Variable Rate Demand Obligations: The four ratings of
Moody's for short-term notes and VRDOs are MIG-1/VMIG-1, MIG-2/VMIG-2,
MIG-3/VMIG-3, and MIG-4/VMIG-4; MIG-1/VMIG-1 denotes "best quality, enjoying
strong protection from established cash flows"; MIG-2/VMIG-2 denotes "high
quality" with "ample margins of protection"; MIG-3/VMIG-3 instruments are of
"favorable quality . . . but lacking the undeniable strength of the preceding
grades"; MIG-4/VMIG-4 instruments are of "adequate quality, carrying specific
risk but having protection . . . and not distinctly or predominantly
speculative."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and with established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATING GROUP'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
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<PAGE> 53
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
AAA--Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest-rated issues only in small
degree.
A--Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
BB, B, CCC, CC, C--Debt rated "BB", "B", "CCC", "CC" and "C" is
regarded, on balance, as predominately speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB--Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
B--Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will
51
<PAGE> 54
likely impair capacity or willingness to pay interest and repay principal.
The "B" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BB" or "BB-" rating.
CCC--Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "B" or "B-" rating.
CC--The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
C--The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has
been filed but debt service payments are continued.
C1--The rating "C1" is reserved for income bonds on which no interest
is being paid.
D--Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. The three designations in the
"A" category are as follows:
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a "+" designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3--Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B--Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C--This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
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<PAGE> 55
D--Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information.
A Standard & Poor's municipal note rating reflects the liquidity concerns
and market access risks unique to such notes. Notes due in three years or less
will likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1 A very strong, or strong, capacity to pay principal and interest. Issues
that possess overwhelming safety characteristics will be given a "+"
designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
</TABLE>
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
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<PAGE> 56
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit fundamentals
are improving, stable, declining, or uncertain, as follows:
<TABLE>
<S> <C>
Improving [UP ARROW]
Stable [LEFT RIGHT ARROW]
Declining [DOWN ARROW]
Uncertain [UP DOWN ARROW]
</TABLE>
Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
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FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive" indicating a potential
upgrade, "Negative" for potential downgrade, or "Evolving" where ratings may be
raised or lowered. FitchAlert is relatively short-term, and should be resolved
within three to 12 months.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD," "DD," or "D" categories.
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<PAGE> 58
DESCRIPTION OF FITCH'S INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded
as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as
for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be rated
below investment grade.
F-4 Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.
</TABLE>
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<PAGE> 59
APPENDIX II
TAXABLE EQUIVALENT YIELDS FOR 1995
<TABLE>
<CAPTION>
TAXABLE INCOME* A TAX-EXEMPT YIELD OF
- ------------------------ -----------------------------------------------------------------
1994
FEDERAL
SINGLE JOINT TAX
RETURN RETURN BRACKET 6.25% 6.50% 6.75% 7.00% 7.25%
------ ------ ------- ----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C>
$23,350- $39,000- 28.00% 8.68% 9.03% 9.38% 9.72% 10.07%
$56,550 $94,250
$56,551- $94,251- 31.00% 9.06% 9.42% 9.78% 10.14% 10.51%
$117,950 $143,600
$117,951- $143,601- 36.00% 9.77% 10.16% 10.55% 10.94% 11.33%
$256,500 $256,500
Over Over
$256,500 $256,500 39.60% 10.35% 10.76% 11.18% 11.59% 12.00%
</TABLE>
- ------------------
* An investor's marginal tax rates may exceed the rates shown in the above table
due to the reduction, or possible elimination, of the personal exemption
deduction for high-income taxpayers and an overall limit on itemized
deductions. Income also may be subject to certain state and local taxes. For
investors who pay alternative minimum tax, tax-exempt yields may be equivalent
to lower taxable yields than those shown above. The tax rates shown above do
not apply to corporate taxpayers. The tax characteristics of the Fund are
described more fully elsewhere in this Prospectus. Consult your tax adviser
for further details. This chart is for illustrative purposes only and cannot
be taken as an indication of anticipated Fund performance.
57
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[This page is intentionally left blank.]
58
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MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
AUTHORIZATION FORM
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase .... shares of Merrill Lynch
Municipal Strategy 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 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>
---------------------------------------- ----------------------------------------
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......................................................
............................................................. ........................, 19.....
(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.
SIGNATURE OF OWNER .................................... SIGNATURE OF CO-OWNER
(IF ANY)........................................................................
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 Municipal Strategy Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
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> <C>
- ---------- --------------
- ---------- --------------
Branch-Code F/C No. F/C Last Name
- ---------- ------------------
- ---------- ------------------
Dealer's Customer A/C No.
</TABLE>
59
<PAGE> 62
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.................. 3
Risk Factors and Special
Considerations.................... 8
Fee Table........................... 10
The Fund............................ 11
Use of Proceeds..................... 11
Investment Objective and Policies... 11
Risks and Special Considerations of
Leverage.......................... 20
Investment Restrictions............. 23
Purchase of Shares.................. 24
Tender Offers....................... 26
Early Withdrawal Charge............. 28
Directors and Officers.............. 29
Investment Advisory and
Administrative Arrangements....... 31
Portfolio Transactions.............. 34
Dividends and Distributions......... 35
Taxes............................... 36
Automatic Dividend Reinvestment
Plan.............................. 40
Net Asset Value..................... 41
Description of Capital Stock........ 41
Performance Data.................... 44
Custodian........................... 45
Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing
Agent............................. 45
Legal Opinions...................... 45
Experts............................. 46
Independent Auditors' Report........ 47
Statement of Assets, Liabilities and
Capital........................... 48
Appendix I--Ratings of Municipal
Bonds and Commercial Paper........ 49
Appendix II--Taxable Equivalent
Yields for 1995................... 57
Authorization Form.................. 59
</TABLE>
Code #
[Artwork]
Prospectus
- ---------------------------------------------------
MERRILL LYNCH
MUNICIPAL
STRATEGY
FUND, INC.
Shares of Common Stock
April , 1995
Distributor:
Merrill Lynch Funds
Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE> 63
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) FINANCIAL STATEMENTS
Auditors' Opinion
Statement of Assets, Liabilities and Capital as of April , 1995
(2) EXHIBITS:
<TABLE>
<S> <C> <C>
(a)(1) -- Articles of Incorporation of Registrant (a)
(2) -- Articles of Amendment to Articles of Incorporation of Registrant
(name change)
(b) -- By-Laws of Registrant
(c) -- Not applicable
(d)(1) -- Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of Registrant
(b)
(2) -- Form of specimen certificate for shares of Common Stock of
Registrant
(e) -- Not applicable
(f) -- Not applicable
(g)(1) -- Form of Investment Advisory Agreement between Registrant and Fund
Asset Management, L.P.
(2) -- Form of Administration Agreement between Registrant and Fund Asset
Management, L.P.
(h)(1) -- Form of Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (a)
(2) -- Form of Selected Dealer Agreement (a)
(i) -- Not applicable
(j) -- Form of Custody Agreement between Registrant and The Bank of New
York
(k) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between Registrant and
Financial Data Services, Inc.
(l) -- Opinion and Consent of Brown & Wood, counsel to the Fund (c)
(m) -- Not applicable
(n) -- Consent of , independent auditors for the Fund (c)
(o) -- Not applicable
(p) -- Certificate of Fund Asset Management, L.P. (c)
(q) -- Not applicable
(r) -- Financial data schedule (c)
</TABLE>
- ------------------
(a) Previously filed.
(b) Reference is made to Article V, Article VI (sections 2,3,4,5 and 6), Article
VII, Article VIII, Article X, Article XI, Article XII and Article XIII of
the Registrant's Articles of Incorporation, filed herewith as Exhibit
(a)(1) to the Registration Statement; and to Article II, Article III
(sections 1, 2, 3, 5 and 17), Article VI, Article VII, Article XII, Article
XIII and Article XIV of the Registrant's By-Laws, filed herewith as Exhibit
(b) to the Registration Statement.
(c) To be filed by amendment.
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<PAGE> 64
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees.......................................................... $86,208
Printing (other than stock certificates)................................... *
Engraving and printing stock certificates.................................. *
Fees and expenses of qualifications under state securities laws (including
fees of counsel)......................................................... *
Legal fees and expenses.................................................... *
Accounting fees and expenses............................................... *
NASD fees.................................................................. 25,500
Miscellaneous.............................................................. *
-------
Total................................................................. $ *
=======
</TABLE>
- ------------------
* To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the captions "Investment Advisory
and Administrative Arrangements" and "Description of Capital Stock--Common
Stock" and in Note 1 to the Statement of Assets, Liabilities and Capital is
incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Fund's Articles of Incorporation, filed as Exhibit (a)(1)
hereto, Article VI of the Fund's By-Laws, filed as Exhibit (b) hereto, and the
Investment Advisory Agreement, a form of which is filed as Exhibit (g)(1)
hereto, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C-2
<PAGE> 65
Reference is made to Section 9 of the Distribution Agreement, a form of
which is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser"), acts as investment
adviser for the following registered investment companies: Apex Municipal Fund,
Inc., 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., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial
Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., 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 Municipal Series Trust, Merrill
Lynch Multi-State Limited Maturity 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., MuniAssets
Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program,
Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Fund, Inc., MuniVest Fund
II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, 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, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York
Holdings, Inc. and Worldwide DollarVest Fund, Inc. Merrill Lynch Asset
Management, L.P. ("MLAM"), an affiliate of the Investment Adviser, acts as the
investment adviser for the following companies: Convertible Holdings, Inc.,
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, 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 Bond Fund for Investment and Retirement, Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Holdings, Merrill Lynch Global Resources Trust, 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 High Income Municipal Bond 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 Ready Assets Trust, Merrill Lynch Retirement
Asset Builder Program, Inc., Merrill Lynch Retirement Series Trust, Merrill
Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income
Fund, Inc. and Merrill Lynch Variable Series Funds, Inc. The address of each of
these investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011,
except that the address of Merrill Lynch Funds for Institutions Series and
Merrill Lynch Institutional Intermediate Fund is One Financial Center, 15th
Floor, Boston, Massachusetts 02111-2646. The address of the Investment Adviser,
MLAM, Merrill Lynch Funds Distributor, Inc. ("MLFD"), Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. also is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill
C-3
<PAGE> 66
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower, World
Financial Center, 250 Vesey Street, New York, New York 10281-1213. The address
of Financial Data Services, Inc. is 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged for
the past two years for his own account or in the capacity of director, officer,
employee, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of all or substantially
all of the investment companies described in the preceding paragraph and also
hold the same positions with all or substantially all of the investment
companies advised by MLAM as they do with those advised by the Investment
Adviser. Messrs. Durnin, Giordano, Harvey, Hewitt and Monagle are directors or
officers of one or more of such companies.
Officers and Partners of FAM are set forth below as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- -------------------------- ----------------------------------------
<S> <C> <C>
ML & Co. ................ Limited Partner Financial Services Holding Company
Princeton Services....... General Partner General Partner of MLAM
Arthur Zeikel............ President President and Director of MLAM;
President and Director of Princeton
Services; Director of MLFD; Executive
Vice President of ML & Co.; Executive
Vice President of Merrill Lynch
Terry K. Glenn........... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; President of
Princeton Administrators, L.P.;
Director of Financial Data Services,
Inc.
Bernard J. Durnin........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano...... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin........ Senior Vice President Senior Vice President of MLAM
Norman R. Harvey......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
N. John Hewitt........... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Philip L. Kirstein....... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President, General Counsel, Director
of Princeton Services; Director of
MLFD
Ronald M. Kloss.......... Senior Vice President and Senior Vice President and Controller of
Controller MLAM; Senior Vice President and
Controller of Princeton Services
</TABLE>
C-4
<PAGE> 67
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- -------------------------- ----------------------------------------
<S> <C> <C>
Joseph T. Monagle........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gerald M. Richard........ Senior Vice President and Senior Vice President and Treasurer of
Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Anthony Wiseman.......... Senior Vice President Senior Vice President of MLAM; 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 Investment Company Act of 1940 and the rules promulgated
thereunder are maintained at the offices of the registrant (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), its investment adviser (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and its custodian and transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
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
Securities Act of 1933;
(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
Securities Act of 1933, 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 hereof.
(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.
C-5
<PAGE> 68
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 9th
day of March, 1995.
MERRILL LYNCH MUNICIPAL STRATEGY 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>
SIGNATURES TITLE DATE
- ------------------------------------------ ----------------------------------- --------------
<C> <C> <S>
/s/ ARTHUR ZEIKEL President and Director (Principal March 9, 1995
- ------------------------------------------ Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and March 9, 1995
- ------------------------------------------ Accounting Officer)
(Gerald M. Richard)
/s/ RONALD W. FORBES Director March 9, 1995
- ------------------------------------------
(Ronald W. Forbes)
/s/ CYNTHIA A. MONTGOMERY Director March 9, 1995
- ------------------------------------------
(Cynthia A. Montgomery)
/s/ CHARLES C. REILLY Director March 9, 1995
- ------------------------------------------
(Charles C. Reilly)
/s/ KEVIN A. RYAN Director March 9, 1995
- ------------------------------------------
(Kevin A. Ryan)
/s/ RICHARD R. WEST Director March 9, 1995
- ------------------------------------------
(Richard R. West)
</TABLE>
C-6
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C> <C>
(a)(2) -- Articles of Amendment to Articles of Incorporation of Registrant (name change)
(b) -- By-Laws of Registrant
(d)(2) -- Form of specimen certificate for shares of Common Stock of Registrant
(g)(1) -- Form of Investment Advisory Agreement between Registrant and Fund Asset
Management, L.P.
(g)(2) -- Form of Administration Agreement between Registrant and Fund Asset Management,
L.P.
(j) -- Form of Custody Agreement between Registrant and The Bank of New York
(k) -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between Registrant and Financial Data Services, Inc.
</TABLE>
<PAGE> 1
EXHIBIT (a)(2)
MUNILEVERAGE FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
MUNILEVERAGE FUND, INC. (the "Corporation"), a Maryland corporation
having its principal office c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202, does hereby certify to the State Department
of Assessments and Taxation of Maryland as follows:
FIRST: The charter of the Corporation is hereby amended by striking
out Article II of the Articles of Incorporation in its entirety and inserting
in lieu thereof the following:
"Article II
NAME
The name of the Corporation is MERRILL LYNCH
MUNICIPAL STRATEGY FUND, INC. (the "Corporation")."
SECOND: The foregoing Articles of Amendment have been effected in the
manner and by the vote required by the Corporation's charter and the laws of
the State of Maryland. Pursuant to Section 2-603 of the Code, the amendment as
hereinabove set forth has been duly advised, approved and adopted by the Board
of Directors of the Corporation, there being no stock entitled to be voted on
the Charter amendment outstanding or subscribed for at the time of approval.
<PAGE> 2
THIRD: Except as amended hereby, the Corporation's charter shall
remain in full force and effect.
FOURTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.
FIFTH: These Articles of Amendment shall be effective on the date of
acceptance for record by the State Department of Assessments and Taxation of
Maryland.
The President acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of his knowledge,
information and belief, the matters set forth in these Articles of Amendment
with respect to the authorization and approval of the amendment of the
Corporation's charter are true in all material respects, and that this
statement is made under the penalties for perjury.
2
<PAGE> 3
IN WITNESS WHEREOF, MUNILEVERAGE FUND, INC. has caused these Articles
of Amendment to be signed in its name and on its behalf by its President, a
duly authorized officer of the Corporation, and attested by its Secretary as of
the 29th day of August, 1994.
MUNILEVERAGE FUND, INC.
__________________________
Philip L. Kirstein
President
Attest:
________________________
Mark B. Goldfus
Secretary
3
<PAGE> 1
EXHIBIT (b)
BY-LAWS
OF
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
ARTICLE I.
Offices
Section 1. Principal Office. The principal office of the Corporation
shall be in the City of Baltimore and State of Maryland.
Section 2. Principal Executive Office. The principal executive
office of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
Section 3. Other Offices. The Corporation may have such other
offices in such places as the Board of Directors from time to time may
determine.
ARTICLE II.
Meetings of Stockholders
Section 1. Annual Meeting. The Corporation shall not be required to
hold an annual meeting of its stockholders in any year in which the election of
directors is not required to be acted upon under the Investment Company Act of
1940. In the event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors by the Investment Company Act of
1940, as amended, such meeting shall be held no later than 120 days after the
occurrence of the event requiring
<PAGE> 2
the meeting. Any stockholders' meeting held in accordance with this Section
shall for all purposes constitute the annual meeting of stockholders for the
year in which the meeting is held.
Section 2. Special Meetings. Special meetings of the stockholders,
unless otherwise provided by law, may be called for any purpose or purposes by
a majority of the Board of Directors, the President, or on the written request
of the holders of at least 10% of the outstanding shares of capital stock of
the Corporation entitled to vote at such meeting if they comply with Section
2-502(b) or (c) of the Maryland General Corporation Law.
Section 3. Place of Meetings. The annual meeting and any special
meeting of the stockholders shall be held at such place within the United
States as the Board of Directors from time to time may determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the
place, date and time of the holding of each annual and special meeting of the
stockholders and the purpose or purposes of each special meeting shall be given
personally or by mail, 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 or her address as it appears on the records
of the Corporation, with postage thereon prepaid.
2
<PAGE> 3
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who, either
before or after the meeting, shall submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or unless the adjournment is for
more than one hundred and twenty days after the original record date, notice of
such adjourned meeting need not be given if the time and place to which the
meeting shall be adjourned were announced at the meeting at which the
adjournment is taken.
Section 5. Quorum. 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
Charter. 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
3
<PAGE> 4
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 Charter, or
these By-Laws, for action upon any given matter shall not prevent action at
such meeting upon any other matter or matters which properly may come before
the meeting, if there shall be present thereat, in person or by proxy, holders
of the number of shares of stock of the Corporation required for action in
respect of such other matter or matters.
Section 6. Organization. At each meeting of the stockholders, the
Chairman of the Board (if one has been designated by the Board), or in his or
her absence or inability to act, the President, or in the absence or inability
to act of the Chairman of the Board and the President, a Vice President, shall
act as chairman of the meeting. The Secretary, or in his or her absence or
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
Charter, each holder of record of shares of stock of the Corporation having
voting power shall be entitled at each meeting
4
<PAGE> 5
of the stockholders to one vote for every share of such stock standing in his
or her name on the record of stockholders of the Corporation as of the record
date determined pursuant to Section 9 of this Article or, if such record date
shall not have been so fixed, then at the later of (i) the close of business on
the day on which notice of the meeting is mailed or (ii) the thirtieth day
before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or her by a proxy signed by
such stockholder or his or her 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 Charter or these By-Laws, any corporate
action to be taken by vote of the stockholders (other than the election of
directors, which shall be by a plurality of votes cast) shall be authorized by
a majority of the total votes cast at a meeting of stockholders by the holders
of shares present in person or represented by proxy and entitled to vote on
such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable,
any such vote need not
5
<PAGE> 6
be by ballot. On a vote by ballot, each ballot shall be signed by the
stockholder voting, or by his or her proxy, if there be such proxy, and shall
state the number of shares voted.
Section 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 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, in advance of any meeting of
stockholders, may appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his or her duties, shall
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his or her
ability. The inspectors shall determine the number of shares outstanding and
the voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, and the validity and effect of proxies, and shall
receive votes, ballots
6
<PAGE> 7
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, 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 Charter, any action required to
be taken at any annual or special meeting of stockholders, or any action which
may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if the
following are filed with the records of stockholders' meetings: (i) a
unanimous written consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter and (ii) a written waiver of any
right to dissent signed by each stockholder entitled to notice of the meeting
but not entitled to vote thereat.
7
<PAGE> 8
ARTICLE III.
Board of Directors
Section 1. General Powers. Except as otherwise provided in the
Charter, the business and affairs of the Corporation shall be managed under the
direction of the Board of Directors. All powers of the Corporation may be
exercised by or under authority of the Board of Directors except as conferred
on or reserved to the stockholders by law or by the Charter or these By-Laws.
Section 2. Number of Directors. The number of directors shall be
fixed from time to time by resolution of the Board of Directors adopted by a
majority of the directors then in office; provided, however, that in no event
shall the number of directors be less than three nor more than fifteen. Any
vacancy created by an increase in the number of directors may be filled in
accordance with Section 6 of this Article III. No reduction in the number of
directors shall have the effect of removing any director from office prior to
the expiration of his or her term unless such director specifically is removed
pursuant to Section 5 of this Article III at the time of such decrease.
Directors need not be stockholders. As long as any preferred stock of the
Corporation is outstanding, the number of directors shall be not less than
five.
Section 3. Election and Term of Directors. Directors shall be
elected annually at a meeting of stockholders held for that purpose; provided,
however, that if no meeting of the stockholders of the Corporation is required
to be held in a
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particular year pursuant to Section 1 of Article II of these By-Laws, directors
shall be elected at the next meeting held. The term of office of each director
shall be from the time of his election and qualification until the election of
directors next succeeding his election and until his successor shall have been
elected and shall have qualified, or until his death, or until he shall have
resigned or until December 31 of the year in which he shall have reached
seventy-two years of age, or until he shall have been removed as hereinafter
provided in these By-Laws, or as otherwise provided by statute or the Articles
of Incorporation.
Section 4. Resignation. A director of the Corporation may resign at
any time by giving written notice of his or her resignation to the Board or the
Chairman of the Board or the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may
be removed (with or without cause) by the stockholders by a vote of sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of capital stock
then entitled to vote in the election of such director.
Section 6. Vacancies. Subject to the provisions of the Investment
Company Act of 1940, as amended, any vacancies in the
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Board of Directors, whether arising from death, resignation, removal, an
increase in the number of directors or any other cause, shall be filled by a
vote of a majority of the Board of Directors then in office, regardless of
whether they constitute a quorum.
Section 7. Place of Meetings. Meetings of the Board may be held at
such place as the Board from time to time may determine or as shall be
specified in the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board may be
held without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 10. Telephone Meetings. Members of the Board of Directors or
of any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in a meeting by
these means constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special
meeting of the Board shall be given by the Secretary as hereinafter provided,
in which notice shall be stated the time and place of the meeting. Notice of
each such meeting shall be
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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 or her at his or her residence or usual place of business, at least
three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special
meeting need not be given to any director who, either before or after the
meeting, shall sign a written waiver of notice which is filed with the records
of the meeting or who shall attend such meeting. Except as otherwise
specifically required by these By-Laws, a notice or waiver of notice of any
meeting need not state the purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, 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
Charter, 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 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
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not present at the time of the adjournment and, unless such time and place were
announced at the meeting at which the adjournment was taken, to the other
directors. At any adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the meeting as originally
called.
Section 14. Organization. The Board, by resolution adopted by a
majority of the entire Board, may designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his or her
absence or inability to act, another director chosen by a majority of the
directors present, shall act as chairman of the meeting and preside thereat.
The Secretary (or, in his or her absence or inability to act, any person
appointed by the Chairman) shall act as secretary of the meeting and keep the
minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting.
Subject to the provisions of the Investment Company Act of 1940, as amended,
any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board or the committee, as the case may be, consent thereto in
writing, and the writings or writing are filed with the minutes of the
proceedings of the Board or the committee.
Section 16. Compensation. Directors may receive compensation for
services to the Corporation in their capacities
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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 at
all times are consistent with the investment policies and restrictions with
respect to securities investments and otherwise of the Corporation, as recited
in the Prospectus of the Corporation included in the registration statement of
the Corporation relating to the initial public offering of its capital stock,
as filed with the Securities and Exchange Commission (or as such investment
policies and restrictions may be modified by the Board of Directors, or, if
required, by a majority vote of the stockholders of the Corporation in
accordance with the Investment Company Act 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 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.
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ARTICLE IV.
Committees
Section 1. Executive Committee. The Board, by resolution adopted by
a majority of the entire board, may designate an Executive Committee consisting
of two or more of the directors of the Corporation, which committee shall have
and may exercise all of the powers and authority of the Board with respect to
all matters other than:
(i) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Charter;
(ii) the filling of vacancies on the Board of Directors;
(iii) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive
Committee;
(iv) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the
Investment Company Act of 1940, as amended, or the taking of any other
action required to be taken by the Board of Directors by the
Investment Company Act of 1940, as amended;
(v) the amendment or repeal of these By-Laws or the adoption of new
By-Laws;
(vi) the amendment or repeal of any resolution of the Board which by
its terms may be amended or repealed only by the Board;
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(vii) the declaration of dividends and, except to the extent permitted
by law, the issuance of capital stock of the Corporation; and
(viii) the approval of any merger or share exchange which does not
require stockholder approval.
The Executive Committee shall keep written minutes of its proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors
from time to time, by resolution adopted by a majority of the whole Board, may
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the
Board of Directors, by resolution, may prescribe.
Section 3. General. One-third, but not less than two, of the members
of any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The
Board may designate a chairman of any committee and such chairman or 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
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disqualified from voting, whether or not he or she or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board
shall have the power at any time to change the membership of any committee, to
fill all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall
be deemed to prevent the Board from appointing one or more committees
consisting in whole or in part of persons who are not directors of the
Corporation; provided, however, that no such committee shall have or may
exercise any authority or power of the Board in the management of the business
or affairs of the Corporation except as may be prescribed by the Board.
ARTICLE V.
Officers, Agents and Employees
Section 1. Number of Qualifications. The officers of the Corporation
shall be a President, who shall be a director of the Corporation, a Secretary
and a Treasurer, each of whom shall be elected by the Board of Directors. The
Board of Directors may elect or appoint one or more Vice Presidents and also
may appoint such other officers, agents and employees as it may deem necessary
or proper. Any two or more offices may be held by the same person, except the
offices of President and Vice President, but no officer shall execute,
acknowledge or verify any
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instrument in more than one capacity. Such officers shall be elected by the
Board of Directors each year at its first meeting held after the annual meeting
of stockholders, each to hold office until the next meeting of the stockholders
and until his or her successor shall have been duly elected and shall have
qualified, or until his or her death, or until he or she shall have resigned,
or have been removed, as hereinafter provided in these By-Laws. The Board from
time to time may elect, 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, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent
or employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the
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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 or her control.
Section 6. Bonds or Other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his or her duties, in such amount and
with such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), the President shall preside at all meetings of the stockholders
and of the Board of Directors. He or she shall have, subject to the control of
the Board of Directors, general charge of the business and affairs of
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the Corporation. He or she may employ and discharge employees and agents of
the Corporation, except such as shall be appointed by the Board, and he or she
may delegate these powers.
Section 8. Vice President. Each Vice President shall have such
powers and perform such duties as the Board of Directors or the President from
time to time may prescribe.
Section 9. Treasurer. The Treasurer shall:
(i) have charge and custody of, and be responsible for, all of the
funds and securities of the Corporation, except those which the
Corporation has placed in the custody of a bank or trust company or
member of a national securities exchange (as that term is defined in
the 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;
(ii) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(iii) cause all moneys and other valuables to be deposited to the
credit of the Corporation;
(iv) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(v) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking
proper vouchers therefor; and
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(vi) in general, perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned
to him or her by the Board or the President.
Section 10. Secretary. The Secretary shall:
(i) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of
the Board and the stockholders;
(ii) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(iii) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to
all other documents to be executed on behalf of the Corporation under
its seal;
(iv) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are
properly kept and filed; and
(v) in general, perform all of the duties incident to the office of
Secretary and such other duties as from time to time may be assigned
to him or her by the Board or the President.
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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 otherwise would be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office. Absent a court determination that an officer or
director seeking indemnification was not liable on the merits or guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office, the decision by the
Corporation to indemnify such person must be based upon the reasonable
determination of independent legal counsel or the vote of a majority of a
quorum of the directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties
to the proceeding ("non-party independent directors"),
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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 or her office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and to
the full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Corporation a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met and a written undertaking to repay any such advance, if it ultimately
should be determined that the standard of conduct has not been met, and
provided further that at least one of the following additional conditions is
met:
(i) the person seeking indemnification shall provide a security in
form and amount acceptable to the Corporation for his or her
undertaking;
(ii) the Corporation is insured against losses arising by reason of the
advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based
on a review of facts readily
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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 or her
activities as an officer or director of the Corporation. The Corporation,
however, may not purchase insurance on behalf of any officer or director of the
Corporation that protects or purports to protect such person from liability to
the Corporation or to its stockholders to which such officer or director
otherwise would be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
The Corporation may indemnify, make advances or purchase insurance to
the extent provided in this Article VI on behalf of an employee or agent who is
not an officer or director of the Corporation.
ARTICLE VII.
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Board,
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representing the number of shares of stock of the Corporation owned by him or
her, provided, however, that certificates for fractional shares will not be
delivered in any case. The certificates representing shares of stock shall be
signed by or in the name of the Corporation by the President or a Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer and sealed with the seal of the Corporation. Any or all of
the signatures or the seal on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate shall be issued,
it may be issued by the Corporation with the same effect as if such officer,
transfer agent or registrar were still in office at the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall
be kept at the principal executive office of the Corporation correct and
complete books and records of account of all the business and transactions of
the Corporation. 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.
Section 3. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of
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the Corporation only by the registered holder thereof, or by his or her
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary or with a transfer agent or transfer clerk, and on surrender of
the certificate or certificates, if issued, for such shares properly endorsed
or accompanied by a duly executed stock transfer power and the payment of all
taxes thereon. Except as otherwise provided by law, the Corporation shall be
entitled to recognize the exclusive right of a person in whose name any share
or shares stand on the record of stockholders as the owner of such share or
shares for all purposes, including, without limitation, the rights to receive
dividends or other distributions, and to vote as such owner, and the
Corporation shall not be bound to recognize any equitable or legal claim to or
interest in any such share or shares on the part of any other person.
Section 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of
any certificates representing shares of stock of the
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Corporation immediately shall notify the Corporation of any loss, destruction
or mutilation of such certificate, and the Corporation may issue a new
certificate of stock in the place of any certificate theretofore issued by it
which the owner thereof shall allege to have been lost or destroyed or which
shall have been mutilated, and the Board, in its discretion, may require such
owner or his or her legal representatives to give to the Corporation a bond in
such sum, limited or unlimited, and in such form and with such surety or
sureties, as the 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 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
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stockholders of record at the time so fixed shall be entitled to receive such
dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder
of the Corporation or his or her agent may inspect and copy during usual
business hours the Corporation's By-Laws, minutes of the proceedings of its
stockholders, annual statements of its affairs, and voting trust agreements on
file at its principal office.
ARTICLE VIII.
Seal
The seal of the Corporation shall be circular in form and shall bear,
in addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal" and "Maryland". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX.
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the 31st day of October.
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ARTICLE X.
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of Directors of
the Corporation from time to time may determine.
Section 2. Custodians. All securities and other investments shall be
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation from time to time may determine. Every
arrangement entered into with any bank or other company for the safekeeping 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 obligations for the payment
of money shall be signed by such officer or officers or person or persons as
the Board of Directors by resolution from time to time shall designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds
or other securities at any time owned by the Corporation may be held on behalf
of the Corporation or sold, transferred or otherwise disposed of subject to any
limits
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imposed by these By-Laws and pursuant to authorization by the Board and, when
so authorized to be held on behalf of the Corporation or sold, transferred or
otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer or pursuant
to any procedure approved by the Board of Directors, subject to applicable law.
ARTICLE XII.
Independent Public Accountants
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange Commission shall be selected annually by the Board of Directors
and ratified by the stockholders in accordance with the provisions of the
Investment Company Act of 1940, as amended.
ARTICLE XIII.
Annual Statement
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of
the Corporation and at such other times as may be directed by the Board. A
report to the stockholders based upon each such examination shall be mailed to
each stockholder of record of the Corporation on such date with respect to each
report as may be determined by the Board, at his or her address
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as the same appears on the books of the Corporation. Such annual statement
also shall be available at the annual meeting of stockholders and shall be
placed on file at the Corporation's principal office in the State of Maryland.
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 then were invested. Such
report also shall show the Corporation's income and expenses for the period
from the end of the Corporation's preceding fiscal year to the close of the
annual or quarterly period covered by the report and any other information
required by the Investment Company Act of 1940, as 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 sixty-six and
two-thirds percent (66 2/3%) 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 also may be amended, altered or repealed by the
affirmative vote of a
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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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EXHIBIT (d)(2)
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
COMMON STOCK CUSIP
PAR VALUE $.10 See Reverse For Certain
Definitions
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
Merrill Lynch Municipal Strategy Fund, Inc., transferable on the books of the
Corporation by the holder in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the
shares represented hereby are issued and shall be held subject to all of the
provisions of the Articles of Incorporation and of the By-Laws of the
Corporation, and of all of the amendments from time to time made thereto. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
Dated:
Secretary President
Countersigned and Registered:
THE BANK OF NEW YORK
By:
Transfer Agent and Registrar
<PAGE> 2
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
A full statement of the designations and any preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of each
class and series of stock which the Corporation is authorized to issue and the
differences in the relative rights and preferences between the shares of each
class and series to the extent that they have been set, and the authority of
the Board of Directors to set the relative rights and preferences of subsequent
classes and series, will be furnished by the Corporation to any stockholder,
without charge, upon request to the Secretary of the Corporation at its
principal office.
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--
_______Custodian_______
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to
Minors Act ________
JT TEN--as joint tenants with right (State)
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received.................hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
___________________________________________________
___________________________________________________
________________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
________________________________________________________________________________
________________________________________________________________________________
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated:___________________
_____________________________________
<PAGE> 3
NOTICE: The Signature to this assignment must correspond with
the name as written upon the face of the Certificate,
in every particular, without alteration or
enlargement, or any change whatever.
***************************************************************************
* *
* Signatures must be guaranteed by an "eligible guarantor institution" *
* as such term is defined in Rule 17Ad-15 under the Securities *
* Exchange Act of 1934. *
* *
***************************************************************************
<PAGE> 1
EXHIBIT (g)(1)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this _____ day of ____________, 1994, by and between
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC., a Maryland corporation (the
"Fund"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (the
"Investment Adviser").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as a closed-end,
non-diversified, management investment company registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on
the terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE> 2
ARTICLE I
Duties of the Investment Adviser
The Fund hereby employs the Investment Adviser to act as investment
adviser of the Fund and to furnish, or arrange for its affiliates to furnish,
the investment advisory services described below, subject to the policies of,
review by and overall control of the Board of Directors of the Fund, for the
period and on the terms and conditions set forth in this Agreement. The
Investment Adviser hereby accepts such employment and agrees during such
period, at its own expense, to render, or arrange for the rendering of, such
services and to assume the obligations herein set forth for the compensation
provided for herein. The Investment Adviser and its affiliates for all
purposes herein shall be deemed to be independent contractors and, unless
otherwise expressly provided or authorized, shall have no authority to act for
or represent the Fund in any way or otherwise be deemed agents of the Fund.
(a) Administrative Services. The Investment Adviser shall perform,
or arrange for its affiliates to perform, the management and administrative
services necessary for the operation of the Fund, including administering
shareholder accounts and handling shareholder relations pursuant to an
Administration Agreement of even date herewith.
(b) Investment Advisory Services. The Investment Adviser shall
provide, or arrange for its affiliates to provide, the Fund with such
investment research, advice and supervision as the
2
<PAGE> 3
latter from time to time may consider necessary for the proper supervision of
the assets of the Fund, shall furnish continuously an investment program for
the Fund and shall determine from time to time which securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall
be held in the various securities in which the Fund invests, options, futures,
options on futures or cash, subject always to the restrictions of the Articles
of Incorporation and the By-Laws of the Fund, as amended from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in filings made by the Fund under the Federal securities
laws. The Investment Adviser shall make decisions for the Fund as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the Fund's portfolio securities shall be exercised.
Should the Board of Directors at any time, however, make any definite
determination as to investment policy and notify the Investment Adviser thereof
in writing, the Investment Adviser shall be bound by such determination for the
period, if any, specified in such notice or until similarly notified that such
determination has been revoked. The Investment Adviser shall take, on behalf
of the Fund, all actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place all orders
for the purchase or sale of portfolio securities for the Fund's account with
brokers or
3
<PAGE> 4
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 shall provide the
staff and personnel necessary to perform its obligations under this Agreement,
shall assume and pay or cause to be paid all expenses incurred in connection
with the maintenance of such staff and personnel, and, at its own expense,
shall provide the office space, facilities, equipment and necessary personnel
which it is obligated to provide under Article I hereof, and shall pay all
compensation of officers of
4
<PAGE> 5
the Fund and all Directors of the Fund who are affiliated persons of the
Investment Adviser.
(b) The Fund. The Fund assumes, and shall pay or cause to be paid,
all other expenses of the Fund including, without limitation: taxes, expenses
for legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses, charges of the custodian, any
sub-custodian and transfer agent, charges of any auction agent and broker
dealers in connection with preferred stock of the Fund, expenses of portfolio
transactions, Securities and Exchange Commission fees, expenses of registering
the shares of common stock and preferred stock under Federal, state and foreign
laws, fees and actual out-of-pocket expenses of Directors who are not
affiliated persons of the Investment Adviser, accounting and pricing costs
(including the daily calculation of the net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or nonrecurring expenses,
and other expenses properly payable by the Fund. It also is understood that
the Fund will reimburse the Investment Adviser for its costs incurred in
providing accounting services to the Fund.
ARTICLE III
Compensation of the Investment Adviser
(a) Investment Advisory Fee. For the services rendered, the
facilities furnished and the expenses assumed by the Investment Adviser, the
Fund shall pay to the Investment Adviser
5
<PAGE> 6
at the end of each calendar month a fee based upon the average daily value of
the net assets of the Fund at the annual rate of 0.75 of 1.0% (0.75%) of the
average daily net assets of the Fund (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 shares of outstanding preferred stock), commencing on
the day following effectiveness hereof. It is understood that the liquidation
preference of any outstanding preferred stock (other than accumulated
dividends) is not considered a liability in determining the Fund's average
daily net assets. If this Agreement becomes effective subsequent to the first
day of a month or shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fee as set forth above. Subject
to the provisions of subsection (b) hereof, payment of the Investment Adviser's
compensation for the preceding month shall be made as promptly as possible
after completion of the computations contemplated by subsection (b) hereof.
During any period when the determination of net asset value is suspended by the
Board of Directors, the average net asset value of a share for the last day
prior to such suspension for this purpose shall be deemed to be the net asset
value at the close of 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
6
<PAGE> 7
Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a date
on which this Agreement is in effect exceed the expense limitations applicable
to the Fund imposed by applicable state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Investment Adviser shall reduce its investment advisory fee by the extent of
such excess and, if required pursuant to any such laws or regulations, will
reimburse the Fund in the amount of such excess; provided, however, to the
extent permitted by law, there shall be excluded from such expenses the amount
of any interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary expenses (including but not limited to legal claims and
liabilities and litigation costs and any indemnification related thereto) paid
or payable by the Fund. Whenever the expenses of the Fund exceed a pro rata
portion of the applicable annual expense limitations, the estimated amount of
reimbursement under such limitations shall be applicable as an offset against
the monthly payment of the fee due to the Investment Adviser. Should two or
more such expense limitations be applicable as at the end of the last business
day of the month, that expense limitation which results in the largest
reduction in the Investment Adviser's fee shall be applicable.
7
<PAGE> 8
ARTICLE IV
Limitation of Liability of the Investment Adviser
The Investment Adviser shall not be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
Activities of the Investment Adviser
The services of the Investment Adviser to the Fund are not to be
deemed to be exclusive; the Investment Adviser and any person controlled by or
under common control with the Investment Adviser (for purposes of this Article
V referred to as "affiliates") are free to render services to others. It is
understood that Directors, officers, employees and shareholders of the Fund are
or may become interested in the Investment Adviser and its affiliates, as
directors, officers, employees, partners and shareholders or otherwise, and
that directors, officers, employees, partners and shareholders of the
Investment Adviser and of its affiliates are or may become similarly
8
<PAGE> 9
interested in the Fund, and that the Investment Adviser and directors,
officers, employees, partners and shareholders of its affiliates may become
interested in the Fund as shareholders or otherwise.
ARTICLE VI
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until ____________, 1996 and thereafter, but
only so long as such continuance specifically is approved at least annually by
(i) the Board of Directors of the Fund, or by the vote of a majority of the
outstanding voting securities of the Fund, and (ii) by the vote of a majority
of those Directors who are not parties to this Agreement or interested persons
of any such party cast in person at a meeting called for the purpose of voting
on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund, or by the Investment Adviser, on
sixty days' written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment.
9
<PAGE> 10
ARTICLE VII
Amendment of this Agreement
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of those Directors who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws of the State of
New York, or any
10
<PAGE> 11
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 and delivered
this Agreement as of the date first above written.
MERRILL LYNCH MUNICIPAL STRATEGY
FUND, INC.
By: ______________________________
Authorized Signatory
ATTEST:
_____________________________
Secretary
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
ATTEST:
_____________________________
Secretary
11
<PAGE> 1
EXHIBIT (g)(2)
ADMINISTRATION AGREEMENT
AGREEMENT made this _________ day of _____________, 1994, by and
between MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC., a Maryland corporation
(the "Fund"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership
("FAM" or the "Administrator").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as a closed-end,
non-diversified, management investment company registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"); and
WHEREAS, the Fund and FAM are entering into an investment
advisory agreement (the "Investment Advisory Agreement") pursuant to which FAM
will provide investment advice to the Fund and be responsible for the portfolio
management of the Fund; and
WHEREAS, the Fund desires to retain FAM to render
administrative services in the manner and on the terms and conditions hereafter
set forth; and
WHEREAS, FAM desires to be retained to perform services on
said terms and conditions;
NOW, THEREFORE, in consideration of the premises and the
covenants hereinafter contained, the Fund and FAM hereby agree as follows:
<PAGE> 2
1. Duties of the Administrator. The Fund hereby retains
FAM 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. FAM
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 effective operation of the Fund, and
(vii) provide the Fund with administrative office and data processing
facilities.
2. Expenses of the Administrator. FAM shall provide the
staff and personnel necessary to perform its obligations
2
<PAGE> 3
under this Agreement, shall assume and pay or cause to be paid all expenses
incurred in connection with the maintenance of such staff and personnel, and,
at its own expense, shall provide the office space, facilities, equipment and
necessary personnel which it is obligated to provide under paragraph 1 hereof,
except that the Fund shall pay the expenses of legal counsel retained by FAM as
may be necessary or appropriate for FAM'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 FAM pursuant to this Agreement, the Fund shall pay to
the Administrator at the end of each calendar month a fee based upon the
average daily value of the net assets of the Fund at the annual rate of ____ of
1% (___%) of the average daily net assets of the Fund (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 shares of outstanding preferred stock),
commencing on the day following effectiveness hereof. It is understood that
the liquidation preference of any outstanding preferred stock (other than
accumulated dividends) is not considered a liability in determining the Fund's
average daily net assets. 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 the part of the month this Agreement is in
3
<PAGE> 4
effect shall be prorated in a manner consistent with the calculation of the fee
as set forth above. Payment of the Administrator's compensation shall be
payable in arrears on the last day of each calendar month for services
performed hereunder during such month. During any period when the
determination of net asset value is suspended by the Board of Directors, the
average net asset value of a share for the last day prior to such suspension
for this purpose shall be deemed to be the net asset value at the close of each
succeeding day until it is again determined.
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
4
<PAGE> 5
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 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
5
<PAGE> 6
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.
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
Investment Company 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 Investment Company 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 and
delivered this Agreement as of the day and year first above written.
MERRILL LYNCH MUNICIPAL
STRATEGY FUND, INC.
By: ______________________________
Authorized Signatory
ATTEST:
By __________________________
Secretary
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
ATTEST:
By __________________________
Secretary
7
<PAGE> 1
EXHIBIT (j)
CUSTODY AGREEMENT
Agreement made as of this day of , 1994,
between MUNICIPAL STRATEGY FUND, INC., a corporation organized and existing
under the laws of the State of Maryland having its principal office and place
of business at (hereinafter called the "Fund"), and
THE BANK OF NEW YORK, a New York corporation authorized to do a banking
business, having its principal office and place of business at 48 Wall Street,
New York, New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "Book-Entry System" shall mean the Federal Reserve/Treasury
book-entry system for United States and federal agency securities, its
successor or successors and its nominee or nominees.
2. "Call Option" shall mean an exchange traded option with
respect to Securities other than Stock Index Options, Futures Contracts, and
Futures Contract Options entitling the holder, upon timely exercise and payment
of the exercise price, as specified therein, to purchase from the writer
thereof the specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually received by the Custodian and signed on behalf
of the Fund by any two Officers, and the term Certificate shall also include
instructions by the Fund to the Custodian communicated by a Terminal Link.
4. "Clearing Member" shall mean a registered broker-dealer which
is a clearing member under the rules of O.C.C. and a member of a national
securities exchange qualified to act as a custodian for an investment company,
or any broker-dealer reasonably believed by the Custodian to be such a clearing
member.
<PAGE> 2
5. "Collateral Account" shall mean a segregated account so
denominated which is specifically allocated to a Series and pledged to the
Custodian as security for, and in consideration of, the Custodian's issuance of
(a) any Put Option guarantee letter or similar document described in paragraph
8 of Article V herein, or (b) any receipt described in Article V or VIII
herein.
6. "Covered Call Option" shall mean an exchange traded option
entitling the holder, upon timely exercise and payment of the exercise price,
as specified therein, to purchase from the writer thereof the specified
underlying Securities (excluding Futures Contracts) which are owned by the
writer thereof and subject to appropriate restrictions.
7. "Depository" shall mean The Depository Trust Company ("DTC"),
a clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository"
shall further mean and include any other person authorized to act as a
depository under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, specifically identified in a certified
copy of a resolution of the Fund's Board of Directors specifically approving
deposits therein by the Custodian.
8. "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.
9. "Futures Contract" shall mean a Financial Futures Contract
and/or Stock Index Futures Contracts.
10. "Futures Contract Option" shall mean an option with respect to
a Futures Contract.
11. "Margin Account" shall mean a segregated account in the name
of a broker, dealer, futures commission merchant, or a Clearing Member, or in
the name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's
effecting an appropriate entry in its books and records.
-2-
<PAGE> 3
12. "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.
13. "O.C.C." shall mean the Options Clearing Corporation, a
clearing agency registered under Section 17A of the Securities Exchange Act of
1934, its successor or successors, and its nominee or nominees.
14. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Treasurer, the Controller, any Assistant
Secretary, any Assistant Treasurer, and any other person or persons, whether or
not any such other person is an officer of the Fund, duly authorized by the
Board of Directors of the Fund to execute any Certificate, instruction, notice
or other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
15. "Option" shall mean a Call Option, Covered Call Option, Stock
Index Option and/or a Put Option.
16. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Officer or from a person reasonably believed
by the Custodian to be an Officer.
17. "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.
18. "Reverse Repurchase Agreement" shall mean an agreement
pursuant to which the Fund sells Securities and agrees to repurchase Securities
at a described or specified date and price.
19. "Security" shall be deemed to include, without limitation,
Money Market Securities, Call Options, Put Options, Stock Index Options, Stock
Index Futures Contracts, Stock Index Futures Contract Options, Financial
Futures Contracts, Financial Futures Contract Options, Reverse Repurchase
Agreements, common stocks and other securities having characteristics similar
to common stocks, preferred stocks, debt obligations issued by state or
municipal governments and by public authorities, (including, without
limitation, general obligation bonds, revenue
-3-
<PAGE> 4
bonds, industrial bonds and industrial development bonds), bonds, debentures,
notes, mortgages or other obligations, and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase, sell or
subscribe for the same, or evidencing or representing any other rights or
interest therein, or any property or assets.
20. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such
transactions as the Fund may from time to time determine.
21. "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.
22. "Shares" shall mean the shares of capital stock of the Fund,
each of which is, in the case of a Fund having Series, allocated to a
particular Series.
23. "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.
24. "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.
25. "Terminal Link" shall mean an electronic data transmission
link between the Fund and the Custodian requiring in connection with each use
of the Terminal Link by or on behalf of the Fund use of an authorization code
provided by the Custodian and at least two access codes established by the
Fund.
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.
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<PAGE> 5
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article
and in Article VIII, the Fund will deliver or cause to be delivered to the
Custodian all Securities and all moneys owned by it, at any time during the
period of this Agreement, and shall specify with respect to such Securities and
money the Series to which the same are specifically allocated. The Custodian
shall segregate, keep and maintain the assets of the Series separate and apart.
The Custodian will not be responsible for any Securities and moneys not
actually received by it. The Custodian will be entitled to reverse any credits
made on the Fund's behalf where such credits have been previously made and
moneys are not finally collected. The Fund shall deliver to the Custodian a
certified resolution of the Board of Directors of the Fund, substantially in
the form of Exhibit A hereto, approving, authorizing and instructing the
Custodian on a continuous and on-going basis to deposit in the Book-Entry
System all Securities eligible for deposit therein, regardless of the Series to
which the same are specifically allocated and to utilize the Book-Entry System
to the extent possible in connection with its performance hereunder, including,
without limitation, in connection with settlements of purchases and sales of
Securities, loans of Securities and deliveries and returns of Securities
collateral. Prior to a deposit of Securities specifically allocated to a Series
in the Depository, the Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit B hereto, approving, authorizing and instructing the Custodian on a
continuous and ongoing basis until instructed to the contrary by a Certificate
actually received by the Custodian to deposit in the Depository all Securities
specifically allocated to such Series eligible for deposit therein, and to
utilize the Depository to the extent possible with respect to such Securities
in connection with its performance hereunder, including, without limitation, in
connection with settlements of purchases and sales of Securities, loans of
Securities, and deliveries and returns of Securities collateral. Securities
and moneys deposited in either the Book-Entry System or the Depository will be
represented in accounts which include only assets held by the Custodian for
customers, including, but not limited to, accounts in which the Custodian acts
in a fiduciary or representative capacity and will be specifically allocated on
the Custodian's books to the separate account for the applicable Series. Prior
to the Custodian's accepting, utilizing and acting with respect to Clearing
Member confirmations for Options and transactions in Options for a Series as
provided in this Agreement, the Custodian shall have received a certified
resolution of the Fund's
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<PAGE> 6
Board of Directors, substantially in the form of Exhibit C hereto, approving,
authorizing and instructing the Custodian on a continuous and on-going basis,
until instructed to the contrary by a Certificate actually received by the
Custodian, to accept, utilize and act in accordance with such confirmations as
provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts,
in the name of each Series, and shall credit to the separate account for each
Series all moneys received by it for the account of the Fund with respect to
such Series. Money credited to a separate account for a Series shall be
disbursed by the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and
address of the person to whom the payment is to be made, the Series account
from which payment is to be made and the purpose for which payment is to be
made; or
(c) In payment of the fees and in reimbursement of the
expenses and liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the
Custodian shall furnish the Fund with confirmations and a summary, on a per
Series basis, of all transfers to or from 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
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<PAGE> 7
any Securities which it may hold hereunder and which may from time to time be
registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in the
Book-Entry System or in the Depository in a separate account in the name of
such Series physically segregated at all times from those of any other person
or persons.
5. Except as otherwise provided in this Agreement and unless
otherwise instructed to the contrary by a Certificate, the Custodian by itself,
or through the use of the Book-Entry System or the Depository with respect to
Securities held hereunder and therein deposited, shall with respect to all
Securities held for the Fund hereunder in accordance with preceding paragraph
4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount payable
upon such Securities which are called, but only if either (i) the Custodian
receives a written notice of such call, or (ii) notice of such call appears in
one or more of the publications listed in Appendix B annexed hereto, which may
be amended at any time by the Custodian without the prior notification or
consent of the Fund;
(c) Present for payment and collect the amount payable
upon all Securities which mature;
(d) Surrender Securities in temporary form for definitive
Securities;
(e) Execute, as custodian, any necessary declarations or
certificates of ownership under the Federal Income Tax Laws or the laws or
regulations of any other taxing authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System or
the Depository with respect to Securities therein deposited, for the account of
a Series, all rights and similar securities issued with respect to any
Securities held by the Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the
Custodian, directly or through the use of the Book-Entry System or the
Depository, shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authorizations, and any other
instruments whereby the authority of the Fund as owner of any Securities held
by the Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate in exchange for
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<PAGE> 8
other Securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege and receive and hold
hereunder specifically allocated to such Series any cash or other Securities
received in exchange;
(c) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate to any protective
committee, reorganization committee or other person in connection with the
reorganization, refinancing, merger, consolidation, recapitalization or sale of
assets of any corporation, and receive and hold hereunder specifically
allocated to such Series such certificates of deposit, interim receipts or
other instruments or documents as may be issued to it to evidence such
delivery;
(d) Make such transfers or exchanges of the assets of the
Series specified in such Certificate, and take such other steps as shall be
stated in such Certificate to be for the purpose of effectuating any duly
authorized plan of liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
(e) Present for payment and collect the amount payable
upon Securities not described in preceding paragraph 5(b) of this Article which
may be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates
are available. The Fund shall deliver to the Custodian such a Certificate no
later than the business day preceding the availability of any such instrument
or certificate. Prior to such availability, the Custodian shall comply with
Section 17(f) of the Investment Company Act of 1940, as amended, in connection
with the purchase, sale, settlement, closing out or writing of Futures
Contracts, Options, or Futures Contract Options by making payments or
deliveries specified in Certificates received by the Custodian in connection
with any such purchase, sale, writing, settlement or closing out upon its
receipt from a broker, dealer, or futures commission merchant of a statement or
confirmation reasonably believed by the Custodian to be in the form customarily
used by brokers, dealers, or future commission merchants with respect to such
Futures Contracts, Options, or Futures Contract Options, as the case may be,
confirming that such Security is held by such broker, dealer or futures
commission merchant, in book-entry form or otherwise, in the name of the
Custodian (or any nominee of the Custodian) as custodian for the Fund,
provided, however, that notwithstanding the foregoing, payments to or
deliveries from the Margin Account, and payments
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<PAGE> 9
with respect to Securities to which a Margin Account relates, shall be made in
accordance with the terms and conditions of the Margin Account Agreement.
Whenever any such instruments or certificates are available, the Custodian
shall, notwithstanding any provision in this Agreement to the contrary, make
payment for any Futures Contract, Option, or Futures Contract Option for which
such instruments or such certificates are available only against the delivery
to the Custodian of such instrument or such certificate, and deliver any
Futures Contract, Option or Futures Contract Option for which such instruments
or such certificates are available only against receipt by the Custodian of
payment therefor. Any such instrument or certificate delivered to the
Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other
than a purchase of an Option, a Futures Contract, or a Futures Contract Option,
the Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if
any; and (h) the name of the broker to whom payment is to be made. The
Custodian shall, upon receipt of Securities purchased by or for the Fund, pay
to the broker specified in the Certificate out of the moneys held for the
account of such Series the total amount payable upon such purchase, provided
that the same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than
a sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a
Certificate, and (ii) with respect to each sale of Money Market Securities, a
Certificate or Oral Instructions, specifying with respect to each such sale:
(a) the Series to which such Securities were specifically allocated; (b) the
name of the issuer and the title of the Security; (c) the number of shares or
principal amount
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<PAGE> 10
sold, and accrued interest, if any; (d) the date of sale; (e) the sale price
per unit; (f) the total amount payable to the Fund upon such sale; (g) the name
of the broker through whom or the person to whom the sale was made, and the
name of the clearing broker, if any; and (h) the name of the broker to whom the
Securities are to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified in the
Certificate against payment of the total amount payable to the Fund upon such
sale, provided that the same conforms to the total amount payable as set forth
in such Certificate or Oral Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the
Fund shall deliver to the Custodian a Certificate specifying with respect to
each Option purchased: (a) the Series to which such Option is specifically
allocated; (b) the type of Option (put or call); (c) the name of the issuer and
the title and number of shares subject to such Option or, in the case of a
Stock Index Option, the stock index to which such Option relates and the number
of Stock Index Options purchased; (d) the expiration date; (e) the exercise
price; (f) the dates of purchase and settlement; (g) the total amount payable
by the Fund in connection with such purchase; (h) the name of the Clearing
Member through whom such Option was purchased; and (i) the name of the broker
to whom payment is to be made. The Custodian shall pay, upon receipt of a
Clearing Member's statement confirming the purchase of such Option held by such
Clearing Member for the account of the Custodian (or any duly appointed and
registered nominee of the Custodian) as custodian for the Fund, out of moneys
held for the account of the Series to which such Option is to be specifically
allocated, the total amount payable upon such purchase to the Clearing Member
through whom the purchase was made, provided that the same conforms to the
total amount payable as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund
pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a
Certificate specifying with respect to each such sale: (a) the Series to which
such Option was specifically allocated; (b) the type of Option (put or call);
(c) the name of the issuer and the title and number of shares subject to such
Option or, in the case of a Stock Index Option, the stock index to which such
Option relates and the number of Stock Index Options sold; (d) the date of
sale; (e) the sale price; (f) the date of settlement; (g) the total amount
payable to the Fund upon such sale; and (h) the name of the Clearing Member
through whom the sale was made. The Custodian shall consent to the delivery of
the Option sold by the Clearing Member which previously supplied the
confirmation described in preceding paragraph 1 of this Article with respect to
such Option against payment to
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<PAGE> 11
the Custodian of the total amount payable to the Fund, provided that the same
conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Call Option: (a)
the Series to which such Call Option was specifically allocated; (b) the name
of the issuer and the title and number of shares subject to the Call Option;
(c) the expiration date; (d) the date of exercise and settlement; (e) the
exercise price per share; (f) the total amount to be paid by the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such Call Option
was exercised. The Custodian shall, upon receipt of the Securities underlying
the Call Option which was exercised, pay out of the moneys held for the account
of the Series to which such Call Option was specifically allocated the total
amount payable to the Clearing Member through whom the Call Option was
exercised, provided that the same conforms to the total amount payable as set
forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Put Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise
price per share; (f) the total amount to be paid to the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such Put Option
was exercised. The Custodian shall, upon receipt of the amount payable upon the
exercise of the Put Option, deliver or direct the Depository to deliver the
Securities specifically allocated to such Series, provided the same conforms to
the amount payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index
Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series to which such Stock Index Option was specifically
allocated; (b) the type of Stock Index Option (put or call); (c) the number of
Options being exercised; (d) the stock index to which such Option relates; (e)
the expiration date; (f) the exercise price; (g) the total amount to be
received by the Fund in connection with such exercise; and (h) the Clearing
Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares for
which
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<PAGE> 12
the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of
the Clearing Member through whom the premium is to be received. The Custodian
shall deliver or cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct
the Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as may be
required by such receipts. Notwithstanding the foregoing, the Custodian has the
right, upon prior written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and
described in the preceding paragraph of this Article is exercised, the Fund
shall promptly deliver to the Custodian a Certificate instructing the Custodian
to deliver, or to direct the Depository to deliver, the Securities subject to
such Covered Call Option and specifying: (a) the Series for which such Covered
Call Option was written; (b) the name of the issuer and the title and number of
shares subject to the Covered Call Option; (c) the Clearing Member to whom the
underlying Securities are to be delivered; and (d) the total amount payable to
the Fund upon such delivery. Upon the return and/or cancellation of any
receipts delivered pursuant to paragraph 6 of this Article, the Custodian shall
deliver, or direct the Depository to deliver, the underlying Securities as
specified in the Certificate against payment of the amount to be received as
set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (e) the premium to be received by the Fund; (f) the date such Put Option
is written; (g) the name of the Clearing Member through whom the premium is to
be received and to whom a Put Option guarantee letter is to be delivered; (h)
the amount of cash, and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series; and (i) the amount of cash and/or the amount and kind
of Securities specifically allocated to such Series to be deposited into the
Collateral Account for such Series. The Custodian shall, after making the
deposits into the Collateral Account 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
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<PAGE> 13
the premium specified in said Certificate. Notwithstanding the foregoing, the
Custodian shall be under no obligation to issue any Put Option guarantee letter
or similar document if it is unable to make any of the representations
contained therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of shares subject to
the Put Option; (c) the Clearing Member from whom the underlying Securities are
to be received; (d) the total amount payable by the Fund upon such delivery;
(e) the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be withdrawn from the Collateral Account for such
Series and (f) the amount of cash and/or the amount and kind of Securities,
specifically allocated to such Series, if any, to be withdrawn from the Senior
Security Account. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian in connection with
such Put Option, the Custodian shall pay out of the moneys held for the account
of the Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as set forth
in such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the number
of options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Security Account for
such Series; (j) the amount of cash and/or the amount and kind of Securities,
if any, specifically allocated to such Series to be deposited in the Collateral
Account for such Series; and (k) the amount of cash and/or the amount and kind
of Securities, if any, specifically allocated to such Series to be deposited in
a Margin Account, and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium specified in the
Certificate, make the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such receipts, if any,
which the Custodian 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.
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<PAGE> 14
11. Whenever a Stock Index Option written by the Fund and
described in the preceding paragraph of this Article is exercised, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect
to such Stock Index Option: (a) the Series for which such Stock Index Option
was written; (b) such information as may be necessary to identify the Stock
Index Option being exercised; (c) the Clearing Member through whom such Stock
Index Option is being exercised; (d) the total amount payable upon such
exercise, and whether such amount is to be paid by or to the Fund; (e) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Margin Account; and (f) the amount of cash and/or amount and kind of
Securities, if any, to be withdrawn from the Senior Security Account for such
Series; and the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account for such Series. Upon the
return and/or cancellation of the receipt, if any, delivered pursuant to the
preceding paragraph of this Article, the Custodian shall pay out of the moneys
held for the account of the Series to which such Stock Index Option was
specifically allocated to the Clearing Member specified in the Certificate the
total amount payable, if any, as specified therein.
12. Whenever the Fund purchases any Option identical to a
previously written Option described in paragraphs, 6, 8 or 10 of this Article
in a transaction expressly designated as a "Closing Purchase Transaction" in
order to liquidate its position as a writer of an Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to the
Option being purchased: (a) that the transaction is a Closing Purchase
Transaction; (b) the Series for which the Option was written; (c) the name of
the issuer and the title and number of shares subject to the Option, or, in the
case of a Stock Index Option, the stock index to which such Option relates and
the number of Options held; (d) the exercise price; (e) the premium to be paid
by the Fund; (f) the expiration date; (g) the type of Option (put or call); (h)
the date of such purchase; (i) the name of the Clearing Member to whom the
premium is to be paid; and (j) the amount of cash and/or the amount and kind of
Securities, if any, to be withdrawn from the Collateral Account, a specified
Margin Account, or the Senior Security Account for such Series. Upon the
Custodian's payment of the premium and the return and/or cancellation of any
receipt issued pursuant to paragraphs 6, 8 or 10 of this Article with respect
to the Option being liquidated through the Closing Purchase Transaction, the
Custodian shall remove, 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
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<PAGE> 15
Custodian, shall make such withdrawals from the Collateral Account, and the
Margin Account and/or the Senior Security Account as may be specified in a
Certificate received in connection with such expiration, exercise, or
consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the
Fund shall deliver to the Custodian a Certificate specifying with respect to
such Futures Contract, (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index or
financial instrument); (c) the number of identical Futures Contracts entered
into; (d) the delivery or settlement date of the Futures Contract(s); (e) the
date the Futures Contract(s) was (were) entered into and the maturity date; (f)
whether the Fund is buying (going long) or selling (going short) on such
Futures Contract(s); (g) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series; (h) the name of the broker, dealer, or futures commission merchant
through whom the Futures Contract was entered into; and (i) the amount of fee
or commission, if any, to be paid and the name of the broker, dealer, or
futures commission merchant to whom such amount is to be paid. The Custodian
shall make the deposits, if any, to the Margin Account in accordance with the
terms and conditions of the Margin Account Agreement. The Custodian shall make
payment out of the moneys specifically allocated to such Series of the fee or
commission, if any, specified in the Certificate and deposit in the Senior
Security Account for such Series the amount of cash and/or the amount and kind
of Securities specified in said Certificate.
2. (a) Any variation margin payment or similar payment
required to be made by the Fund to a broker, dealer, or futures commission
merchant with respect to an outstanding Futures Contract, shall be made by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
(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
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<PAGE> 16
to be paid or received, and with respect to a Financial Futures Contract, the
Securities and/or amount of cash to be delivered or received; (c) the broker,
dealer, or futures commission merchant to or from whom payment or delivery is
to be made or received; and (d) the amount of cash and/or Securities to be
withdrawn from the Senior Security Account for such Series. The Custodian shall
make the payment or delivery specified in the Certificate, and delete such
Futures Contract from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to
offset a Futures Contract held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate specifying: (a) the items of information
required in a Certificate described in paragraph 1 of this Article, and (b) the
Futures Contract being offset. The Custodian shall make payment out of the
money specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by
the Fund, the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Futures Contract Option: (a) the Series to
which such Option is specifically allocated; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and such other
information as may be necessary to identify the Futures Contract underlying the
Futures Contract Option purchased; (d) the expiration date; (e) the exercise
price; (f) the dates of purchase and settlement; (g) the amount of premium to
be paid by the Fund upon such purchase; (h) the name of the broker or futures
commission merchant through whom such option was purchased; and (i) the name of
the broker, or futures commission merchant, to whom payment is to be made. The
Custodian shall pay out of the moneys specifically allocated to such Series,
the total amount to be paid upon such purchase to the broker or futures
commissions merchant through whom the purchase was made, provided that the same
conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to each such
sale: (a) Series to which
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<PAGE> 17
such Futures Contract Option was specifically allocated; (b) the type of Future
Contract Option (put or call); (c) the type of Futures Contract and such other
information as may be necessary to identify the Futures Contract underlying the
Futures Contract Option; (d) the date of sale; (e) the sale price; (f) the date
of settlement; (g) the total amount payable to the Fund upon such sale; and (h)
the name of the broker of futures commission merchant through whom the sale was
made. The Custodian shall consent to the cancellation of the Futures Contract
Option being closed against payment to the Custodian of the total amount
payable to the Fund, provided the same conforms to the total amount payable as
set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund
pursuant to paragraph 1 is exercised by the Fund, the Fund shall promptly
deliver to the Custodian a Certificate specifying: (a) the Series to which such
Futures Contract Option was specifically allocated; (b) the particular Futures
Contract Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall make, out of the moneys and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect
to such Futures Contract Option: (a) the Series for which such Futures Contract
Option was written; (b) the type of Futures Contract Option (put or call); (c)
the type of Futures Contract and such other information as may be necessary to
identify the Futures Contract underlying the Futures Contract Option; (d) the
expiration date; (e) the exercise price; (f) the premium to be received by the
Fund; (g) the name of the broker or futures commission merchant through whom
the premium is to be received; and (h) the amount of cash and/or the amount and
kind of Securities, if any, to be deposited in the Senior Security Account for
such Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the moneys and Securities specifically allocated to
such Series the deposits into the Senior Security Account, if any, as specified
in the Certificate. The deposits, if any, to be made to the Margin Account
shall be made by the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
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<PAGE> 18
5. Whenever a Futures Contract Option written by the Fund which
is a call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option
was specifically allocated; (b) the particular Futures Contract Option
exercised; (c) the type of Futures Contract underlying the Futures Contract
Option; (d) the name of the broker or futures commission merchant through whom
such Futures Contract Option was exercised; (e) the net total amount, if any,
payable to the Fund upon such exercise; (f) the net total amount, if any,
payable by the Fund upon such exercise; and (g) the amount of cash and/or the
amount and kind of Securities to be deposited in the Senior Security Account
for such Series. The Custodian shall, upon its receipt of the net total amount
payable to the Fund, if any, specified in such Certificate make the payments,
if any, and the deposits, if any, into the Senior Security Account as specified
in the Certificate. The deposits, if any, to be made to the Margin Account
shall be made by the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written by the
Fund and which is a put is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying such Futures Contract Option; (d)
the name of the broker or futures commission merchant through whom such Futures
Contract Option is exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount and kind of Securities and/or cash to be
withdrawn from or deposited in, the Senior Security Account for such Series, if
any. The Custodian shall, upon its receipt of the net total amount payable to
the Fund, if any, specified in the Certificate, make out of the moneys and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits to and/or withdrawals from the Margin Account, if
any, shall be made by the Custodian in accordance with the terms and conditions
of the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option
identical to a previously written Futures Contract Option described in this
Article in order to liquidate its position as a writer of such Futures Contract
Option, the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to the Futures Contract Option being purchased: (a) the
Series to which such Option is specifically allocated; (b) that the transaction
is a closing transaction; (c) the type of Future Contract and such other
information as may be necessary to identify the Futures Contract underlying the
Futures Option Contract; (d) the exercise price; (e) the premium to be paid by
the Fund; (f) the expiration date; (g) the name of the broker or futures
commission merchant to whom the premium is to be paid;
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<PAGE> 19
and (h) the amount of cash and/or the amount and kind of Securities, if any, to
be withdrawn from the Senior Security Account for such Series. The Custodian
shall effect the withdrawals from the Senior Security Account specified in the
Certificate. The withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased
by the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in
the case of an exercise such deposits into the Senior Security Account as may
be specified in a Certificate. The deposits to and/or withdrawals from the
Margin Account, if any, shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of
a Futures Contract Option described in this Article shall be subject to Article
VI hereof.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the
Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the
Series for which such short sale was made; (b) the name of the issuer and the
title of the Security; (c) the number of shares or principal amount sold, and
accrued interest or dividends, if any; (d) the dates of the sale and
settlement; (e) the sale price per unit; (f) the total amount credited to the
Fund upon such sale, if any, (g) the amount of cash and/or the amount and kind
of Securities, if any, which are to be deposited in a Margin Account and the
name in which such Margin Account has been or is to be established; (h) the
amount of cash and/or the amount and kind of Securities, if any, to be
deposited in a Senior Security Account, and (i) the name of the broker through
whom such short sale was made. The Custodian shall upon its receipt of a
statement from such broker confirming such sale and that the total amount
credited to the Fund upon such sale, if any, as specified in the Certificate is
held by such broker for the account of the Custodian (or any nominee of the
Custodian) as custodian of the Fund, issue a receipt or make the deposits into
the Margin Account and the Senior Security Account specified in the
Certificate.
2. In connection with the closing-out of any short sale, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect
to each such closing out: (a) the Series for which such transaction is being
made; (b) the
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<PAGE> 20
name of the issuer and the title of the Security; (c) the number of shares or
the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net total amount
payable to the broker upon such closing-out; (h) the amount of cash and the
amount and kind of Securities to be withdrawn, if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such closing-out, and
the return and/ or cancellation of the receipts, if any, issued by the
Custodian with respect to the short sale being closed-out, pay out of the
moneys held for the account of the Fund to the broker the net total amount
payable to the broker, and make the withdrawals from the Margin Account and the
Senior Security Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement
with respect to Securities and money held by the Custodian hereunder, the Fund
shall deliver to the Custodian a Certificate, or in the event such Reverse
Repurchase Agreement is a Money Market Security, a Certificate or Oral
Instructions specifying: (a) the Series for which the Reverse Repurchase
Agreement is entered; (b) the total amount payable to the Fund in connection
with such Reverse Repurchase Agreement and specifically allocated to such
Series; (c) the broker or dealer through or with whom the Reverse Repurchase
Agreement is entered; (d) the amount and kind of Securities to be delivered by
the Fund to such broker or dealer; (e) the date of such Reverse Repurchase
Agreement; and (f) the amount of cash and/or the amount and kind of Securities,
if any, specifically allocated to such Series to be deposited in a Senior
Security Account for such Series in connection with such Reverse Repurchase
Agreement. The Custodian shall, upon receipt of the total amount payable to the
Fund specified in the Certificate, Oral Instructions, or Written Instructions
make the delivery to the broker or dealer, and the deposits, if any, to the
Senior Security Account, specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement
described in preceding paragraph 1 of this Article, the Fund shall promptly
deliver a Certificate or, in the event such Reverse Repurchase Agreement is a
Money Market Security, a Certificate or Oral Instructions to the Custodian
specifying: (a) the Reverse Repurchase Agreement being terminated and the
Series for which same was entered; (b) the total amount payable by the
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<PAGE> 21
Fund in connection with such termination; (c) the amount and kind of Securities
to be received by the Fund and specifically allocated to such Series in
connection with such termination; (d) the date of termination; (e) the name of
the broker or dealer with or through whom the Reverse Repurchase Agreement is
to be terminated; and (f) the amount of cash and/or the amount and kind of
Securities to be withdrawn from the Senior Securities Account for such Series.
The Custodian shall, upon receipt of the amount and kind of Securities to be
received by the Fund specified in the Certificate or Oral Instructions, make
the payment to the broker or dealer, and the withdrawals, if any, from the
Senior Security Account, specified in such Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall deliver
or cause to be delivered to the Custodian a Certificate specifying with respect
to each such loan: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the title of the
Securities, (c) the number of shares or the principal amount loaned, (d) the
date of loan and delivery, (e) the total amount to be delivered to the
Custodian against the loan of the Securities, including the amount of cash
collateral and the premium, if any, separately identified, and (f) the name of
the broker, dealer, or financial institution to which the loan was made. The
Custodian shall deliver the Securities thus designated to the broker, dealer or
financial institution to which the loan was made upon receipt of the total
amount designated as to be delivered against the loan of Securities. The
Custodian may accept payment in connection with a delivery otherwise than
through the Book-Entry System or Depository only in the form of a certified or
bank cashier's check payable to the order of the Fund or the Custodian drawn on
New York Clearing House funds and may deliver Securities in accordance with the
customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by
the Fund, the Fund shall deliver or cause to be delivered to the Custodian a
Certificate specifying with respect to each such loan termination and return of
Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be returned, (d)
the date of termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any offsetting credits
as described in said Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will
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<PAGE> 22
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 Account, the Custodian shall be under no
obligation to make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member
in whose name, or for whose benefit, the account was established as specified
in the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions
with respect to Securities deposited in any Margin Account shall be dealt with
in accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security
interest in and to any property at any time held by the Custodian in any
Collateral Account described herein. In accordance with applicable law the
Custodian may enforce its lien and realize on any such property whenever the
Custodian has made payment or delivery pursuant to any Put Option guarantee
letter or similar document or any receipt issued hereunder by the Custodian. In
the event the Custodian should realize on any such property net proceeds which
are less than the Custodian's obligations under any Put Option guarantee letter
or similar document or any receipt, such deficiency shall be a debt owed the
Custodian by the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with
a statement with respect to each Margin Account in which money or Securities
are held specifying as of the close of
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<PAGE> 23
business on the previous business day: (a) the name of the Margin Account; (b)
the amount and kind of Securities held therein; and (c) the amount of money
held therein. The Custodian shall make available upon request to any broker,
dealer, or futures commission merchant specified in the name of a Margin
Account a copy of the statement furnished the Fund with respect to such Margin
Account.
6. Promptly after the close of business on each business day in
which cash and/or Securities are maintained in a Collateral Account for any
Series, the Custodian shall furnish the Fund with a statement with respect to
such Collateral Account specifying the amount of cash and/or the amount and
kind of Securities held therein. No later than the close of business next
succeeding the delivery to the Fund of such statement, the Fund shall furnish
to the Custodian a Certificate 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 Custodian's obligation with
respect to any outstanding Put Option guarantee letter or similar document, the
Fund shall promptly specify in a Certificate the additional cash and/or
Securities to be deposited in such Collateral Account to eliminate such
deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the
resolution of the Board of Directors of the Fund, certified by the Secretary or
any Assistant Secretary, either (i) setting forth with respect to the Series
specified therein the date of the declaration of a dividend or distribution,
the date of payment thereof, the record date as of which shareholders entitled
to payment shall be determined, the amount payable per Share of such Series to
the shareholders of record as of that date and the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund on
the payment date, or (ii) authorizing with respect to the Series specified
therein the declaration of dividends and distributions on a daily basis and
authorizing the Custodian to rely on Oral Instructions or a Certificate setting
forth the date of the declaration of such dividend or distribution, the date of
payment thereof, the record date as of which shareholders entitled to payment
shall be determined, the amount payable per Share of such Series to the
shareholders of record as of that date and the total amount payable to the
Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall pay out of
the moneys held for the account of each Series the total amount payable to the
Dividend Agent and any
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<PAGE> 24
sub-dividend agent or co-dividend agent of the Fund with respect to such
Series.
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to
the Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade date,
and price; and
(b) The amount of money to be received by the Custodian
for the sale of such Shares and specifically allocated to the separate account
in the name of such Series.
2. Upon receipt of such money from the Transfer Agent, the
Custodian shall credit such money to the separate account in the name of the
Series for which such money was received.
3. Upon issuance of any Shares of any Series described in the
foregoing provisions of this Article, the Custodian shall pay, out of the money
held for the account of such Series, all original issue or other taxes required
to be paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Whenever the Fund desires the Custodian to make payment out of
the money held by the Custodian hereunder in connection with a redemption of
any Shares, it shall furnish to the Custodian:
(a) A resolution by the Board of Directors of the Fund
directing the Transfer Agent to redeem the Shares;
and
(b) A Certificate specifying the number and Series of
Shares redeemed; and
(c) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting
forth the Series and number of Shares received by the Transfer Agent for
redemption and that such Shares are in good form for redemption, the Custodian
shall make payment to the Transfer Agent out of the moneys held in the separate
account in the name of the Series the total amount specified in the Certificate
issued pursuant to the foregoing paragraph 4 of this Article.
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<PAGE> 25
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds
on behalf of any Series which results in an overdraft because the moneys held
by the Custodian in the separate account for such Series shall be insufficient
to pay the total amount payable upon a purchase of Securities specifically
allocated to such Series, as set forth in a Certificate or Oral Instructions,
or which results in an overdraft in the separate account of such Series for
some other reason, or if the Fund is for any other reason indebted to the
Custodian with respect to a Series, including any indebtedness to The Bank of
New York under the Fund's Cash Management and Related Services Agreement,
(except a borrowing for investment or for temporary or emergency purposes using
Securities as collateral pursuant to a separate agreement and subject to the
provisions of paragraph 2 of this Article), such overdraft or indebtedness
shall be deemed to be a loan made by the Custodian to the Fund for such Series
payable on demand and shall bear interest from the date incurred at a rate per
annum (based on a 360-day year for the actual number of days involved) equal to
1/2% over Custodian's prime commercial lending rate in effect from time to
time, such rate to be adjusted on the effective date of any change in such
prime commercial lending rate but in no event to be less than 6% per annum. In
addition, the Fund hereby agrees that the Custodian shall have a continuing
lien and security interest in and to any property specifically allocated to
such Series at any time held by it for the benefit of such Series or in which
the Fund may have an interest which is then in the Custodian's possession or
control or in possession or control of any third party acting in the
Custodian's behalf. The Fund authorizes the Custodian, in its sole discretion,
at any time to charge any such overdraft or indebtedness together with interest
due thereon against any balance of account standing to such Series' credit on
the Custodian's books. In addition, the Fund hereby covenants that on each
Business Day on which either it intends to enter a Reverse Repurchase Agreement
and/or otherwise borrow from a third party, or which next succeeds a Business
Day on which at the close of business the Fund had outstanding a Reverse
Repurchase Agreement or such a borrowing, it shall prior to 9 a.m., New York
City time, advise the Custodian, in writing, of each such borrowing, shall
specify the Series to which the same relates, and shall not incur any
indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any
bank (including, if the borrowing is pursuant to a separate agreement, the
Custodian) from which it borrows money for investment or for temporary or
emergency purposes using Securities held by the Custodian hereunder as
collateral for such borrowings, a notice or undertaking in the form currently
employed by any such bank setting forth the amount which such
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<PAGE> 26
bank will loan to the Fund against delivery of a stated amount of collateral.
The Fund shall promptly deliver to the Custodian a Certificate specifying with
respect to each such borrowing: (a) the Series to which such borrowing relates;
(b) the name of the bank, (c) the amount and terms of the borrowing, which may
be set forth by incorporating by reference an attached promissory note, duly
endorsed by the Fund, or other loan agreement, (d) the time and date, if known,
on which the loan is to be entered into, (e) the date on which the loan becomes
due and payable, (f) the total amount payable to the Fund on the borrowing
date, (g) the market value of Securities to be delivered as collateral for such
loan, including the name of the issuer, the title and the number of shares or
the principal amount of any particular Securities, and (h) a statement
specifying whether such loan is for investment purposes or for temporary or
emergency purposes and that such loan is in conformance with the Investment
Company Act of 1940 and the Fund's prospectus. The Custodian shall deliver on
the borrowing date specified in a Certificate the specified collateral and the
executed promissory note, if any, against delivery by the lending bank of the
total amount of the loan payable, provided that the same conforms to the total
amount payable as set forth in the Certificate. The Custodian may, at the
option of the lending bank, keep such collateral in its possession, but such
collateral shall be subject to all rights therein given the lending bank by
virtue of any promissory note or loan agreement. The Custodian shall deliver
such Securities as additional collateral as may be specified in a Certificate
to collateralize further any transaction described in this paragraph. The Fund
shall cause all Securities released from collateral status to be returned
directly to the Custodian, and the Custodian shall receive from time to time
such return of collateral as may be tendered to it. In the event that the Fund
fails to specify in a Certificate the Series, the name of the issuer, the title
and number of shares or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall not be under any
obligation to deliver any Securities.
ARTICLE XV.
TERMINAL LINK
1. At no time and under no circumstances shall the Fund be
obligated to have or utilize the Terminal Link, and the provisions of this
Article shall apply if, but only if, the Fund in its sole and absolute
discretion elects to utilize the Terminal Link to transmit Certificates to the
Custodian.
2. The Terminal Link shall be utilized by the Fund only for the
purpose of the Fund providing Certificates to the Custodian with respect to
transactions involving Securities or for the transfer of money to be applied to
the payment of dividends, distributions or redemptions of Fund Shares, and
shall be utilized by the Custodian only for the purpose of providing notices to
the Fund. Such use shall commence only
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<PAGE> 27
after the Fund shall have delivered to the Custodian a Certificate
substantially in the form of Exhibit D and shall have established access codes.
Each use of the Terminal Link by the Fund shall constitute a representation and
warranty that the Terminal Link is being used only for the purposes permitted
hereby, that at least two Officers have each utilized an access code, that such
safekeeping procedures have been established by the Fund, and that such use
does not contravene the Investment Company Act of 1940, as amended, or the
rules or regulations thereunder.
3. The Fund shall obtain and maintain at its own cost and expense
all equipment and services, including, but not limited to communications
services, necessary for it to utilize the Terminal Link, and the Custodian
shall not be responsible for the reliability or availability of any such
equipment or services.
4. The Fund acknowledges that any data bases made available as
part of, or through the Terminal Link and any proprietary data, software,
processes, information and documentation (other than any such which are or
become part of the public domain or are legally required to be made available
to the public) (collectively, the "Information"), are the exclusive and
confidential property of the Custodian. The Fund shall, and shall cause others
to which it discloses the Information, to keep the Information confidential by
using the same care and discretion it uses with respect to its own confidential
property and trade secrets, and shall neither make nor permit any disclosure
without the express prior written consent of the Custodian.
5. Upon termination of this Agreement for any reason, the Fund
shall return to the Custodian any and all copies of the Information which are
in the Fund's possession or under its control, or which the Fund distributed to
third parties. The provisions of this Article shall not affect the copyright
status of any of the Information which may be copyrighted and shall apply to
all Information whether or not copyrighted.
6. The Custodian reserves the right to modify the Terminal Link
from time to time without notice to the Fund except that the Custodian shall
give the Fund notice not less than 75 days in advance of any modification which
would materially adversely affect the Fund's operation, and the Fund agrees
that the Fund shall not modify or attempt to modify the Terminal Link without
the Custodian's prior written consent. The Fund acknowledges that any software
or procedures provided the Fund as part of the Terminal Link are the property
of the Custodian and, accordingly, the Fund agrees that any modifications to
the Terminal Link, whether by the Fund, or by the Custodian and whether with or
without the Custodian's consent, shall become the property of the Custodian.
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7. Neither the Custodian nor any manufacturers and suppliers it
utilizes or the Fund utilizes in connection with the Terminal Link makes any
warranties or representations, express or implied, in fact or in law, including
but not limited to warranties of merchantability and fitness for a particular
purpose.
8. The Fund will cause its Officers and employees to treat the
authorization codes and the access codes applicable to Terminal Link with
extreme care, and irrevocably authorizes the Custodian to act in accordance
with and rely on Certificates received by it through the Terminal Link. The
Fund acknowledges that it is its responsibility to assure that only its
Officers use the Terminal Link on its behalf, and that a Custodian shall not be
responsible nor liable for use of the Terminal Link on the Fund's behalf by
persons other than such persons or Officers, or by only a single Officer, nor
for any alteration, omission, or failure to promptly forward.
9(a). Except as otherwise specifically provided in Section 9(b) of
this Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the direct result of the negligence of the Custodian
in an amount not exceeding for any incident $25,000 provided, however, that the
Custodian shall have no liability under this Section 9 if the Fund fails to
comply with the provisions of Section 11.
9(b). The Custodian's liability for its negligence in executing or
failing to execute in accordance with a Certificate received through Terminal
Link shall be only with respect to a transfer of funds which is not made in
accordance with such Certificate after such Certificate shall have been duly
acknowledged by the Custodian, and shall be contingent upon the Fund complying
with the provisions of Section 12 of this Article, and shall be limited to (i)
restoration of the principal amount mistransferred, if and to the extent that
the Custodian would be required to make such restoration under applicable law,
and (ii) the lesser of (A) a Fund's actual pecuniary loss incurred by reason of
its loss of use of the mistransferred funds or the funds which were not
transferred, as the case may be, or (B) compensation for the loss of the use of
the mistransferred funds or the funds which were not transferred, as the case
may be, at a rate per annum equal to the average federal funds rate as computed
from the Federal Reserve Bank of New York's daily determination of the
effective rate for federal funds, for the period during which a Fund has lost
use of such funds. In no event shall the Custodian have any liability for
failing to execute in accordance with a Certificate a transfer of funds where
the Certificate is received by the Custodian through Terminal Link other than
through the applicable transfer module for the particular instructions
contained in such Certificate.
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10. Without limiting the generality of the foregoing, in no event
shall the Custodian or any manufacturer or supplier of its computer equipment,
software or services relating to the Terminal Link be responsible for any
special, indirect, incidental or consequential damages which the Fund may incur
or experience by reason of its use of the Terminal Link even if the Custodian
or any manufacturer or supplier has been advised of the possibility of such
damages, nor with respect to the use of the Terminal Link shall the Custodian
or any such manufacturer or supplier be liable for acts of God, or with respect
to the following to the extent beyond such person's reasonable control: machine
or computer breakdown or malfunction, interruption or malfunction of
communication facilities, labor difficulties or any other similar or dissimilar
cause.
11. The Fund shall notify the Custodian of any errors, omissions
or interruptions in, or delay or unavailability of, the Terminal Link as
promptly as practicable, and in any event within 24 hours after the earliest of
(i) discovery thereof, (ii) the Business Day on which discovery should have
occurred through the exercise of reasonable care and (iii) in the case of any
error, the date of actual receipt of the earliest notice which reflects such
error, it being agreed that discovery and receipt of notice may only occur on a
business day. The Custodian shall promptly advise the Fund whenever the
Custodian learns of any errors, omissions or interruption in, or delay or
unavailability of, the Terminal Link.
12. The Custodian shall verify to the Fund, by use of the Terminal
Link, receipt of each Certificate the Custodian receives through the Terminal
Link, and in the absence of such verification the Custodian shall not be liable
for any failure to act in accordance with such Certificate and the Fund may not
claim that such Certificate was received by the Custodian. Such verification,
which may occur after the Custodian has acted upon such Certificate, shall be
accomplished on the same day on which such Certificate is received.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as
sub-custodian for each Series' Foreign Securities (as such term is defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as
amended) and other assets, the foreign banking institutions and foreign
securities depositories and clearing agencies designated on Schedule I hereto
("Foreign Sub-Custodians") to carry out their respective
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responsibilities in accordance with the terms of the subcustodian agreement
between each such Foreign Sub-Custodian and the Custodian, copies of which have
been previously delivered to the Fund and receipt of which is hereby
acknowledged (each such agreement, a "Foreign Sub-Custodian Agreement"). The
Custodian shall be liable for the acts and omissions of each Foreign
SubCustodian constituting negligence or willful misconduct in the conduct of
its responsibilities under the terms of the Foreign Sub-Custodian Agreement.
Upon receipt of a Certificate, together with a certified resolution
substantially in the form attached as Exhibit E of the Fund's Board of
Directors, the Fund may designate any additional foreign sub-custodian with
which the Custodian has an agreement for such entity to act as the Custodian's
agent, as its sub-custodian and any such additional foreign sub-custodian shall
be deemed added to Schedule I. Upon receipt of a Certificate from the Fund, the
Custodian shall cease the employment of any one or more Foreign Sub-Custodians
for maintaining custody of the Fund's assets and such Foreign Sub-Custodian
shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substantially in
the form previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the
Fund or any Series against a Foreign Sub- Custodian as a consequence of any
loss, damage, cost, expense, liability or claim sustained or incurred by the
Fund or any Series if and to the extent that the Fund or such Series has not
been made whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with
the terms of the applicable Foreign SubCustodian Agreement, use reasonable
efforts to arrange for the independent accountants of the Fund to be afforded
access to the books and records of any Foreign Sub-Custodian insofar as such
books and records relate to the performance of such Foreign SubCustodian under
its agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as
mutually agreed upon, statements in respect of the securities and other assets
of each Series held by Foreign SubCustodians, including but not limited to, an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign Sub-
Custodian for the Custodian on behalf of the Series.
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6. The Custodian shall furnish annually to the Fund, as mutually
agreed upon, information concerning the Foreign SubCustodians employed by the
Custodian. Such information shall be similar in kind and scope to that
furnished to the Fund in connection with the Fund's initial approval of such
Foreign SubCustodians and, in any event, shall include information pertaining
to (i) the Foreign Custodians' financial strength, general reputation and
standing in the countries in which they are located and their ability to
provide the custodial services required, and (ii) whether the Foreign
Sub-Custodians would provide a level of safeguards for safekeeping and custody
of securities not materially different form those prevailing in the United
States. The Custodian shall monitor the general operating performance of each
Foreign Sub-Custodian, and at least annually obtain and review the annual
financial report published by such Foreign Sub-Custodian to determine that it
meets the financial criteria of an "Eligible Foreign Custodian" under Rule
17f-5(c)(2)(i) or (ii). The Custodian will promptly inform the Fund in the
event that the Custodian learns that a Foreign Sub-Custodian no longer
satisfies the financial criteria of an "Eligible Foreign Custodian" under such
Rule. The Custodian agrees that it will use reasonable care in monitoring
compliance by each Foreign Sub-Custodian with the terms of the relevant Foreign
Sub-Custodian Agreement and that if it learns of any breach of such Foreign
Sub-Custodian Agreement believed by the Custodian to have a material adverse
effect on the Fund or any Series it will promptly notify the Fund of such
breach. The Custodian also agrees to use reasonable and diligent efforts to
enforce its rights under the relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the
contrary, settlement and payment for securities received for the account of any
Series and delivery of securities maintained for the account of such Series may
be effected in accordance with the customary or established securities trading
or securities processing practices and procedures in the jurisdiction or market
in which the transaction occurs, including, without limitation, delivery of
securities to the purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
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ARTICLE XVII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI
neither the Custodian nor its nominee shall be liable for any loss or damage,
including counsel fees, resulting from its action or omission to act or
otherwise, either hereunder or under any Margin Account Agreement, except for
any such loss or damage arising out of its own negligence or willful
misconduct. In no event shall the Custodian be liable to the Fund or any third
party for special, indirect or consequential damages or lost profits or loss of
business, arising under or in connection with this Agreement, even if
previously informed of the possibility of such damages and regardless of the
form of action. The Custodian may, with respect to questions of law arising
hereunder or under any Margin Account Agreement, apply for and obtain the
advice and opinion of counsel to the Fund or of its own counsel, at the expense
of the Fund, and shall be fully protected with respect to anything done or
omitted by it in good faith in conformity with such advice or opinion. The
Custodian shall be liable to the Fund for any loss or damage resulting from the
use of the Book-Entry System or any Depository arising by reason of any
negligence or willful misconduct on the part of the Custodian or any of its
employees or agents.
2. Without limiting the generality of the foregoing, the
Custodian shall be under no obligation to inquire into, and shall not be liable
for:
(a) The validity of the issue of any Securities
purchased, sold, or written by or for the Fund, the legality of the purchase,
sale or writing thereof, or the propriety of the amount paid or received
therefor;
(b) The legality of the sale or redemption of any Shares,
or the propriety of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any
dividend by the Fund;
(d) The legality of any borrowing by the Fund using
Securities as collateral;
(e) The legality of any loan of portfolio Securities, nor
shall the Custodian be under any duty or obligation to see to it that any cash
collateral delivered to it by a broker, dealer, or financial institution or
held by it at any time as a result of such loan of portfolio Securities of the
Fund is adequate collateral for the Fund against any loss it might sustain as a
result of such loan. The 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
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amount of such cash collateral held by it for the Fund is sufficient collateral
for the Fund, but such duty or obligation shall be the sole responsibility of
the Fund. In addition, the Custodian shall be under no duty or obligation to
see that any broker, dealer or financial institution to which portfolio
Securities of the Fund are lent pursuant to Article 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 termination of
such loan, provided, however, that the Custodian shall promptly notify the Fund
in the event that such dividends or interest are not paid and received when
due; or
(f) The sufficiency or value of any amounts of money
and/or Securities held in any Margin Account, Senior Security Account or
Collateral Account in connection with transactions by the Fund. In addition,
the Custodian shall be under no duty or obligation to see that any broker,
dealer, futures commission merchant or Clearing Member makes payment to the
Fund of any variation margin payment or similar payment which the Fund may be
entitled to receive from such broker, dealer, futures commission merchant or
Clearing Member, to see that any payment received by the Custodian from any
broker, dealer, futures commission merchant or Clearing Member is the amount
the Fund is entitled to receive, or to notify the Fund of the Custodian's
receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the Fund
until the Custodian actually receives and collects such money directly or by
the final crediting of the account representing the Fund's interest at the
Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be
liable for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held
in the Depository, unless the Custodian shall have actually received timely
notice from the Depository. In no event shall the Custodian have any
responsibility or liability for the failure of the Depository to collect, or
for the late collection or late crediting by the Depository of any amount
payable upon Securities deposited in the Depository which may mature or be
redeemed, retired, called or otherwise become payable. However, upon receipt of
a Certificate from the Fund of an overdue amount on Securities held in the
Depository the Custodian shall make a claim against the Depository on behalf of
the Fund, except that the Custodian shall not be under any obligation to appear
in, prosecute or defend any action suit or proceeding in respect to any
Securities held by the Depository which in its opinion may involve it in
expense or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
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5. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount due to the Fund from the
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by the Transfer Agent of the Fund of any amount paid by the
Custodian to the Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount, if the Securities upon which
such amount is payable are in default, or if payment is refused after due
demand or presentation, unless and until (i) it shall be directed to take such
action by a Certificate and (ii) it shall be assured to its satisfaction of
reimbursement of its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XVI appoint one or more banking institutions
as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-
Custodian or Co-Custodians including, but not limited to, banking institutions
located in foreign countries, of Securities and moneys at any time owned by the
Fund, upon such terms and conditions as may be approved in a Certificate or
contained in an agreement executed by the Custodian, the Fund and the appointed
institution.
8. The Custodian shall not be under any duty or obligation (a) to
ascertain whether any Securities at any time delivered to, or held by it or by
any Foreign Sub-Custodian, for the account of the Fund and specifically
allocated to a Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or (b) to ascertain
whether any transactions by the Fund, whether or not involving the Custodian,
are such transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees
to pay to the Custodian all out-of- pocket expenses and such compensation as
may be agreed upon from time to time between the Custodian and the Fund. The
Custodian may charge such compensation and any expenses with respect to a
Series incurred by the Custodian in the performance of its duties pursuant to
such agreement against any money specifically allocated to such Series. Unless
and until the Fund instructs the Custodian by a Certificate to apportion any
loss, damage, liability or expense among the Series in a specified manner, the
Custodian shall also be entitled to charge against any money held by it for the
account of a Series such Series' pro rata share (based on such Series net asset
value at the time of the charge to the aggregate net asset value of all Series
at that time) of the amount of any loss, damage, liability or expense,
including counsel fees, for which it shall be entitled to reimbursement under
the provisions of this Agreement. The
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expenses for which the Custodian shall be entitled to reimbursement hereunder
shall include, but are not limited to, the expenses of sub-custodians and
foreign branches of the Custodian incurred in settling outside of New York City
transactions involving the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the Custodian a
Certificate or facsimile thereof confirming such Oral Instructions in such
manner so that such Certificate or facsimile thereof is received by the
Custodian, whether by hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such Oral Instructions
are given to the Custodian. The Fund agrees that the fact that such confirming
instructions are not received by the Custodian shall in no way affect the
validity of the transactions or enforceability of the transactions hereby
authorized by the Fund. The Fund agrees that the Custodian shall incur no
liability to the Fund in acting upon Oral Instructions given to the Custodian
hereunder concerning such transactions provided such instructions reasonably
appear to have been received from an Officer.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian
shall provide in hard copy or on microfilm, whichever the Custodian elects, any
records included in any such delivery which are maintained by the Custodian on
a computer disc, or are similarly maintained, and the Fund shall
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<PAGE> 36
reimburse the Custodian for its expenses of providing such hard copy or
micro-film.
13. The Custodian shall provide the Fund with any report obtained
by the Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against and save
the Custodian harmless from all liability, claims, losses and demands
whatsoever, including attorney's fees, howsoever arising or incurred because of
or in connection with this Agreement, including the Custodian's payment or
non-payment of checks pursuant to paragraph 6 of Article XIII as part of any
check redemption privilege program of the Fund, except for any such liability,
claim, loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement,
including, without limitation, those contained in Article XVI the Custodian may
deliver and receive Securities, and receipts with respect to such Securities,
and arrange for payments to be made and received by the Custodian in accordance
with the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities
whatsoever except such duties and responsibilities as are specifically set
forth in this Agreement, and no covenant or obligation shall be implied in this
Agreement against the Custodian.
ARTICLE XVIII.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by
giving to the other party a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of
giving of such notice. In the event such notice is given by the Fund, it shall
be accompanied by a copy of a resolution of the Board of Directors of the Fund,
certified by the Secretary or any Assistant Secretary, electing to terminate
this Agreement and designating a successor custodian or custodians, each of
which shall be a bank or trust company having not less than $2,000,000
aggregate capital,
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surplus and undivided profits. In the event such notice is given by the
Custodian, the Fund shall, on or before the termination date, deliver to the
Custodian a copy of a resolution of the Board of Directors of the Fund,
certified by the Secretary or any Assistant Secretary, designating a successor
custodian or custodians. In the absence of such designation by the Fund, the
Custodian may designate a successor custodian which shall be a bank or trust
company having not less than $2,000,000 aggregate capital, surplus and
undivided profits. Upon the date set forth in such notice this Agreement shall
terminate, and the Custodian shall upon receipt of a notice of acceptance by
the successor custodian on that date deliver directly to the successor
custodian all Securities and moneys then owned by the Fund and held by it as
Custodian, after deducting all fees, expenses and other amounts for the payment
or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund be deemed to be its own custodian and the Custodian shall thereby
be relieved of all duties and responsibilities pursuant to this Agreement,
other than the duty with respect to Securities held in the Book Entry System
which cannot be delivered to the Fund to hold such Securities hereunder in
accordance with this Agreement.
ARTICLE XIX.
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 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 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 Officers as
set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Custodian, shall be sufficiently
given if addressed to the Custodian and mailed or delivered to it at its
offices at 90 Washington Street, New York, New York 10286, or at such other
place as the Custodian may from time to time designate in writing.
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<PAGE> 38
3. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Fund shall be sufficiently given
if addressed to the Fund and mailed or delivered to it at its office at the
address for the Fund first above written, or at such other place as the Fund
may from time to time designate in writing.
4. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties with the same formality
as this Agreement and approved by a resolution of the Board of Directors of the
Fund.
5. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by the Fund without the written
consent of the Custodian, or by the Custodian without the written consent of
the Fund, authorized or approved by a resolution of the Fund's Board of
Directors.
6. This Agreement shall be construed in accordance with the laws
of the State of New York without giving effect to conflict of laws principles
thereof. Each party hereby consents to the jurisdiction of a state or federal
court situated in New York City, New York in connection with any dispute
arising hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
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<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective corporate Officers, thereunto duly authorized
and their respective corporate seals to be hereunto affixed, as of the day and
year first above written.
MUNICIPAL STRATEGY FUND, INC.
[SEAL] By: _____________________
Attest:
_________________________
THE BANK OF NEW YORK
[SEAL] By: /s/ [Illegible]
Attest:
/s/ [Illegible]
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<PAGE> 40
APPENDIX A
I, , and I, , of Municipal Strategy
Fund, Inc., a Maryland corporation (the "Fund"), do hereby certify that:
The following individuals serve in the following positions with the
Fund and each has been duly elected or appointed by the Board of Directors of
the Fund to each such position and qualified therefor in conformity with the
Fund's Articles of Incorporation and By-Laws, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
_______________________ __________________________ ________________________
<PAGE> 41
APPENDIX B
I, Ira R. Rosner, a Vice President with THE BANK OF NEW YORK do hereby
designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
<PAGE> 42
EXHIBIT A
CERTIFICATION
The undersigned, , hereby certifies that he or
she is the duly elected and acting of Municipal Strategy 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 , 1994, 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
, 1994, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis to deposit in the Book-Entry System, as defined in
the Custody Agreement, all securities eligible for deposit therein, regardless
of the Series to which the same are specifically allocated, and to utilize the
Book-Entry System to the extent possible in connection with its performance
thereunder, including, without limitation, in connection with settlements of
purchases and sales of securities, loans of securities, and deliveries and
returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
Municipal Strategy Fund, Inc. as of the day of , 1994.
__________________________
[SEAL]
<PAGE> 43
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies that
he or she is the duly elected and acting of Municipal
Strategy 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 , 1994, 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
, 1994, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis until such time as it receives a Certificate, as
defined in the Custody Agreement, to the contrary to deposit in the Depository,
as defined in the Custody Agreement, all securities eligible for deposit
therein, regardless of the Series to which the same are specifically allocated,
and to utilize the Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in connection with
settlements of purchases and sales of securities, loans of securities, and
deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
Municipal Strategy Fund, Inc. as of the day of , 1994.
_________________________
[SEAL]
<PAGE> 44
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby certifies that he or
she is the duly elected and acting of Municipal Strategy
Fund, Inc., a Maryland corporation (the "Fund"), and further certifies that the
following resolution was adopted by the Board of Trustees of the Fund at a
meeting duly held on , 1994, 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 , 1994, (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis until such
time as it receives a Certificate, as defined in the Custody
Agreement, to the contrary to deposit in the Participants Trust
Company as Depository, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of the Series to
which the same are specifically allocated, and to utilize the
Participants Trust Company to the extent possible in connection with
its performance thereunder, including, without limitation, in
connection with settlements of purchases and sales of securities,
loans of securities, and deliveries and returns of securities
collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
Municipal Strategy Fund, Inc., as of the day of , 1994.
_________________________
[SEAL]
<PAGE> 45
EXHIBIT C
CERTIFICATION
The undersigned, , hereby certifies that
he is the duly elected and acting of Municipal Strategy 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 , 1994, 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
, 1994 (the "Custody Agreement") is authorized and instructed on
a continuous and ongoing basis until such time as it receives a Certificate, as
defined in the Custody Agreement, to the contrary, to accept, utilize and act
with respect to Clearing Member confirmations for Options and transaction in
Options, regardless of the Series to which the same are specifically allocated,
as such terms are defined in the Custody Agreement, as provided in the Custody
Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
Municipal Strategy Fund, Inc. as of the day of , 1994.
_________________________
[SEAL]
<PAGE> 46
EXHIBIT D
The undersigned, , hereby certifies that
he or she is the duly elected and acting of Municipal
Strategy Fund, Inc., a Maryland corporation (the "Fund"), further certifies
that the following resolutions were adopted by the Board of Directors of the
Fund at a meeting duly held on , 1994, at which a quorum was
at all times present and that such resolutions have not been modified or
rescinded and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to the
Custody Agreement between The Bank of New York and the Fund dated as of
, 1994 (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis to act in accordance with, and to rely on
Certificates (as defined in the Custody Agreement) given by the Fund to the
Custodian by a Terminal Link (as defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant use of
such access codes only to Officers of the Fund as defined in the Custody
Agreement, shall establish internal safekeeping procedures to safeguard and
protect the confidentiality and availability of such access codes, shall limit
its use of the Terminal Link to those purposes permitted by the Custody
Agreement, shall require at least two such Officers to utilize their respective
access codes in connection with each such Certificate, and shall use the
Terminal Link only in a manner that does not contravene the Investment Company
Act of 1940, as amended, or the rules and regulations thereunder.
RESOLVED, that Officers of the Fund shall, following the establishment
of such access codes and such internal safekeeping procedures, advise the
Custodian that the same have been established by delivering a Certificate, as
defined in the Custody Agreement, and the Custodian shall be entitled to rely
upon such advice.
IN WITNESS WHEREOF, I hereunto set my hand and the seal of Municipal
Strategy Fund, Inc., as of the day of , 1994.
_________________________
[SEAL]
<PAGE> 47
EXHIBIT E
The undersigned, , hereby certifies that he or
she is the duly elected and acting of Municipal Strategy Fund,
Inc., a Maryland corporation (the "Fund"), further certifies that the following
resolutions were adopted by the Board of Directors of the Fund at a meeting
duly held on , 1994, at which a quorum was at all times present
and that such resolutions have not been modified or rescinded and are in full
force and effect as of the date hereof.
RESOLVED, that the maintenance of the Fund's assets in each country
listed in Schedule I hereto be, and hereby is, approved by the Board of
Directors as consistent with the best interests of the Fund and its
shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the foreign
branches of The Bank of New York (the "Bank") listed in Schedule I located in
the countries specified therein, and with the foreign subcustodians and
despositories listed in Schedule I located in the countries specified therein
be, and hereby is, approved by the Board of Directors as consistent with the
best interest of the Fund and its shareholders; and further
RESOLVED, that the Subcustodian Agreements presented to this meeting
between the Bank and each of the foreign subcustodians and depositories listed
in Schedule I providing for the maintenance of the Fund's assets with the
applicable entity, be and hereby are, approved by the Board of Directors as
consistent with the best interests of the Fund and its shareholders; and
further
RESOLVED, that the appropriate officers of the Fund are hereby
authorized to place assets of the Fund with the aforementioned foreign branches
and foreign subcustodians and depositories as hereinabove provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of them,
are authorized to do any and all other acts, in the name of the Fund and on its
behalf, as they, or any of them, may determine to be necessary or desirable and
proper in connection with or in furtherance of the foregoing resolutions.
IN WITNESS WHEREOF, I hereunto set my hand and the seal of Municipal
Strategy Fund, Inc., as of the day of , 1994.
_________________________
[SEAL]
<PAGE> 48
SCHEDULE I
Bank of New York Branches
and
Eligible Foreign Custodians
<TABLE>
<CAPTION>
Country Bank Name and Address Status
- ------- --------------------- ------
<S> <C> <C>
Argentina The First National Bank of Boston Correspondent
Florida 99, 1005 Buenos Aires,
Argentina Australia Australia and New Zealand Banking Correspondent
Group, Limited
35 Elizabeth Street,
Melbourne, Australia
Austria GiroCredit Bank Aktiengesellschaft Correspondent
der Sparkassen
A-1011 Wien, Schubertring 5,
Vienna, Austria
Belgium Banque Bruxelles Lambert, S.A. Correspondent
Cours Saint Michel 60
Brussels 1040
Belgium
Brazil The First National Bank of Boston Correspondent
Rua Libero Badaro, 497,
01009 Sao SP (Alt 226)
Brazil
Canada Royal Trust Corporation of Canada Correspondent
55 King Street West
Royal Trust Tower, Toronto,
Ontario M5W 1P9, Canada
Chile Banco de Chile Correspondent
Departamento Comisiones de Confianza
Ahumada 251, Piso 3
Santiago
China Standard Chartered Bank Correspondent
8/F Edinburgh Tower
The Landmark, 15 Queens Road Central
Hong Kong
</TABLE>
<PAGE> 49
<TABLE>
<S> <C> <C>
Denmark Den Danske Bank Correspondent
2-12 Holmens Kanal
DK 1092 Copenhagen K.
Denmark
Euromarket Cedel, S.A. Depository
67 Boulevard Grande-Duchesse
Charlotte
L-1010, Luxembourg
Finland Union Bank of Finland Ltd. Correspondent
Aleksanterinkatu 30,
Helsinki, Finland
France Banque Paribas Correspondent
BP 141
3 Rue D'Antin
75078 Paris, France
Germany Dresdner Bank A.G. Correspondent
Jurgen-Ponto-Platz 1 (Alt 207)
6000 Frankfurt 11,
Federal Republic of Germany
Greece Creditbank Correspondent
Banking Relations Division
40 Stadiou Street
GR10252 Athens
Hong Kong The HongKong & Shanghai Banking Correspondent
Corporation
1 Queen's Road Central,
Hong Kong
India The HongKong & Shanghai Banking Correspondent
Corporation
52/60 Mahatma Gandi Road
Bombay 400 001
Indonesia The HongKong & Shanghai Banking Correspondent
Corporation
P.O. Box 2307, Jakarta 1001,
Indonesia
Ireland Allied Irish Bank Correspondent
P.O. Box 518
I.F.S.C.
Dublin 1
Israel Israel Discount Bank Limited Correspondent
27-31 Yehuda Halevi Street
65-546 Tel Aviv
</TABLE>
<PAGE> 50
<TABLE>
<S> <C> <C>
Italy Citibank, N.A. Correspondent
Foro Buonaparte, 16
20121 Milano Italy
Japan The Yasuda Trust & Banking Correspondent
Company, Limited
2-1 Yaesu, 1-Chome
Chuo-ku, Tokyo 103,
Japan
Korea Bank of Seoul Correspondent
10-1, Namdaeman-Ro 2-Ka
Chung-ku, Seoul, 100-092,
Korea
Malaysia The HongKong & Shanghai Banking Correspondent
Corporation Ltd.
2 Leboh Ampang
Kuala Lumpur, Malaysia
Mexico Citibank, N.A. Correspondent
Paseo de la Reforma 390,
Mexico City, 06695
Mexico
Netherlands Amsterdam-Rotterdam Bank, N.V. Correspondent
Kemelstede 2, 4817 St. Breda
New Zealand Australia and New Zealand Banking Correspondent
Group Ltd.
UDC Tower
113-119, The Terrace
Wellington, l
New Zealand
Norway Den norske Bank AS Correspondent
P.O. Box 1171 Sentrum
0107 OSLO 1
Pakistan Standard Chartered Bank Correspondent
Box 4896
Ismail Ibrahim Chundrigar Road
Karachi 2
</TABLE>
<PAGE> 51
<TABLE>
<S> <C> <C>
Philippines The HongKong & Shangahi Correspondent
Corporation Ltd.
San Miguel Avenue
Ortigas Centre
Pasig, Metro Manila
Portugal Banco Comercial Portugues Correspondent
Avienda Jose Malhoa
Lote 1686, 7th Floor
1000 Lisbon
Singapore United Overseas Bank Limited Correspondent
1 Bonham Street,
Raffles Place
Singapore
South Africa Standard Bank of South Africa Correspondent
Limited
P.O. Box 3720
Johannesburg 2000
Spain Banco Bilbao Vizcaya, S.A. Correspondent
Clara Del Ray, 26-3 Floor
28002 Madrid
Sri Lanka Standard Chartered Bank Correspondent
P.O. Box 27
17 Janadhipathi Mawatha
Colombo 1
Sweden Skandinaviska Enskilda Banken Correspondent
Jakobsgatan 6
Stockholm, S-106 40
Switzerland Union Bank of Switzerland Correspondent
Bahnhofstrasse, 45
8021 Zurich
Taiwan The HongKong & Shanghai Banking Correspondent
Corporation
333 Section 1, Keelung Road
Taipei 10548
Thailand The Siam Commercial Bank, Ltd. Correspondent
1060 Phetchaburi Road,
Bangkok 10400, Thailand
Turkey Citibank, N.A. Correspondent
Abdi Ipekci Cad. 65
80200 Macka
Istanbul
</TABLE>
<PAGE> 52
<TABLE>
<S> <C> <C>
United The Bank of New York Branch
Kingdom 3 Birchin Lane
London EC3V 9BY
Uruguay The Bank of Boston Correspondent
Zabala 1463
Casilla de Correo 90
Montevideo
Venezuela Citibank, N.A. Correspondent
Carmelitas a Altagracia,
Edificio Citibank,
Caracas, 1010, Venezuela
</TABLE>
<PAGE> 1
EXHIBIT (k)
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the ____ day of _______ 1994 by and between
MERRILL LYNCH MUNICIPAL STRATEGY 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 contained in this
Agreement, the Fund and FDS agree as follows:
1. APPOINTMENT OF FDS AS TRANSFER AGENT, DIVIDEND DISBURSING
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
Shareholder, or, if the shares are held in an account in the name of
MLPF&S for benefit of an identified customer, such account, including
a Plan Account, any account under a plan (by whatever name referred to
in the Prospectus) pursuant to the Self-Employed Individuals
Retirement Act of 1962 ("Keogh Act Plan") and any plan (by whatever
name referred to in the
<PAGE> 2
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;
(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
2
<PAGE> 3
of such charge in the manner set forth in the Prospectus. [FDS shall
pay, on behalf of MLFD, to MLPF&S such deducted early withdrawal
charges imposed on all Shares maintained in the name of MLPF&S, or
maintained in the name of an account identified as a customer account
of MLPF&S.]
(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 transactions
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
accompanied 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 Commission, 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, including
"out-of-pocket" expenses, will be set forth in the Schedule 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 electronical information storage media and print-outs) of any and all of
its
4
<PAGE> 5
books and records which relate to any transaction or function performed by
MLFDS under or pursuant to this Agreement.
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,
provided that this indemnification shall not apply to actions or omissions of
FDS in cases of willful misconduct, failure to act in good faith or negligence
by FDS, 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.
8. REGARDING FDS.
(a) FDS hereby agrees to hire, purchase, develop and maintain such
dedicated personnel, facilities, equipment, software, 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 Disbursing 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
5
<PAGE> 6
shall be measured by the standard applicable to persons possessing such special
skill and technical knowledge.
(b) FDS warrants and represents that it is duly authorized and
permitted to act as Transfer Agent, Dividend Disbursing Agent, and Shareholder
Servicing Agent under all applicable laws and that it will immediately notify
the 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 party 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
commenced.
(b) Upon termination of this Agreement, FDS shall deliver all
unissued and cancelled stock certificates representing Shares remaining in its
possession, and all Shareholder records, books, stock ledgers, instruments and
other documents (including computerized or other electronically stored
information) made or accumulated in the performance of its duties as Transfer
Agent, Disbursing Agent and Shareholder Servicing Agent for the 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 officers and their respective
corporate seals hereunto duly affixed and attested, as of the day and year
above written.
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
By ________________________________________
ATTEST:
_________________________
Secretary
FINANCIAL DATA SERVICES, INC.
By ________________________________
ATTEST:
__________________________
Secretary
7
