<PAGE>
As filed with the Securities and Exchange Commission on November 16, 1995
Securities Act File No. 33-
Investment Company Act File No. 811-7203
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM N-2
/x/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / Pre-Effective Amendment No.
/ / Post-Effective Amendment No.
and/or
/x/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940
/x/ Amendment No. 4
(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. Frank P. Bruno, Esq.
Fund Asset Management, L.P. Brown & Wood
P.O. Box 9011 One World Trade Center
Princeton, N.J. 08543-9011 New York, New York 10048-0557
___________________
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/
___________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION> Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Being Price Offering Registration
Title of Securities Being Registered Registered (1) Per Unit (1) Price (1) Fee
<S> <C> <C> <C>
Auction Market Preferred Stock, Series A 2,000 shares $25,000 $50,000,000 $10,000.00
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
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.
1
<PAGE>
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
- - ----------------- -----------------
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; Plan of Distribution
3. Fee Table and Synopsis Not Applicable
4. Financial Highlights Not Applicable
5. Plan of Distribution Plan of Distribution
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant Prospectus Summary; 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 AMPS;
Description of Capital
Stock
11. Defaults and Arrears on Senior
Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of
Additional Information Not Applicable
Part B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page Not Applicable
15. Table of Contents Not Applicable
16. General Information and History Not Applicable
17. Investment Objective and Policies Prospectus Summary;
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; Plan of
Distribution; Transfer
Agent, Dividend Disbursing
Agent and Registrar;
Experts
21. Brokerage Allocation and Other Practices Portfolio Transactions
22. Tax Status Taxes
23. Financial Statements Financial Statements
Part C - OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
2
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 16, 1995
PROSPECTUS
- - --------
$__________
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
AUCTION MARKET PREFERRED STOCK ("AMPS(REGISTERED TRADEMARK)")
_____ SHARES, SERIES A
LIQUIDATION PREFERENCE $25,000 PER SHARE
Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is a recently
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, 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 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 (SUCH
OBLIGATIONS ARE COMMONLY REFERRED TO AS "JUNK BONDS") 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 address of the Fund
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone
number is (609) 282-2800. Investors are advised to read this Prospectus
carefully and retain it for future reference.
(Continued on next page.)
The Broker-Dealers intend to maintain a secondary trading market in the
AMPS outside of Auctions; however, they have no obligation to do so, and
there can be no assurance that a secondary market for the AMPS will develop
or, if it does develop, that it will provide holders with a liquid trading
market (i.e., trading will depend on the presence of willing buyers and
sellers and the trading price is subject to variables to be determined at the
time of the trade by the Broker-Dealers). The AMPS will not be registered on
any stock exchange or on the National Association of Securities Dealers
Automated Quotation system. An increase in the level of interest rates,
particularly during any Long Term Dividend Period, likely will have an
adverse effect on the secondary market price of the AMPS, and a
selling shareholder may sell AMPS between Auctions at a price per share of
less than $25,000.
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>
<CAPTION>
Price to Sales Proceeds to
Public(1) Load(2) Fund(1)(3)
<S> <C> <C>
Per Share . . . . . . . . . . . . . . . . . $25,000 None $25,000
Total . . . . . . . . . . . . . . . . . . . $ None $
</TABLE>
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Investment Adviser have agreed to indemnify Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") against
certain liabilities under the Securities Act of 1933, as amended. See
"Plan of Distribution".
(3) Before deduction of expenses, payable by the Fund, estimated at
$__________.
The AMPS are being offered on a continuing basis by the Fund through
Merrill Lynch, which has agreed to use its best efforts to solicit purchasers
of the AMPS. There can be no assurance that the AMPS offered by this
Prospectus will be sold. The Fund may reject any order in whole or in part.
See "Plan of Distribution". One or more certificates for the AMPS
will be delivered to the nominee of The Depository Trust Company.
(Registered Trademark)Registered trademark of Merrill Lynch & Co., Inc.
MERRILL LYNCH & CO.
The date of this Prospectus is January , 1996.
1
<PAGE>
(Continued from previous page.)
Dividends on the shares of Auction Market Preferred Stock(Registered
Trademark), Series A ("Series A AMPS(Registered Trademark)" or
"AMPS(Registered Trademark)") of the Fund offered hereby will be cumulative
from the Date of Original Issue. The cash dividend rate (the "Applicable
Rate") on the Series A AMPS for the Initial Dividend Period and the number of
days in the Initial Dividend Period will be determined by the Board of
Directors of the Fund. The number of days in the Initial Dividend Period for
the AMPS will not exceed 45 days. The Applicable Rate for the Initial
Dividend Period and the Initial Dividend Payment Date will be set forth in a
Prospectus Supplement.
The Applicable Rate on the shares of AMPS for each Subsequent Dividend
Period will be determined pursuant to periodic auctions conducted in
accordance with the procedures described in Appendix C hereto (an "Auction").
After the Initial Dividend Period, except as otherwise provided
herein, each Subsequent Dividend Period for the shares of Series A AMPS will
be a 28-Day Dividend Period; provided, however, that prior to any Auction,
the Fund may elect, subject to certain limitations described herein, upon
giving notice to holders thereof, a Special Dividend Period. See
"Description of AMPS-Dividends".
The Applicable Rate on the shares of AMPS for each Subsequent Dividend
Period will be reset on the basis of Bids, Hold Orders and Sell Orders placed
by Existing Holders and Potential Holders in the Auction conducted on
the Business Day next preceding the commencement of such Dividend Period.
The Applicable Rate that results from an Auction for any Dividend Period will
not be greater than the Maximum Applicable Rate. See "Description of AMPS--
The Auction--Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders". For Series A AMPS sold by the Fund
pursuant to this Prospectus in connection with an Auction for a Subsequent
Dividend Period, the Applicable Rate will be set forth in a Prospectus
Supplement.
The Fund currently is required to allocate net capital gains and other
taxable income, if any, proportionately between shares of Common Stock and
shares of AMPS. The Funds will give notice of the amount of any taxable
income to be included in a dividend on shares of AMPS in the related Auction,
as described herein, or include such income in a dividend on shares
of AMPS without giving advance notice thereof if it increases the dividend by
an additional amount to offset substantially the tax effect thereof. The
amount of taxable income allocable to shares of AMPS will depend upon the
amount of such income realized by the Fund and other factors but generally is
not expected to be significant. See "Taxes".
Each prospective purchaser should review carefully the detailed
information regarding the Auction Procedures which appears in this
Prospectus, including the Appendices, and should note that (i) an Order
constitutes an irrevocable commitment to hold, purchase or sell AMPS based
upon the results of the related Auction, (ii) the Auctions will be conducted
through telephone communications, (iii) settlement for purchases and sales
will be on the Business Day following the Auction and (iv) ownership of AMPS
will be maintained in book-entry form by or through the Securities
Depository. Under certain circumstances, holders of AMPS may be unable to
sell their shares of AMPS in an Auction and thus may lack liquidity of
investment. Shares of AMPS only may be transferred pursuant to a Bid or a
Sell Order placed in an Auction through a Broker-Dealer to the Auction Agent
or in the secondary market, if any.
The shares of AMPS are redeemable, in whole or in part, at the option of
the Fund, on any Dividend Payment Date (except during the Initial Dividend
Period or a Non-Call period) at the Optional Redemption Price per share and
will be subject to mandatory redemption on dates fixed by the Board of
Directors, under certain circumstances, at the Mandatory Redemption
Price per share.
If the Fund fails to pay on any Dividend Payment Date (or within the
applicable grace period) the full amount of any dividend or the redemption
price of shares of AMPS called for redemption, the Applicable Rate will not
be based on the results of an Auction but instead will be equal to the Non-
Payment Period Rate until such failure to pay is cured. See "Description of
AMPS--Dividends--Non-Payment Period; Late Charge".
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to
the more detailed information included elsewhere in this Prospectus. Certain
of the capitalized terms used herein are defined in the Glossary that appears
at the end of this Prospectus.
THE FUND . . . . . . . . . . . . . Merrill Lynch Municipal Strategy
Fund, Inc. (the "Fund") is a
recently organized, continuously
offered, non-diversified, closed-
end management investment company.
See "The Fund".
INVESTMENT OBJECTIVE AND The investment objective of the
POLICIES . . . . . . . . . . . . . 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,
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".
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 0.50 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 125
other registered management
investment companies. The
Investment Adviser also offers
portfolio management and portfolio
analysis services to individuals
and institutions. As of September
30, 1995, the Investment Adviser
and MLAM had a total of
approximately $189.4 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".
THE OFFERING . . . . . . . . . . . The Fund is offering an aggregate
of _____ shares of Series A AMPS,
at a purchase price of $25,000 per
share plus accumulated dividends,
if any, from the Date of Original
Issue. The shares of AMPS are
being offered on a continuing basis
by the Fund through Merrill Lynch,
who has agreed to use its best
efforts to solicit purchasers of
the AMPS. See "Plan of
Distribution".
The AMPS will be shares of
Preferred Stock of the Fund that
entitle their holders to receive
cash dividends at a rate per annum
that may vary for the successive
Dividend Periods. In general as
described below, each Dividend
Period subsequent to the Initial
Dividend Period will be 28 days in
length. The Applicable Rate for a
particular Dividend Period will be
determined by an Auction conducted
on the Business Day next preceding
the start of such Dividend Period.
The Fund's Articles Supplementary
establishing the Series A AMPS
authorize the Fund to issue
additional series of AMPS
designated Series B AMPS, Series C
AMPS, Series D AMPS and Series E
AMPS, which also are referred to
herein as "AMPS". The Series A
AMPS are the only series currently
offered and to be issued and
outstanding.
Through their Broker-Dealers,
Beneficial Owners and Potential
Beneficial Owners of shares of AMPS
of each series may participate in
Auctions therefor, although, except
in the case of a Special Dividend
Period, Beneficial Owners desiring
to continue to hold all of their
shares of AMPS regardless of the
Applicable Rate resulting from
Auctions need not participate. For
an explanation of Auctions and the
method of determining the
Applicable Rate, see "Description
of AMPs--The Auction".
Except as described herein,
investors in AMPS will not receive
certificates representing ownership
of their shares. Ownership of AMPS
will be maintained in book entry
form by the Securities Depository
or its nominee for the account of
the investor's Agent Member. The
investor's Agent Member, in turn,
will maintain records of such
investor's beneficial ownership of
AMPS. Accordingly, references
herein to an investor's investment
in or purchase, sale or ownership
of AMPS are to purchases, sales or
ownership of those shares by
Beneficial Owners.
DIVIDENDS AND DIVIDEND After the Initial Dividend Period,
PERIODS . . . . . . . . . . . . . . each Subsequent Dividend Period for
the Series A AMPS will generally
consist of 28 days (a "28-Day
Dividend Period"); provided,
however, that prior to any Auction,
the Fund may elect, subject to
certain limitations described
herein, upon giving notice to
holders thereof, a Special Dividend
Period. A Special Dividend Period
is a Dividend Period consisting of
a specified number of days (other
than 28 in the case of Series A
AMPS), evenly divisible by seven
and not fewer than seven nor more
than 364 (a "Short Term Dividend
Period") or a Dividend Period
consisting of a specified period of
one whole year or more but not
greater than five years (a "Long
Term Dividend Period"). Dividends
on the AMPS offered hereby are
cumulative from the Date of
Original Issue and are payable
when, as and if declared by the
Board of Directors of the Fund, out
of funds legally available
therefor. The Applicable Rate on
the Series A AMPS for the Initial
Dividend Period and the number of
days in the Initial Dividend Period
will be determined by the Board of
Directors of the Fund. Dividends
on the shares of AMPS will be
payable commencing on the Initial
Dividend Payment Date at the
Applicable Rate for the Initial
Dividend Period set forth in a
Prospectus Supplement. Thereafter,
in the case of Dividend Periods
which are not Special Dividend
Periods, dividends will be payable
generally on each succeeding fourth
_________ in the case of Series A
AMPS, subject to certain
exceptions.
Dividends for the Series A AMPS
will be paid through the Securities
Depository (The Depository Trust
Company or a successor securities
depository) on each Dividend
Payment Date for such series. The
Securities Depository's normal
procedures provide for it to
distribute dividends in next-day
funds settled through the New York
Clearing House to Agent Members,
who are in turn expected to
distribute such dividends to the
person for whom they are acting as
agent in accordance with the
instructions of such person. Each
of the initial Broker-Dealers,
however, has indicated to the Fund
that such Broker-Dealer or one of
its affiliates will make such
dividend payments available in
same-day funds to customers that
use such Broker-Dealer or affiliate
as Agent Member. See "Description
of AMPS--Dividends".
For each Subsequent Dividend
Period, the cash dividend rate on
the shares of each series of AMPS
will be the Applicable Rate for
such series that the Auction Agent
(IBJ Schroder Bank & Trust Company
or any successor) advises the Fund
has resulted from an Auction
relating to such series. See
"Description of AMPS--Dividends".
The first Auction for each series
of AMPS is scheduled to be held on
the ending date for the Initial
Dividend Period for such series of
AMPS as set forth above. For
Series A AMPS sold by the Fund
pursuant to this Prospectus in
connection with an Auction for a
Subsequent Dividend Period, the
Applicable Rate will be set forth
in a Prospectus Supplement.
The Articles Supplementary provide
that until the Fund gives a Request
for Special Dividend Period and the
related Notice of Special Dividend
Period with respect to a series of
AMPS, only 28-Day Dividend Periods
will be applicable to the Series A
AMPS. While the Fund does not
currently intend to give a Request
for Special Dividend Period with
respect to the AMPS, it may so
elect in the future subject to, and
on, the conditions discussed under
"Description of the AMPS--
Dividends--Notification of Dividend
Period".
A Special Dividend Period will not
be effective for a series of the
AMPS unless Sufficient Clearing
Bids exist at the Auction in
respect of such Special Dividend
Period. If Sufficient Clearing
Bids do not exist at such Auction
for a series of the AMPS, the
Dividend Period commencing on the
Business Day succeeding such
Auction will be a 28-Day Dividend
Period in the case of Series A
AMPS, and the holders of the AMPS
of such series outstanding prior to
such Auction will be required to
continue to hold such shares for
such Dividend Period. In addition,
the Fund may not give a Notice of
Special Dividend Period with
respect to a series of AMPS, or if
the Fund has given a Notice of
Special Dividend Period for a
series of AMPS, the Fund will be
required to give a Notice of
Revocation in respect thereof if
(i) either the 1940 Act AMPS Asset
Coverage is not satisfied or the
Fund fails to maintain S&P Eligible
Assets and Moody's Eligible Assets
each with an aggregate Discounted
Value at least equal to the AMPS
Basic Maintenance Amount, in each
case on each of the two Valuation
Dates immediately preceding the
Business Day prior to the related
Auction Date for the AMPS, (ii)
sufficient funds for the payment of
dividends payable on the
immediately succeeding Dividend
Payment Date have not been
irrevocably deposited with the
Auction Agent by the close of
business on the third Business Day
preceding the related Auction Date,
or (iii) the Broker-Dealers have
given the Fund notice that it is
not advisable to hold an Auction in
respect of a Special Dividend
Period. In such event, the next
succeeding Dividend Period will be
a 28-Day Dividend Period in the
case of Series A AMPS, provided
that if the then current Dividend
Period for the Series A AMPS is a
Special Dividend Period of less
than 28 days, the next succeeding
Dividend Period will be the same
length as the current Dividend
Period.
ADVANCE NOTICE OF Dividends paid by the Fund, to the
ALLOCATION OF TAXABLE extent paid from tax-exempt income
INCOME; INCLUSION OF earned on municipal obligations,
TAXABLE INCOME IN will be exempt from Federal income
DIVIDENDS . . . . . . . . . . . . . taxes, subject to the possible
application of the alternative
minimum tax. However, the Fund is
required to allocate net capital
gains and other income subject to
regular Federal income taxes, if
any, proportionately between shares
of Common Stock and shares of AMPS
in accordance with the current
position of the IRS described
herein. The Fund will notify the
Auction Agent of the amount of any
net capital gains or other taxable
income to be included in any
dividend on shares of AMPS prior to
the Auction establishing the
Applicable Rate for such dividend.
The Auction Agent in turn will
notify each Broker-Dealer whenever
it receives any such notice from
the Fund, and each Broker-Dealer
will notify its Beneficial Owners
and Potential Beneficial Owners, as
provided in its Broker-Dealer
Agreement. In limited
circumstances, the Fund also may
include such income in a dividend
on shares of AMPS without giving
advance notice thereof if it
increases the dividend by an
additional amount to offset the tax
effect thereof. The amount of
taxable income allocable to shares
of AMPS will depend upon the amount
of such income realized by the Fund
and other factors, but generally is
not expected to be significant.
See "Taxes" and "Description of
AMPS--The Auction--Auction Date;
Advance Notice of Allocation of
Taxable Income; Inclusion of
Taxable Income in Dividends".
ADDITIONAL DIVIDENDS . . . . . . . If the Fund retroactively allocates
any net capital gains or other
income subject to regular Federal
income taxes to shares of AMPS
without having given advance notice
thereof as described above, which
may only happen when such
allocation is made as a result of
the redemption of all or a portion
of the outstanding shares of AMPS
or the liquidation of the Fund, the
Fund will make certain payments to
holders of shares of AMPS to which
such allocation was made to offset
substantially the tax effect
thereof. In no other instances
will the Fund be required to make
payments to holders of shares of
AMPS to offset the tax effect of
any reallocation of net capital
gains or other taxable income. See
"Description of AMPS--Dividends--
Additional Dividends" and "Taxes".
DETERMINATION OF MAXIMUM Except during a Non-Payment Period,
APPLICABLE RATES . . . . . . . . . the Applicable Rate for any
Dividend Period for shares of AMPS
of each series will not be more
than the Maximum Applicable Rate
applicable to such shares. The
Maximum Applicable Rate for shares
of AMPS will depend on the credit
rating assigned to such shares and
on the duration of the Dividend
Period. The Maximum Applicable
Rate will be the Applicable
Percentage of the Reference Rate.
The Reference Rate is (i) with
respect to any Dividend Period or
any Short Term Dividend Period
having 28 or fewer days, the higher
of the applicable "AA" Composite
Commercial Paper Rate and the
Taxable Equivalent of the
Short-Term Municipal Bond Rate,
(ii) with respect to any Short Term
Dividend Period having more than 28
but fewer than 183 days, the
applicable "AA" Composite
Commercial Paper Rate, (iii) with
respect to any Short Term Dividend
Period having 183 or more but fewer
than 364 days, the applicable U.S.
Treasury Bill Rate and (iv) with
respect to any Long Term Dividend
Period, the applicable U.S.
Treasury Note Rate. The Applicable
Percentage will be determined based
on (i) the lower of the credit
rating or ratings assigned on such
date to the AMPS by Moody's and
S&P (or, if Moody's or S&P or both
shall not make such rating
available, the equivalent of either
or both of such ratings by a
Substitute Rating Agency or two
Substitute Rating Agencies or, in
the event that only one such rating
shall be available, such rating)
and (ii) whether the Fund has
provided notification to the
Auction Agent prior to the Auction
establishing the Applicable Rate
for any dividend that net capital
gains or other taxable income will
be included in such dividend on
shares of AMPS as follows:
<TABLE>
<CAPTION> Applicable
Applicable Percentage Percentage
Credit Ratings of Reference Rate of Reference Rate
Moody's S&P --No Notification --Notification
<S> <C> <C> <C> 6
"aa3" or higher AA-- or higher 110% 150%
"a3" to "a1" A-- to A+ 125% 160%
"baa3" to "baa1" BBB-- to BBB+ 150% 250%
Below "baa3" Below BBB-- 200% 275%
</TABLE>
There is no minimum Applicable Rate
in respect of any Dividend Period.
The Applicable Rate for any
Dividend Period commencing during
any Non-Payment Period, and the
rate used to calculate the late
charge described under "Description
of AMPS--Dividends--Non-Payment
Period; Late Charge," initially
will be 200% of the Reference Rate
(or 275% of such rate if the Fund
has provided notification to the
Auction Agent prior to the Auction
establishing the Applicable Rate
for any dividend that net capital
gains or other taxable income will
be included in such dividend on
shares of AMPS).
AUCTION PROCEDURES . . . . . . . . Separate Auctions will be conducted
for each series of AMPS. As used
in the following description of the
Auction Procedures, unless the
context otherwise requires, "AMPS"
means the series of AMPS subject to
the related Auction, and
"Beneficial Owners," "Potential
Beneficial Owners," "Existing
Holders" and "Potential Holders"
means Beneficial Owners of such
series, Potential Beneficial Owners
of such series, Existing Holders of
such series and Potential Holders
of such series, respectively.
Unless otherwise permitted by the
Fund, Beneficial Owners and
Potential Beneficial Owners of AMPS
may only participate in Auctions
through their Broker-Dealers.
Broker-Dealers will submit the
Orders of their respective
customers who are Beneficial Owners
and Potential Beneficial Owners to
the Auction Agent, designating
themselves as Existing Holders in
respect of shares subject to Orders
submitted or deemed submitted to
them by Beneficial Owners and as
Potential Holders in respect of
shares subject to Orders submitted
to them by Potential Beneficial
Owners. On or prior to each
Auction Date for the AMPS (the
Business Day next preceding the
first day of each Dividend Period),
each Beneficial Owner may submit
Orders to its Broker-Dealer as
follows:
-- Hold Order--indicating its
desire to hold shares of AMPS
without regard to the
Applicable Rate for the next
Dividend Period for such shares.
-- Bid--indicating its desire to
hold shares of AMPS, provided
that the Applicable Rate for
the next Dividend Period for
such shares is not less than
the rate per annum specified
in such Bid.
-- Sell Order--indicating its
desire to sell shares of AMPS
without regard to the
Applicable Rate for the next
Dividend Period for such shares.
A Beneficial Owner may submit
different types of Orders to its
Broker-Dealer with respect to
shares of AMPS then held by such
Beneficial Owner, provided that the
total number of shares of AMPS
covered by such Orders does not
exceed the number of shares of AMPS
held by such Beneficial Owner. If,
however, a Beneficial Owner offers
through its Broker-Dealer to
purchase additional shares of AMPS
in such Auction, such Beneficial
Owner, for purposes of such offer
to purchase additional shares, will
be treated as a Potential
Beneficial Owner as described
below. Bids by Beneficial Owners
through their Broker-Dealers with
rates per annum higher than the
Maximum Applicable Rate will be
treated as Sell Orders. A Hold
Order (in the case of an Auction
relating to a Dividend Period which
is not a Special Dividend Period)
and a Sell Order (in the case of an
Auction relating to a Special
Dividend Period) shall be deemed to
have been submitted on behalf of a
Beneficial Owner if an Order with
respect to shares of AMPS then held
by such Beneficial Owner is not
submitted on behalf of such
Beneficial Owner for any reason,
including the failure of a
Broker-Dealer to submit such
Beneficial Owner's Order to the
Auction Agent.
Potential Beneficial Owners of
shares of AMPS may submit Bids
through their Broker-Dealers in
which they offer to purchase shares
of AMPS, provided that the
Applicable Rate for the next
Dividend Period for such shares is
not less than the rate per annum
specified in such Bid. A Bid by a
Potential Beneficial Owner with a
rate per annum higher than the
Maximum Applicable Rate will not be
considered.
Neither the Fund nor the Auction
Agent will be responsible for a
Broker-Dealer's failure to comply
with any of the foregoing.
A Broker-Dealer also may hold AMPS
for its own account as a Beneficial
Owner. A Broker-Dealer thus may
submit Orders to the Auction Agent
as a Beneficial Owner or a
Potential Beneficial Owner and
therefore participate in an Auction
as an Existing Holder or Potential
Holder on behalf of both itself and
its customers. An Order placed
with the Auction Agent by a
Broker-Dealer as an Existing Holder
or a Potential Holder as or on
behalf of a Beneficial Owner or a
Potential Beneficial Owner, as the
case may be, will be treated in the
same manner as an Order placed with
a Broker-Dealer by a Beneficial
Owner or a Potential Beneficial
Owner. Similarly, any failure by a
Broker-Dealer to submit to the
Auction Agent an Order in respect
of any AMPS held by it or its
customers who are Beneficial Owners
will be treated in the same manner
as a Beneficial Owner's failure to
submit to its Broker-Dealer an
Order in respect of AMPS held by
it, as described above. Inasmuch
as a Broker-Dealer participates in
an Auction as an Existing Holder or
a Potential Holder only to
represent the interests of a
Beneficial Owner or Potential
Beneficial Owner, whether it be its
customers or itself, all discussion
herein relating to the consequences
of an Auction for Existing Holders
and Potential Holders also applies
to the underlying beneficial
ownership interests represented
thereby.
If Sufficient Clearing Bids exist
in an Auction (that is, in general,
the number of shares of AMPS
subject to Bids by Potential
Holders with rates equal to or
lower than the Maximum Applicable
Rate is at least equal to the
number of shares of AMPS subject to
Sell Orders by Existing Holders),
the Applicable Rate will be the
lowest rate per annum specified in
the Submitted Bids which, taking
into account such rate per annum
and all lower rates per annum bid
by Existing Holders and Potential
Holders, would result in Existing
Holders and Potential Holders
owning all of the shares of AMPS
available for purchase in the
Auction. If Sufficient Clearing
Bids do not exist, the Dividend
Period next following the Auction
automatically will be a 28-Day
Dividend Period in the case of
Series A AMPS, and the Applicable
Rate will be the Maximum Applicable
Rate, and in such event, Existing
Holders that have submitted Sell
Orders will not be able to sell in
the Auction all, and may not be
able to sell any, shares of AMPS
subject to such Sell Orders. Thus,
under certain circumstances,
Existing Holders and, thus, the
Beneficial Owners they represent
may not have liquidity of
investment. If all Existing
Holders submit (or are deemed to
have submitted) Hold Orders in an
Auction, the Dividend Period next
following the Auction automatically
shall be the same length as the
immediately preceding Dividend
Period, and the Applicable Rate
will be 59% of the Reference Rate
(as defined under "Determination of
Maximum Applicable Rates" above) in
effect on the date of the Auction
(or 90% of such rate if the Fund
has provided notification to the
Auction Agent prior to the Auction
establishing the Applicable Rate
for any dividend that net capital
gains or other taxable income will
be included in such dividend on
shares of AMPS).
The Auction Procedures include a
pro rata allocation of shares for
purchase and sale, which may result
in an Existing Holder selling or
holding, or a Potential Holder
purchasing, a number of shares of
AMPS that is less than the number
of shares of AMPS specified in its
Order. To the extent the
allocation has this result, a
Broker-Dealer will be required to
make appropriate pro rata
allocations among its customers and
itself.
A Sell Order by an Existing Holder
will constitute an irrevocable
offer to sell the shares of AMPS
subject thereto, and a Bid placed
by an Existing Holder also will
constitute an irrevocable offer to
sell the shares of AMPS subject
thereto if the rate per annum
specified in the Bid is higher than
the Applicable Rate determined in
the Auction, in each case at a
price per share equal to $25,000.
A Bid placed by a Potential Holder
will constitute an irrevocable
offer to purchase the shares of
AMPS subject thereto if the rate
per annum specified in such Bid is
less than or equal to the
Applicable Rate determined in the
Auction. Settlement of purchases
and sales will be made on the next
Business Day (also a Dividend
Payment Date) after the Auction
Date through the Securities
Depository. Purchasers will make
payment through their Agent Members
in same-day funds to the Securities
Depository against delivery by
book-entry to their Agent Members.
The Securities Depository will make
payment to the sellers' Agent
Members in accordance with the
Securities Depository's normal
procedures, which now provide for
payment in same-day funds. See
"Description of AMPS--The Auction".
ASSET MAINTENANCE . . . . . . . . . Under the Articles Supplementary,
the Fund must maintain (i) S&P
Eligible Assets and Moody's
Eligible Assets each having in the
aggregate a Discounted Value at
least equal to the AMPS Basic
Maintenance Amount and (ii) 1940
Act AMPS Asset Coverage of at least
200%. See "Description of AMPS--
Asset Maintenance".
The Fund estimates that, based on
the anticipated composition of its
portfolio and current market
conditions, 1940 Act AMPS Asset
Coverage with respect to shares of
AMPS would be approximately ____%
immediately after the issuance of
the shares of AMPS offered hereby
in an amount representing
approximately 35% of the Fund's
capital.
The Discount Factors and guidelines
for calculating the Discounted
Value of the Fund's portfolio for
purposes of determining whether the
AMPS Basic Maintenance Amount has
been satisfied have been
established by Moody's and S&P in
connection with the Fund's receipt
of ratings on the shares of AMPS on
their Date of Original Issue of
"aaa" from Moody's and AAA from
S&P. See "Investment Objective and
Policies--Rating Agency
Guidelines".
MANDATORY If the AMPS Basic Maintenance
REDEMPTION . . . . . . . . . . . . Amount or the 1940 Act AMPS Asset
Coverage is not maintained or
restored as specified herein,
shares of AMPS will be subject to
mandatory redemption, out of funds
legally available therefor, at the
Mandatory Redemption Price of
$25,000 per share plus an amount
equal to dividends thereon (whether
or not earned or declared)
accumulated but unpaid to the date
fixed for redemption. In addition,
holders of AMPS may be entitled to
receive Additional Dividends in the
event of redemption of such AMPS to
the extent provided herein. See
"Description of AMPS--Dividends--
Additional Dividends". Any such
redemption will be limited to the
minimum number of shares of AMPS
necessary to restore the AMPS Basic
Maintenance Amount or the 1940 Act
AMPS Asset Coverage, as the case
may be. The Fund's ability to make
such a mandatory redemption may be
restricted by the provisions of the
Investment Company Act of 1940, as
amended (the "1940 Act"). See
"Description of AMPS--Redemption--
Mandatory Redemption".
OPTIONAL REDEMPTION . . . . . . . . The shares of AMPS of each series
are redeemable at the option of the
Fund, as a whole or in part, on any
Dividend Payment Date (except
during the Initial Dividend Period
or a Non-Call Period) at the
Optional Redemption Price of
$25,000 per share, plus an amount
equal to dividends thereon (whether
or not earned or declared)
accumulated but unpaid to the date
fixed for redemption plus the
premium, if any, resulting from the
designation of a Premium Call
Period. See "Description of AMPS--
Redemption--Optional Redemption".
In addition, holders of shares of
AMPS may be entitled to receive
Additional Dividends in the event
of redemption of such shares of
AMPS to the extent provided herein.
See "Description of AMPS--
Dividends--Additional Dividends".
LIQUIDATION The liquidation preference of each
PREFERENCE . . . . . . . . . . . . share of AMPS will be $25,000, plus
an amount equal to accumulated but
unpaid dividends (whether or not
earned or declared). See
"Description of AMPS--Liquidation
Rights". In addition, holders of
AMPS may be entitled to receive
Additional Dividends in the event
of the liquidation of the Fund as
provided herein. See "Description
of AMPS--Dividends--Additional
Dividends".
RATINGS . . . . . . . . . . . . . . It is a condition to their issuance
that the AMPS be issued with a
rating of "aaa" from Moody's and
AAA from S&P.
SPECIAL CONSIDERATIONS The Fund has registered as a "non-
AND RISK FACTORS . . . . . . . . . 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 ("S&P"),
Moody's Investors Service, Inc.
("Moody's") or Fitch Investors
Service, Inc. ("Fitch") 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".
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 securities the potential
investment return on which is based
on the change in particular
measurements of value or interest
rates ("indexed securities"),
including securities the potential
investment return on which is
inversely related to a change in
particular measurements of value or
interest rates ("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 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.
Derivative instruments may have
certain characteristics which have
a similar effect on the return to
Common Stock investors as the
leveraging of the Fund's portfolio;
however, certain derivative
investments will not be taken into
account for purposes of calculating
the percentage of leverage of the
Fund's portfolio. For a further
discussion of the risks associated
with derivative 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. Options
transactions involve the potential
loss of the opportunity to profit
from any price increase in the
underlying security above the
option exercise price or the
potential loss of the premium paid
for the option. 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 organizations. 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 organizations.
The Fund's Charter includes
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 Charter".
For so long as any shares of AMPS
are rated by Moody's, the Fund will
not buy or sell financial futures
contracts, write, purchase or sell
call options on financial futures
contracts or purchase put options
on financial futures contracts or
write call options (except covered
call options) on portfolio
securities unless it receives
written confirmation from Moody's
that engaging in such transactions
would not impair the ratings then
assigned to the shares of AMPS by
Moody's, except that the Fund may
engage in Moody's Hedging
Transactions subject to the
limitations described herein. For
so long as any shares of AMPS are
rated by S&P, the Fund will not
purchase or sell financial futures
contracts, write, purchase or sell
options on financial futures
contracts or write put options
(except covered put options) or
call options (except covered call
options) on portfolio securities
unless it receives written
confirmation from S&P that engaging
in such transactions will not
impair the ratings then assigned to
the shares of AMPS by S&P, except
that the Fund may engage in S&P
Hedging Transactions subject to the
limitations described herein. See
"Investment Objective and Policies-
-Rating Agency Guidelines" and "--
Options and Futures Transactions".
There are a number of specific
factors investors in AMPS should
consider.
-- The credit ratings of the AMPS
could be reduced while an
investor holds the AMPS.
-- Neither Broker-Dealers nor the
Fund are obligated to purchase
shares of AMPS in an Auction or
otherwise nor is the Fund required
to redeem shares of AMPS in the
event of a failed Auction.
-- If in an Auction for the AMPS
Sufficient Clearing Bids do not
exist the Applicable Rate will be
the Maximum Applicable Rate, and in
such event, Beneficial Owners that
have submitted Sell Orders will not
be able to sell in the Auction all,
and may not be able to sell any,
shares of AMPS subject to such Sell
Orders. Thus, under certain
circumstances, Beneficial Owners
may not have liquidity of
investment.
The Broker-Dealers intend to
maintain a secondary trading market
in the AMPS outside of Auctions;
however, they have no obligation to
do so and there can be no assurance
that a secondary market for the
AMPS will develop or, if it does
develop, that it will provide
holders with a liquid trading
market (i.e., trading will depend
on the presence of willing buyers
and sellers and the trading price
is subject to variables to be
determined at the time of the trade
by the Broker-Dealers). The AMPS
will not be registered on any stock
exchange or on the National
Association of Securities Dealers
Automated Quotation system. An
increase in the level of interest
rates likely will have an adverse
effect on the secondary market
price of the AMPS, and a selling
shareholder may sell AMPS between
Auctions at a price per share of
less than $25,000.
VOTING RIGHTS . . . . . . . . . . . The 1940 Act requires that the
holders of AMPS and any other
Preferred Stock, voting as a
separate class, have the right to
elect at least two directors at all
times and to elect a majority of
the directors at any time when two
years' dividends on the AMPS or any
other Preferred Stock are unpaid.
The holders of AMPS and any other
Preferred Stock will vote as a
separate class on certain other
matters as required under the
Fund's Charter and the 1940 Act.
See "Description of AMPS--Voting
Rights" and "Description of Capital
Stock--Certain Provisions of the
Charter".
10
<PAGE>
THE FUND
Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is a
recently 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
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's
principal office is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and its telephone number is (609) 282-2800.
The Fund commenced operations on November 3, 1995 upon the closing
of the subscription offering of 4,819,625 shares of its Common Stock. The
proceeds of such offering were $48,196,245 prior to the payment of
organizational and offering expenses. 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.
USE OF PROCEEDS
Assuming that all shares of Series A AMPS currently registered are
sold, it is estimated that the net proceeds of this offering will be $______
after payment of offering expenses estimated to be $__________.
The net proceeds of the offering will be invested in accordance with
the Fund's investment objective and policies during a period estimated not to
exceed three months from the offer and sale of such shares of AMPS depending
on market conditions and the availability of appropriate securities. Pending
such investment, it is anticipated that the proceeds will be invested in
short-term tax-exempt securities. See "Investment Objective and Policies".
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Fund as of November ___, 1995 and as adjusted to give effect to the issuance
of the shares of AMPS offered hereby in an amount representing approximately
35% of the Fund's capital.
<TABLE>
<CAPTION>
Actual As Adjusted
<S> <C> <C>
Shareholders' equity:
Capital Stock (200,000,000 shares authorized)
Preferred Stock, par value $.10 per share (no shares
issued; ____ shares of AMPS issued and outstanding, as
$
adjusted, at $25,000 per share liquidation preference) .
Common Stock, par value $.10 per share (_______ shares
$
issued and outstanding) . . . . . . . . . . . . . . . .
Capital in excess of par value attributable to Common
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undistributed investment income--net . . . . . . . . . . . .
Unrealized appreciation on investments--net . . . . . . . .
Net assets . . . . . . . . . . . . . . . . . . . . . . . . . $ $
</TABLE>
11
<PAGE>
PORTFOLIO COMPOSITION
As of November __, 1995, approximately ___% of the market value of
the Fund's portfolio was invested in long-term municipal obligations and
approximately ____% of the market value of the Fund's portfolio was invested
in short-term municipal obligations. The following table sets forth certain
information with respect to the composition of the Fund's long-term municipal
obligation investment portfolio as of November __, 1995.
<TABLE>
<CAPTION> Value
Number of
S&P* Moody's* (in thousands) Percent
Issues
AAA Aaa -- $ -- -- %
AA Aa -- -- --
A A -- -- --
BBB Baa -- -- --
BB Ba -- -- --
B B -- -- --
CCC Caa -- -- --
CC Ca -- -- --
C C
Total . . . . . . . . . . . . . . . -- $ -- 100.0 %
(table continued)
Value
Number of
S&P* Moody's* (in thousands) Percent
Issues
<S> <C> <C> <C> <C>
AAA Aaa -- $ -- -- %
AA Aa -- -- --
A A -- -- --
BBB Baa -- -- --
BB Ba -- -- --
B B -- -- --
CCC Caa -- -- --
CC Ca -- -- --
C C
Total . . . . . . . . . . . . . . . -- $ -- 100.0 %
</TABLE>
* Ratings: Using the higher of S&P's or Moody's ratings on the Fund's
municipal obligations. See "Schedule of Investments". S&P rating
categories may be modified further by a plus (+) or minus (-) in AA, A,
BBB, BB, B and C ratings. Moody's rating categories may be modified further
by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings.
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, in the opinion of bond counsel to the
issuer, is exempt from Federal income taxes 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 interim and temporary periods
as discussed below, 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 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.
12
<PAGE>
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 to be 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 seeks 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
A 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 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
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<PAGE>
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
creditworthiness of the issuer of such bonds but also the creditworthiness 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%) in 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".
The Fund intends to invest primarily in long-term Municipal Bonds
with a maturity of more than ten years. Also, the Fund may invest in
intermediate-term Municipal Bonds with a maturity of between three and ten
years. The Fund may invest in short-term, tax-exempt securities, short-term
U.S. Government securities, repurchase agreements or cash. Such short-term
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 or in anticipation of the repurchase or redemption of
the Fund's securities and temporary 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 for
the special tax treatment afforded regulated investment companies under 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.
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<PAGE>
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 of 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" bonds 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 repayment of
the principal and payment of the 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.
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 participation 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 AMPS or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known
as
15
<PAGE>
"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. For so long as shares of
AMPS are rated by Moody's or S&P, unless it receives written confirmation
from S&P or Moody's, as the case may be, that such action would not impair
the ratings then assigned to the shares of AMPS by Moody's or S&P, the Fund
will not borrow moneys except for the purpose of clearing portfolio
securities transactions (which borrowings under any circumstances shall be
limited to the lesser of $10 million and an amount equal to 5% of the market
value of the Fund's assets at the time of such borrowings and which
borrowings shall be repaid within 60 days and not be extended or renewed).
When-Issued Securities and Delayed Delivery Transactions. The Fund
may purchase or sell Municipal Bonds on a delayed delivery basis or on a
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 Bonds that
pay interest based on an index of Municipal Bond interest rates. 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. The Fund will not
invest more than 10% of its total assets in inverse floating obligations and
residual interest bonds.
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 a 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 15% of the Fund's net assets. In the
event of default by the seller under a repurchase
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<PAGE>
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.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the
Glossary that appears at the end of this Prospectus.
The Fund intends that, so long as shares of AMPS are outstanding,
the composition of its portfolio will reflect guidelines established by
Moody's and S&P in connection with the Fund's receipt of a rating for such s-
hares on their Date of Original Issue of at least "aaa" from Moody's and AAA
from S&P. Moody's and S&P, nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines described below have
been developed by Moody's and S&P in connection with issuances of
asset-backed and similar securities, including debt obligations and variable
rate Preferred Stock, generally on a case-by-case basis through discussions
with the issuers of these securities. The guidelines are designed to ensure
that assets underlying outstanding debt or Preferred Stock will be varied
sufficiently and will be of sufficient quality and amount to justify
investment-grade ratings. The guidelines do not have the force of law but
have been adopted by the Fund in order to satisfy current requirements
necessary for Moody's and S&P to issue the above-described ratings for shares
of AMPS, which ratings generally are relied upon by institutional investors
in purchasing such securities. The guidelines provide a set of tests for
portfolio composition and asset coverage that supplement (and in some cases
are more restrictive than) the applicable requirements under the 1940 Act.
See "Description of AMPS--Asset Maintenance".
The Fund intends to maintain a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount and to maintain the Minimum
Liquidity Level. Moody's and S&P each has established separate guidelines
for determining Discounted Value. To the extent any particular portfolio
holding does not satisfy the applicable rating agency's guidelines, all or a
portion of such holding's value will not be included in
the calculation of Discounted Value (as defined by such rating agency). The
Moody's and S&P guidelines do not impose any limitations on the percentage of
Fund assets that may be invested in holdings not eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund
will seek to alter the composition of its portfolio to reattain a Discounted
Value at least equal to the AMPS Basic Maintenance Amount on or prior to the
AMPS Basic Maintenance Cure Date, thereby incurring additional transaction
costs and possible losses and/or gains on dispositions of
portfolio securities. To the extent any such failure is not cured in a
timely manner, shares of AMPS will be subject to redemption. See
"Description of AMPS--Asset Maintenance" and "Description of AMPS--
Redemption". The AMPS Basic Maintenance Amount includes the sum of (i) the
aggregate liquidation value of AMPS then outstanding and (ii) certain accrued
and projected payment obligations of the Fund. See "Description of AMPS--
Asset Maintenance".
The Fund may, but is not required to, adopt any modifications to
these guidelines that hereafter may be established by Moody's or S&P.
Failure to adopt any such modifications, however, may result in a change in
the ratings described above or a withdrawal of ratings altogether. In
addition, any rating agency providing a rating for the shares of AMPS, at any
time, may change or withdraw any such rating. As set forth in the Articles
Supplementary, the Board of Directors, without shareholder approval, may
modify certain definitions or restrictions which have been adopted by the
Fund pursuant to the rating agency guidelines, provided the Board of
Directors has obtained written confirmation from Moody's and S&P that any
such change would not impair the ratings then assigned by Moody's and S&P to
the AMPS.
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<PAGE>
As recently described by Moody's and S&P, a Preferred Stock rating
is an assessment of the capacity and willingness of an issuer to pay
Preferred Stock obligations. The ratings on the AMPS are not recommendations
to purchase, hold or sell shares of AMPS, inasmuch as the
ratings do not comment as to market price or suitability for a particular
investor, nor do the rating agency guidelines described above address the
likelihood that a holder of shares of AMPS will be able to sell such shares
in an Auction. The ratings are based on current information furnished to
Moody's and S&P by the Fund and the Investment Adviser and information
obtained from other sources. The ratings may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such
information. The Common Stock has not been rated by a nationally recognized
statistical rating organization.
S&P AAA Rating Guidelines. The Discounted Value of the Fund's S&P
Eligible Assets is calculated on each Valuation Date. See "Description of
AMPS--Asset Maintenance--AMPS Basic Maintenance Amount". S&P Eligible Assets
include cash, Receivables for Municipal Bonds Sold (as defined below)
and Municipal Bonds eligible for consideration under S&P's current
guidelines. For purposes of calculating the Discounted Value of the Fund's
portfolio under current S&P guidelines, the fair market value of Municipal
Bonds eligible for consideration under such guidelines must be discounted by
the applicable S&P Discount Factor set forth in the table below. The
Discounted Value of a Municipal Bond eligible for consideration under S&P
guidelines is the fair market value thereof divided by the S&P Discount
Factor. The S&P Discount Factor used to discount a particular Municipal Bond
will be determined by reference to (a) the rating by S&P or Moody's on such
Municipal Bond and (b) the S&P Exposure Period. The S&P Exposure Period is
the maximum period of time following a Valuation Date, including
the Valuation Date and the AMPS Basic Maintenance Cure Date, that the Fund
has to cure any failure to maintain, as of such Valuation Date, a Discounted
Value for its portfolio at least equal to the AMPS Basic Maintenance Amount.
S&P Discount Factors applicable to Municipal Bonds for a range of
S&P Exposure Periods are set forth below:
<TABLE>
<CAPTION> S&P Discount Factors
Rating Category
Exposure AA AA A BB
<S> <C> <C> <C> <C>
40 Business Days . . . . . . 19% 19% 21% 25%
0 5 0 0
22 Business Days . . . . . . 17 17 19 23
0 5 0 0
10 Business Days . . . . . . 15 16 17 21
5 0 5 5
7 Business Days . . . . . . 15 15 17 21
0 5 0 0
3 Business Days . . . . . . 13 13 15 19
0 5 0 0
</TABLE>
Since the S&P Exposure Period currently applicable to the Fund is
seven Business Days, the S&P Discount Factors currently applicable to
Municipal Bonds eligible for consideration under S&P guidelines will be
determined by reference to the factors set forth opposite the exposure period
line entitled "7 Business Days". Notwithstanding the foregoing, (i) the S&P
Discount Factor for short-term Municipal Bonds will be 115%, so long
as such Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature or have a
demand feature exercisable in 30 days or less, or 125% if such Municipal
Bonds are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's;
provided, however, such short-term Municipal Bonds rated by Moody's but not
rated by S&P having a demand feature exercisable in 30 days or less must be
backed by a letter of credit, liquidity facility or guarantee from a bank or
other financial institution having a short-term rating of at least A-1+ from
S&P; and further provided that such short-term Municipal Bonds rated by
Moody's but not rated by S&P may comprise no more than 50% of short-term
Municipal Bonds that qualify as S&P Eligible Assets and (ii) no S&P Discount
Factor will be applied to cash or to Receivables for Municipal Bonds Sold.
"Receivables for Municipal Bonds Sold," for purposes of calculating S&P
Eligible Assets as of any Valuation Date, means the book value of receivables
for Municipal Bonds sold as of or prior to such Valuation Date
if such receivables are due within five Business Days of such Valuation Date.
The Fund may adopt S&P Discount Factors for Municipal Bonds other than
Municipal Bonds provided that S&P advises the Fund in writing that such
action will not adversely affect its then current rating on the AMPS. Also,
for purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not
rated by S&P, rated VMIG-1 by Moody's, which do not mature or have a demand
feature exercisable in 30 days and which do not have a long-term rating,
shall be considered to be short-term Municipal Bonds.
The S&P guidelines require certain minimum issue size and
geographical diversification and impose other requirements for purposes of
determining S&P Eligible Assets. In order to be considered S&P Eligible
Assets, Municipal Bonds must:
(i) Be interest bearing and pay interest at least semi-annually,
(ii) Be payable with respect to principal and interest in
U.S. dollars;
(iii) Be publicly rated BBB or higher by S&P or, except in the
case of Anticipation Notes that are grant anticipation notes or bond
anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's, be rated
at least A by Moody's (provided that such Moody's-rated Municipal Bonds will
be included in S&P Eligible Assets only to the extent the fair market value
of such Municipal Bonds does not exceed 50% of the aggregate fair market
value of the S&P Eligible Assets. For purposes of determining the S&P
Discount Factors applicable to any such Moody's-rated Municipal Bonds, such
Municipal Bonds will be deemed to have an S&P rating which is one full rating
category lower than its Moody's rating);
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<PAGE>
(iv) Not be subject to a covered call or covered put option
written by the Fund;
(v) Not be part of a private placement of Municipal Bonds; and
(vi) Be part of an issue with an original issue size of at
least $20 million or, if of an issue with an original issue size below
$20 million (but in no event below $10 million), be issued by an issuer
with a total of at least $50 million of securities outstanding.
Notwithstanding the foregoing:
(i) Municipal Bonds of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the fair market value of such Bonds does not exceed 10% of the aggregate
fair market value of the S&P Eligible Assets, provided that 2% is added
to the applicable S&P Discount Factor for every 1% by which
the fair market value of such Municipal Bonds exceeds 5% of the aggregate
fair market value of the S&P Eligible Assets;
(ii) Municipal Bonds guaranteed or insured by any one bond
insurer will be considered S&P Eligible Assets only to the extent the
fair market value of such Municipal Bonds does not exceed 25% of the
aggregate fair market value of the S&P Eligible Assets; and
(iii) Municipal Bonds issued by issuers in any one state or
territory will be considered S&P Eligible Assets only to the extent the
fair market value of such Municipal Bonds does not exceed 20% of the
aggregate fair market value of S&P Eligible Assets.
The Fund may include Municipal Bonds as S&P Eligible Assets pursuant
to guidelines and restrictions to be established by S&P, provided that S&P
advises the Fund in writing that such action will not adversely affect its
then current rating on the AMPS.
As discussed above, the Fund may engage in options or futures
transactions. For so long as any shares of AMPS are rated by S&P, the Fund
will not purchase or sell financial futures contracts, write, purchase or
sell options on financial futures contracts or write put options (except
covered put options) or call options (except covered call options) on
portfolio securities unless it receives written confirmation from S&P that
engaging in such transactions will not impair the ratings then assigned to
the shares of AMPS by S&P, except that the Fund may purchase or sell
financial futures contracts based on the Bond Buyer Municipal Bond Index (the
"Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds") and write, purchase or sell put and call options on such contracts
(collectively "S&P Hedging Transactions"), subject to the following
limitations:
(i) the Fund will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a
financial futures contract or option held by the Fund by the Fund's taking an
opposite position thereto ("Closing Transactions")), which would cause the
Fund at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding financial futures contracts based on the
Municipal Index, (B) outstanding financial futures contracts based on the
Municipal Index exceeding in number 25% of the quotient of the fair market
value of the Fund's total assets divided by $100,000 or (C) outstanding
financial futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded financial futures contracts based
on the Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause
the Fund at the time of such transaction to own or have sold the lesser of
(A) outstanding financial futures contracts based on Treasury Bonds and on
the Municipal Index exceeding in number 25% of the quotient of the fair
market value of the Fund's total assets divided by $100,000 or (B)
outstanding financial futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded financial futures contracts
based on Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close
out any outstanding financial futures contract which the Fund owns or
has sold or any outstanding option thereon owned by the Fund in the
event (A) the Fund does not have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount on two consecutive Valuation Dates and (B) the Fund is required
to pay Variation Margin on the second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close
out any outstanding financial futures contract or option thereon in the
month prior to the delivery month under the terms of such financial futures
contract or option thereon unless the Fund holds the securities deliverable
under such terms; and
(v) when the Fund writes a financial futures contract or an
option thereon, it will either maintain an amount of cash, cash
equivalents or short-term, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus
the amount of Initial Margin and Variation Margin held in the account of
or on behalf of the Fund's broker with respect to such financial futures
contract or option equals the fair market value of the financial futures
contract or option, or, in the event the Fund writes a financial futures
contract or option thereon which requires
delivery of an underlying security, it shall hold such underlying security in
its portfolio.
19
<PAGE>
For purposes of determining whether the Fund has S&P Eligible Assets
with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an
amount equal to (i) 30% of the aggregate settlement value, as marked to
market, of any outstanding financial futures contracts based on the Municipal
Index which are owned by the Fund plus (ii) 25% of the aggregate settlement
value, as marked to market, of any outstanding financial futures contracts
based on Treasury Bonds which contracts are owned by the Fund.
Moody's "aaa" Rating Guidelines. The Discounted Value of the Fund's
Moody's Eligible Assets is calculated on each Valuation Date. See
"Description of AMPS--Asset Maintenance--AMPS Basic Maintenance Amount".
Moody's Eligible Assets include cash, Receivables for Municipal Bonds (as
defined below), and Municipal Bonds eligible for consideration under Moody's
guidelines. For purposes of calculating the Discounted Value of the Fund's
portfolio under current Moody's guidelines, the fair market value of
Municipal Bonds eligible for consideration under such guidelines must be
discounted by the applicable Moody's Discount Factor set forth in the table
below. The Discounted Value of a Municipal Bond eligible for consideration
under Moody's guidelines is the lower of par and the quotient of the fair
market value thereof divided by the Moody's Discount Factor. The Moody's
Discount Factor used to discount a particular Municipal Bond will be
determined by reference to (a) the rating by Moody's or S&P on such Municipal
Bond and (b) the Moody's Exposure Period. Moody's Discount Factors for a
range of Moody's Exposure Periods are set forth below:
<TABLE>
<CAPTION> Moody's Discount Factors Rating Category
Moody's Exposure Period Aaa(1) Aa(1) A(1) Baa(1) Other(2) VMIG-1(3) SP-1+(3)
<S> <C> <C> <C> <C> <C>
7 weeks or less . . . . . . . . . . . . 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than
seven weeks . . . . . . . . . . . . . 154 164 173 205 235 137 149
9 weeks or less but greater than
eight weeks . . . . . . . . . . . . . 158 169 179 209 242 138 150
</TABLE>
(1) Moody's rating.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Municipal Bonds rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's,
rated SP-1+ or A-1+ by S&P which do not mature or have a demand feature at
par exercisable within the Moody's Exposure Period and which do not have a
long-term rating. For the purposes of the definition of Moody's Eligible
Assets, these securities will have an assumed rating of A by Moody's.
Since the Moody's Exposure Period currently is 49 days, the Moody's
Discount Factors currently applicable to Municipal Bonds eligible for
consideration under Moody's guidelines will be determined by reference to the
factors set forth opposite the exposure period line entitled "7 weeks or
less". Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term Municipal Bonds so long as such Municipal Bonds are
rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand
feature at par exercisable within the Moody's Exposure Period, and the
Moody's Discount Factor for such Municipal Bonds will be 125% if such
Municipal Bonds are not rated by Moody's but are rated A-1+, SP-1+ or AA by
S&P and mature or have a demand feature at par exercisable within the Moody's
Exposure Period, and (ii) no Moody's Discount Factor will be applied
to cash or to Receivables for Municipal Bonds Sold. "Receivables for
Municipal Bonds Sold," for purposes of calculating Moody's Eligible Assets as
of any Valuation Date, means no more than the aggregate of the following:
(i) the book value of receivables for Municipal Bonds sold as of or prior to
such Valuation Date if such receivables are due within five Business Days of
such Valuation Date, and if the trades which generated such receivables are
(A) settled through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (B) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the
Moody's Discounted Value of Municipal Bonds sold as of or prior to such
Valuation Date which generated receivables, if such receivables are due
within five Business Days of such Valuation Date but do not comply with
either of conditions (A) or (B) of the preceding clause (i).
The Moody's guidelines impose certain requirements as to minimum
issue size, issuer diversification, issue type concentration and county
concentration, as well as other requirements for purposes of determining
whether Municipal Bonds constitute Moody's Eligible Assets, as set forth in
the table below:
20
<PAGE>
<TABLE>
<CAPTION> Maximum State or
Minimum Maximum Territory
Issue Size Underlying Concentration
Rating ($ Millions) Obligor (%)(1) (%)(1)(3)
<S> <C> <C> <C>
Aaa . . . . . . . . . . . . . . . 10 100 100
Aa . . . . . . . . . . . . . . . 10 20 60
A . . . . . . . . . . . . . . . . 10 10 40
Baa . . . . . . . . . . . . . . . 10 6 20
Other (2) . . . . . . . . . . . . 10 4 12
</TABLE>
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) are each limited to 10% of Moody's Eligible Assets. For
diversification purposes, Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described
above, any such Municipal Bond backed by the guaranty, letter of credit or
insurance issued by a third party will be deemed to be issued by such third
party if the issuance of such third party credit is the sole determinant of
the rating on such Municipal Bond.
Current Moody's guidelines also require that Municipal Bonds
constituting Moody's Eligible Assets pay interest in cash, be publicly rated
Baa or higher by Moody's or, if not rated by Moody's but rated by S&P, that
they be rated at least BBB- by S&P, not have suspended ratings by Moody's and
be part of an issue of Municipal Bonds of at least $10,000,000. For
purposes of determining the Moody's Discount Factors applicable to any such
S&P-rated Municipal Bonds, such Municipal Bonds (excluding any short-term
Municipal Bonds) will be deemed to have a Moody's rating which is one full
rating category lower than its S&P rating. When the Fund sells a Municipal
Bond and agrees to repurchase it at a future date, the Discounted Value of
such Municipal Bond will constitute a Moody's Eligible Asset and the amount
the Fund is required to pay upon repurchase of such bond will count as a
liability for purposes of calculating the AMPS Basic Maintenance Amount.
When the Fund purchases a Municipal Bond and agrees to sell it at a future
date to another party, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such Municipal Bond will constitute a
Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset if it is (i) held in a margin account, (ii) subject to
any material lien, mortgage, pledge, security interest or security agreement
of any kind, (iii) held for the purchase of a security pursuant to
a Forward Commitment or
(iv) irrevocably deposited by the Fund for the payment of dividends or
redemption.
For so long as shares of AMPS are rated by Moody's, in managing the
Fund's portfolio, the Investment Adviser will not alter the composition of
the Fund's portfolio if, in the reasonable belief of the Investment Adviser,
the effect of any such alteration would be to cause the Fund to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of
such Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of
Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount by five
percent or less, the Investment Adviser will not alter the composition of the
Fund's portfolio in a manner reasonably expected to reduce the aggregate
Discounted Value of Moody's Eligible Assets unless the Fund shall have
confirmed that, after giving effect to such alteration, the aggregate
Discounted Value of Moody's Eligible Assets would exceed the AMPS Basic
Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund
will not buy or sell financial futures contracts, write, purchase or sell
call options on financial futures contracts or purchase put options on
21
<PAGE>
financial futures contracts or write call options (except covered call
options) on portfolio securities unless it receives written confirmation from
Moody's that engaging in such transactions would not impair the ratings
then assigned to the shares of AMPS by Moody's, except that the Fund may
purchase or sell exchange-traded financial futures contracts based on the
Municipal Index or Treasury Bonds and purchase, write or sell exchange-traded
put options on such financial futures contracts and purchase, write or sell
exchange-traded call options on such financial futures contracts
(collectively "Moody's Hedging Transactions"), subject to the following
limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction
based on the Municipal Index (other than Closing Transactions) which would
cause the Fund at the time of such transaction to own or have sold (A)
outstanding financial futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded financial
futures contracts based on the Municipal Index in the 30 days preceding the
time of effecting such transaction as reported by The Wall Street Journal or
(B) outstanding financial futures contracts based on the Municipal Index
having a fair market value exceeding the fair market value of all Municipal
Bonds constituting Moody's Eligible Assets owned by the Fund (other than
Moody's Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Fund at the time of such transaction to own or
have sold (A) outstanding financial futures contracts based on Treasury
Bonds having an aggregate fair market value exceeding 40% of the aggregate
fair market value of Moody's Eligible Assets owned by the Fund and rated Aa
by Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by S&P)
or (B) outstanding financial futures contracts based on Treasury Bonds having
an aggregate fair market value exceeding 80% of the aggregate fair market
value of all Municipal Bonds constituting Moody's Eligible Assets owned by
the Fund (other than Moody's Eligible Assets already subject to a Moody's
Hedging Transaction) and rated Baa or A by Moody's (or, if not rated
by Moody's but rated by S&P, rated A or AA by S&P) (for purposes of the
foregoing clauses (i) and (ii), the Fund shall be deemed to own the number of
financial futures contracts that underlie any outstanding options written
by the Fund);
(iii) the Fund will engage in Closing Transactions to close
out any outstanding financial futures contract based on the Municipal
Index if the amount of open interest in the Municipal Index as reported
by The Wall Street Journal is less than 5,000;
(iv) the Fund will engage in a Closing Transaction to close
out any outstanding financial futures contract by no later than the
fifth Business Day of the month in which such contract expires and will
engage in a Closing Transaction to close out any outstanding option on a
financial futures contract by no later than the first Business Day of the
month in which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only
with respect to financial futures contracts or options thereon having
the next settlement date or the settlement date immediately thereafter;
(vi) the Fund will not engage in options and futures
transactions for leveraging or speculative purposes and will not write
any call options or sell any financial futures contracts for the purpose
of hedging the anticipated purchase of an asset prior to completion of
such purchase; and
(vii) the Fund will not enter into an option or futures
transaction unless, after giving effect thereto, the Fund would continue
to have Moody's Eligible Assets with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Fund is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows: (i) assets subject to call
options written by the Fund which are either exchange-traded and "readily
reversible" or which expire within 49 days after the date as of which such
valuation is made shall be valued at the lesser of (A) Discounted Value and
(B) the exercise price of the call option written by the Fund; (ii) assets
subject to call options written by the Fund not meeting the requirements
22
<PAGE>
of clause (i) of this sentence shall have no value; (iii) assets subject to
put options written by the Fund shall be valued at the lesser of (A) the
exercise price and (B) the Discounted Value of the subject security;
(iv) futures contracts shall be valued at the lesser of (A) settlement price
and (B) the Discounted Value of the subject security, provided that, if a
contract matures within 49 days after the date as of which such valuation is
made, where the Fund is the seller the contract may be valued at the
settlement price and where the Fund is the buyer the contract may be valued
at the Discounted Value of the subject securities; and (v) where delivery may
be made to the Fund with any security of a class of securities, the Fund
shall assume that it will take delivery of the security with the lowest
Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(i) 10% of the exercise price of a written call option; (ii) the exercise
price of any written put option; (iii) where the Fund is the seller under a
financial futures contract, 10% of the settlement price of the financial
futures contract; (iv) where the Fund is the purchaser under a financial
futures contract, the settlement price of assets purchased under such
financial futures contract; (v) the settlement price of the underlying
financial futures contract if the Fund writes put options on a financial
futures contract; and (vi) 105% of the fair market value of the underlying
financial futures contracts if the Fund writes call options on a financial
futures contract and does not own the underlying contract.
For so long as any shares of AMPS are rated by Moody's, the Fund
will not enter into any contract to purchase securities for a fixed price at
a future date beyond customary settlement time (other than such contracts
that constitute Moody's Hedging Transactions), except that the Fund may enter
into such contracts to purchase newly-issued securities on the date such
securities are issued ("Forward Commitments"), subject to the following
limitations:
(i) the Fund will maintain in a segregated account with its
custodian cash, cash equivalents or short term, fixed-income securities
rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the
Forward Commitment with a fair market value that equals or exceeds the amount
of the Fund's obligations under any Forward Commitments to which it is from
time to time a party or long-term, fixed income securities with a
Discounted Value that equals or exceeds the amount of the Fund's obligations
under any Forward Commitment to which it is from time to time a party, and
(ii) the Fund will not enter into a Forward Commitment
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund
pursuant to such Forward Commitments shall be zero.
For so long as shares of AMPS are rated by S&P or Moody's, the Fund,
unless it has received written confirmation from S&P and/or Moody's, as the
case may be, that such action would not impair the ratings then assigned to
the AMPS by S&P and/or Moody's, as the case may be, will not (i)
borrow money except for the purpose of clearing transactions in portfolio
securities (which borrowings under any circumstances shall be limited to the
lesser of $10 million and an amount equal to 5% of the fair market value of
the Fund's assets at the time of such borrowings and which borrowings shall
be repaid within 60 days and not be extended or renewed and shall not cause
the aggregate Discounted Value of Moody's Eligible Assets and S&P Eligible
Assets to be less than the AMPS Basic Maintenance Amount), (ii) engage in
short sales of securities, (iii) lend any securities, (iv) issue any class or
series of stock ranking prior to or on a parity with the AMPS with respect to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, (v) reissue any AMPS previously
purchased or redeemed by the Fund, (vi) merge or consolidate into
or with any other corporation or entity, (vii) change the Fund's pricing
service or
(vii) engage in reverse repurchase agreements.
23
<PAGE>
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 and options thereon. While the Fund's use of
hedging strategies is 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. For so long as the AMPS are rated by Moody's and S&P, the
Fund's use of options and financial futures contracts will be subject to
the limitations described under "Investment Objective and Policies--Rating
Agency Guidelines". 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 nationally recognized statistical rating
organizations, the Fund may be required to limit its use of hedging
techniques in accordance with the specified guidelines of such rating
organizations.
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.
Financial Futures Contracts and Options. The Fund is authorized to
purchase and sell certain financial futures contracts and options thereon
solely for the purpose of hedging its investments in Municipal Bonds against
declines in value and hedging 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
24
<PAGE>
delivery of the type of financial instrument covered by the contract or, in
the case of index-based financial 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 financial futures contracts.
The purchase or sale of a financial 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 financial futures contract fluctuates making the long and short
positions in the financial 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 financial 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 financial 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, U.S. 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 financial 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 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 financial futures contracts and movements in the price of the
security which is the subject of the hedge. If the price of the financial
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 financial 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 financial futures contracts on U.S.
Government securities and options on such
25
<PAGE>
financial 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 (the
"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 financial 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 financial 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 financial futures contract, thereby ensuring
that the use of such financial 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".
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 financial futures contract.
The liquidity of a secondary market in a financial futures contract
may be adversely affected by "daily price fluctuation limits" established by
commodity exchanges which limit the amount of fluctuation in a financial
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 reached or exceeded 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.
26
<PAGE>
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 financial 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.
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the
Glossary that appears at the back of this Prospectus.
Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of 40,000 shares of AMPS, designated respectively: 8,000 shares
of Series A AMPS, 8,000 shares of Series B AMPS, 8,000 shares of Series C
AMPS, 8,000 shares of Series D AMPS and 8,000 shares of Series E AMPS. The
Series A AMPS offered hereby are the only series currently offered and to be
issued and outstanding.
The AMPS will be shares of Preferred Stock that entitle their
holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividends Period for each such series. After the
Initial Dividend Period, each Subsequent Dividend Period for the Series A
AMPS will generally be a 28-Day Dividend Period; provided, however, that
prior to any Auction, the Fund may elect, subject to certain limitations
described herein, upon giving notice to holders thereof, a Special Dividend
Period. The Applicable Rate for a particular Dividend Period will be
determined by an Auction conducted on the Business Day before the start of
such Dividend Period. Beneficial Owners and Potential Beneficial Owners of
shares of AMPS may participate in Auctions therefor, although, except in the
case of a Special Dividend Period, Beneficial Owners desiring to continue to
hold all of their shares of AMPS regardless of the Applicable Rate resulting
from Auctions need not participate. For an explanation of Auctions and the
method of determining the Applicable Rate, see "Description of AMPS--The
Auction".
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of AMPS will be represented by
one or more certificates registered in the name of the nominee of the
Securities Depository (initially expected to be Cede), and no person
acquiring shares of AMPS will be entitled to receive a certificate
representing such shares. See Appendix C (Auction Procedures). As a result,
the nominee of the Securities Depository is expected to be the sole holder of
record of the shares of AMPS. Accordingly, each purchaser of AMPS
must rely on (i) the procedures of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such purchaser's
Agent Member, to receive dividends, distributions and notices and to exercise
voting rights (if and when applicable) and (ii) the records of the Securities
Depository and, if such purchaser is not a member of the Securities
Depository, such purchaser's Agent Member, to evidence its
beneficial ownership of shares of AMPS.
When issued and sold, the shares of AMPS will have a liquidation
preference of $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) and will be fully paid
and non-assessable. See "Description of AMPS--Liquidation Rights". The
shares of AMPS will not be convertible into shares of Common Stock or other
capital stock of the Fund, and the holders thereof will have no preemptive
rights. The shares of AMPS will not be subject to any sinking fund but will
be subject to redemption at the option of the Fund at the Optional Redemption
Price on any Dividend Payment Date (except during the Initial Dividend Period
and during a Non-Call Period) and, under certain
circumstances, will be subject to mandatory redemption by the Fund at the
Mandatory Redemption Price stated herein. See "Description of AMPS--
Redemption".
In addition to serving as the Auction Agent in connection with the
Auction Procedures described below, IBJ Schroder Bank & Trust Company will be
the transfer agent, registrar, dividend disbursing agent
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<PAGE>
and redemption agent for the shares of AMPS. The Auction Agent, however,
will serve merely as the agent of the Fund, acting in accordance with the
Fund's instructions, and will not be responsible for any evaluation or
verification of any matters certified to it.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any shares of
AMPS so long as the Fund is current in the payment of dividends on AMPS and
on any other capital stock of the Fund ranking on a parity with the AMPS with
respect to the payment of dividends or upon liquidation.
The following is a brief description of the terms of the shares of
AMPS. This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the Fund's Charter and Articles
Supplementary, including the provisions thereof establishing the AMPS. The
Fund's Charter and the form of Articles Supplementary
establishing the terms of the AMPS have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
THE AUCTION
General. Holders of the shares of AMPS of each series will be
entitled to receive cumulative cash dividends on their shares when, as and if
declared by the Board of Directors of the Fund, out of funds legally
available therefor, on the Initial Dividend Payment Date with respect to the
Initial Dividend Period and, thereafter, on each Dividend Payment Date with
respect to a Subsequent Dividend Period (generally a period of 28 days in the
case of Series A AMPS, subject to certain exceptions set forth under
"Description of AMPS--Dividends--General") at the rate per annum equal to the
Applicable Rate for each such Dividend Period.
The provisions of the Articles Supplementary establishing the terms
of the shares of AMPS offered hereby will provide that the Applicable Rate
for each series of AMPS for each Dividend Period after the Initial Dividend
Period therefor will be equal to the rate per annum that the Auction Agent
advises has resulted on the Business Day preceding the first day of such
Dividend Period due to implementation of the auction procedures set forth in
the Articles Supplementary (the "Auction Procedures") in which persons
determine to hold or offer to purchase or sell shares of AMPS of such series.
The Auction Procedures are attached as Appendix C to this Prospectus. Each
periodic operation of such procedures with respect to the
shares of AMPS is referred to hereinafter as an "Auction". If, however, the
Fund should fail to pay or duly provide for the full amount of any dividend
on shares of AMPS of any series or the redemption price of shares of AMPS of
such series called for redemption, the Applicable Rate for shares of AMPS
will be determined as set forth under "Description of AMPS--Dividends--
Determination of Dividend Rate".
Auction Agent Agreement. The Fund will enter into an agreement (the
"Auction Agent Agreement") with IBJ Schroder Bank & Trust Company (together
with any successor bank or trust company or other entity entering into a
similar agreement with this Fund, the "Auction Agent"), which provides, among
other things, that the Auction Agent will follow the Auction
Procedures for the purpose of determining the Applicable Rate for the AMPS.
The Fund will pay the Auction Agent compensation for its services under the
Auction Agent Agreement.
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for
any error of judgment made, by it in the performance of its duties under the
Auction Agent Agreement, and will not be liable for any error of judgment
made in good faith unless the Auction Agent shall have been negligent in
ascertaining the pertinent facts. Pursuant to the Auction Agent Agreement,
the Fund is required to indemnify the Auction Agent for certain losses and
liabilities incurred by the Auction Agent without negligence or bad faith on
its part in connection with the performance of its duties under such
agreement.
The Auction Agent may terminate the Auction Agent Agreement upon
notice to the Fund, which termination may be no earlier than 60 days
following delivery of such notice. If the Auction Agent resigns, the Fund
will use its best efforts to enter into an agreement with a successor Auction
Agent containing substantially the same terms and conditions as the Auction
Agent Agreement. The Fund may terminate the
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<PAGE>
Auction Agent Agreement, provided that prior to such termination the Fund
shall have entered into such an agreement with respect thereto with a
successor Auction Agent.
Broker-Dealer Agreements. The Auctions require the participation of
one or more broker-dealers. The Auction Agent will enter into agreements
with Merrill Lynch, ____________ and _____________ and may enter into similar
agreements (collectively, the "Broker-Dealer Agreements") with one or more of
the broker-dealers (collectively, the "Broker-Dealers") selected by the Fund,
which provide for the participation of such Broker-Dealers in Auctions.
Merrill Lynch is an affiliate of the Investment Adviser in that they share a
common parent, ML & Co. A Broker-Dealer Agreement may be terminated by the
Auction Agent or a Broker-Dealer on five days' notice to the other party,
provided that the Broker-Dealer Agreement with Merrill Lynch may not be
terminated without the prior written consent of the Fund, which consent may
not be unreasonably withheld.
Securities Depository. The Depository Trust Company initially will
act as the Securities Depository for the Agent Members with respect to the
shares of AMPS of each series. One or more registered certificates for all
of the shares of AMPS initially will be registered in the name of Cede, as
nominee of the Securities Depository. The certificate will bear a legend to
the effect that such certificate is issued subject to the provisions
restricting transfers of shares of AMPS contained in the Articles
Supplementary. Cede initially will be the holder of record of all shares of
AMPS, and Beneficial Owners will not be entitled to receive certificates
representing their ownership interest in such shares. See Appendix C
(Auction Procedures). The Securities Depository will maintain lists of its
participants and will maintain the positions (ownership interests) of shares
of AMPS held by each Agent Member, whether as the Beneficial Owner thereof
for its own account or as nominee for the Beneficial Owner thereof. Payments
made by the Fund to holders of AMPS will be duly made by making
payments to the nominee of the Securities Depository.
Auction Procedures. The following is a brief summary of the
procedures to be used in conducting Auctions. Separate auctions will be
conducted for each series of AMPS. Accordingly, as used in the following
brief summary, unless the context otherwise requires, "AMPS" means the series
of AMPS subject to the related Auction and "Beneficial Owners,"
"Potential Beneficial Owners," "Existing Holders" and "Potential Holders"
mean Beneficial Owners, Potential Beneficial Owners, Existing Holders and
Potential Holders of such series, respectively. This summary is qualified by
reference to the Auction procedures set forth in Appendix C hereto. The
Settlement Procedures to be used with respect to Auctions are set forth in
Appendix B hereto.
Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends. An Auction to determine the
Applicable Rate for each series of AMPS offered hereby for each Dividend
Period (other than the Initial Dividend Period therefor) will be held on the
first Business Day (as hereinafter defined) preceding the first day of such
Dividend Period, which first day is also the Dividend Payment Date for the
preceding Dividend Period (the date of each Auction being referred to herein
as an "Auction Date"). "Business Day" means a day on which the New York
Stock Exchange is open for trading and which is not a Saturday, Sunday or
other day on which banks in The City of New York are authorized or obligated
by law to close. Auctions for shares of Series A AMPS for Dividend Periods
after the Initial Dividend Period normally will be held every _____________
after the preceding Dividend Payment Date, and each subsequent Dividend
Period normally will begin on the following ______________ (also a Dividend
Payment Date). The Auction Date and the first day of the related Dividend
Period (both of which must be Business Days) need not be consecutive
calendar days. For example, in most cases, if the _________ that normally
would be an Auction Date is not a Business Day, then such Auction Date will
be the preceding ____________ and the first day of the related Dividend
Period will continue to be the following ___________. See "Description of
AMPS--Dividends" for information concerning the circumstances under which a
Dividend Payment Date may fall on a date other than the days specified above,
which may affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net
capital gains or other income subject to regular Federal income taxes in any
dividend on shares of AMPS, the Fund will notify the Auction Agent of the
amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established.
Whenever the Auction Agent receives such notice from the Fund, in turn it
will notify each Broker-Dealer, who, on or prior to such Auction Date, in
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<PAGE>
accordance with its Broker-Dealer Agreement, will notify its customers who
are Beneficial Owners and Potential Beneficial Owners believed to be
interested in submitting an Order in the Auction to be held on such Auction
Date. The Fund also may include such income in a dividend on shares of AMPS
without giving advance notice thereof if it increases the dividend by an
additional amount calculated as if such income were a Retroactive Taxable
Allocation and the additional amount were an Additional Dividend; provided
that the Fund will notify the Auction Agent of the additional amounts to be
included in such dividend at least five Business Days prior to the applicable
Dividend Payment Date. See "Description of AMPS--Dividends--Additional
Dividends".
Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by
telephone a:
(i) Hold Order--indicating the number of outstanding shares, if
any, of AMPS that such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for the next Dividend Period for such shares;
(ii) Bid--indicating the number of outstanding shares, if
any, of AMPS that such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next Dividend Period for
such shares is not less than the rate per annum then specified by
such Beneficial Owner; and/or
(iii) Sell Order--indicating the number of outstanding shares,
if any, of AMPS that such Beneficial Owner offers to sell without
regard to the Applicable Rate for the next Dividend Period for such
shares; and
(b) Broker-Dealers will contact customers who are Potential
Beneficial Owners of shares of AMPS to determine whether such Potential
Beneficial Owners desire to submit Bids indicating the number of shares of
AMPS which they offer to purchase provided that the Applicable Rate for the
next Dividend Period for such shares is not less than the rates per annum
specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial
Owner to a Broker-Dealer and the communication by a Broker-Dealer, whether or
not acting for its own account, to the Auction Agent of the foregoing
information is hereinafter referred to as an "Order" and collectively as
"Orders". A Beneficial Owner or a Potential Beneficial Owner placing an
Order, including a Broker-Dealer acting in such capacity for its own account,
is hereinafter referred to as a "Bidder" and collectively as "Bidders". Any
Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date shall be
irrevocable.
In an Auction, a Beneficial Owner may submit different types of
Orders with respect to shares of AMPS then held by such Beneficial Owner, as
well as Bids for additional shares of AMPS. For information concerning the
priority given to different types of Orders placed by Beneficial Owners, see
"Submission of Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the
Applicable Percentage of the Reference Rate. The Auction Agent will round
each applicable Maximum Applicable Rate to the nearest one-thousandth (0.001)
of one percent per annum, with any such number ending in five ten-thousandths
of one percent being rounded upwards to the nearest one-thousandth (0.001) of
one percent. The Auction Agent will not round the
applicable Reference Rate as part of its calculation of the Maximum
Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the
credit rating or ratings assigned to such shares. The Applicable Percentage
will be determined based on (i) the lower of the credit rating or ratings
assigned on such date to such shares by Moody's and S&P (or if Moody's or S&P
or both shall not make such rating available, the equivalent of either or
both of such ratings by a Substitute Rating Agency or two Substitute Rating
Agencies or, in the event that only one such rating shall be available, such
rating) and (ii) whether the Fund has provided notification to the Auction
Agent prior to the Auction
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<PAGE>
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on shares of AMPS as
follows:
<TABLE>
<CAPTION> Applicable Applicable
Credit Ratings Percentage of Percentage of
Reference Rate-- Reference Rate--
Moody's S&P No Notification Notification
<S> <C> <C>
"aa3" or higher AA-- or higher 110% 150%
"a3" to "a1" A-- to A+ 125% 160%
"baa3" to "baa1" BBB-- to BBB+ 150% 250%
Below "baa3" Below BBB-- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend
Period.
The Fund will take all reasonable action necessary to enable S&P and
Moody's to provide a rating for the AMPS. If either S&P or Moody's shall not
make such a rating available, or neither S&P nor Moody's shall make such a
rating available, Merrill Lynch or its affiliates and successors, after
consultation with the Fund, will select a nationally
recognized statistical rating organization (a "Substitute Rating Agency") or
two nationally recognized statistical rating organizations ("Substitute
Rating Agencies") to act as a Substitute Rating Agency or Substitute Rating
Agencies, as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher
than the Maximum Applicable Rate will be treated as a Sell Order, and any Bid
by a Potential Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will not be considered. See "Determination of
Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and
"Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares".
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a
Beneficial Owner. A Broker-Dealer thus may submit Orders to the Auction
Agent as a Beneficial Owner or a Potential Beneficial Owner and therefore
participate in an Auction as an Existing Holder or Potential Holder on behalf
of both itself and its customers. Any Order placed with the Auction Agent by
a Broker-Dealer as or on behalf of a Beneficial Owner or a Potential
Beneficial Owner will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner.
Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an
Order in respect of any AMPS held by it or its customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of AMPS held by
it, as described in the next paragraph. Inasmuch as a Broker-Dealer
participates in an Auction as an Existing Holder or a Potential Holder only
to represent the interests of a Beneficial Owner or Potential Beneficial
Owner, whether it be its customers or itself, all discussion herein relating
to the consequences of an Auction for Existing Holders and Potential Holders
also applies to the underlying beneficial ownership interests represented
thereby. For information concerning the priority given to different types of
Orders placed by Existing Holders, see "Submission of Orders by
Broker-Dealers to Auction Agent". Each purchase or sale in an Auction will
be settled on the Business Day next succeeding the Auction Date at a price
per share equal to $25,000. See "Notification of Results; Settlement".
If one or more Orders covering in the aggregate all of the
outstanding shares of AMPS held by a Beneficial Owner are not submitted to
the Auction Agent prior to the Submission Deadline, either because a
Broker-Dealer failed to contact such Beneficial Owner or otherwise, the
Auction Agent shall deem a Hold Order (in the case of an Auction relating to
a Dividend Period which is not Special Dividend Period) and a Sell Order (in
the case of an Auction relating to a Special Dividend Period) to have been
submitted on behalf of such Beneficial Owner covering the number of
outstanding shares of AMPS held by such Beneficial Owner and not subject to
Orders submitted to the Auction Agent.
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<PAGE>
If all of the outstanding shares of AMPS are subject to Submitted
Hold Orders, the Dividend Period next succeeding the Auction automatically
shall be the same length as the immediately preceding Dividend Period, and
the Applicable Rate for the next Dividend Period for all shares of AMPS will
be 59% of the Reference Rate on the date of the applicable Auction (or 90% of
such rate if the Fund has provided notification to the Auction Agent prior to
the Auction establishing the Applicable Rate for any dividend that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS).
For the purposes of an Auction, shares of AMPS for which the Fund
shall have given notice of redemption and deposited moneys therefor with the
Auction Agent in trust, as set forth under "Description of AMPS--Redemption,"
will not be considered as outstanding and will not be included in such
Auction. Pursuant to the Articles Supplementary of the Fund, the Fund will
be prohibited from reissuing and its affiliates (other than Merrill Lynch)
will be prohibited from transferring (other than to the Fund)
any shares of AMPS they may acquire. Neither the Fund nor any affiliate of
the Fund (other than Merrill Lynch) may submit an Order in any Auction,
except that an affiliate of the Fund that is a Broker-Dealer may submit an
Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to
1:00 P.M., New York City time, on each Auction Date, or such other time on
the Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing
all Orders obtained by it for the Auction to be conducted on such Auction
Date, designating itself (unless otherwise permitted by the Fund) as the
Existing Holder or Potential Holder in respect of the shares of AMPS subject
to such Orders. Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
If the rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent will round such
rate per annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the
Auction Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including
the number of outstanding shares of AMPS held by such Existing Holder,
provided that if more than one Hold Order is submitted by such Existing
Holder and the number of shares of AMPS subject to such Hold Orders exceeds
the number of outstanding shares of AMPS held by such Existing Holder, the
number of shares of AMPS subject to each of such Hold Orders will be reduced
pro rata so that such Hold Orders, in the aggregate, will cover exactly the
number of outstanding shares of AMPS held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending
order of their respective rates per annum if more than one Bid is
submitted by such Existing Holder, up to and including the excess of the
number of outstanding shares of AMPS held by such Existing Holder over
the number of outstanding shares of AMPS subject to any Hold Order
referred to in clause (i) above (and if more than one Bid submitted by such
Existing Holder specifies the same rate per annum and together they cover
more than the remaining number of shares that can be the subject of valid
Bids after application of clause (i) above and of the foregoing portion of
this clause (ii) to any Bid or Bids specifying a lower rate or rates per
annum, the number of shares subject to each of such Bids will be reduced pro
rata so that such Bids, in the aggregate, cover exactly such remaining number
of outstanding shares); and the number of outstanding shares, if any,
subject to Bids not valid under this clause (ii) shall be treated as the
subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and
including the excess of the number of outstanding shares of AMPS held by
such Existing Holder over the sum of the number of shares of AMPS
subject to Hold Orders referred to in clause (i) above and the number of
shares of AMPS subject to valid Bids by such Existing Holder
referred to in clause (ii) above; provided that, if more than one Sell Order
is submitted by any Existing Holder and the number of shares of AMPS subject
to such Sell Orders is
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<PAGE>
greater than such excess, the number of shares of AMPS subject to each
of such Sell Orders will be reduced pro rata so that such Sell Orders,
in the aggregate, will cover exactly the number of shares of AMPS equal
to such excess.
If more than one Bid of any Potential Holder is submitted in any
Auction, each Bid submitted in such Auction will be considered a separate Bid
with the rate per annum and number of shares of AMPS specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. Not earlier than the Submission Deadline for each Auction,
the Auction Agent will assemble all Orders submitted or deemed submitted to
it by the Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as
submitted or deemed submitted by a Broker-Dealer hereinafter being referred
to as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell
Order," as the case may be, or as a "Submitted Order") and will determine the
excess of the number of outstanding shares of AMPS over the number of
outstanding shares of AMPS subject to Submitted Hold Orders (such excess
being referred to as the "Available AMPS") and whether Sufficient Clearing
Bids have been made in such Auction. Sufficient Clearing Bids will have been
made if the number of outstanding shares of AMPS that are the subject of
Submitted Bids of Potential Holders with rates per annum not higher than the
Maximum Applicable Rate equals or exceeds the number of outstanding shares
that are the subject of Submitted Sell Orders (including the number of shares
subject to Bids of Existing Holders specifying rates per annum
higher than the Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate per annum specified in the Submitted Bids (the
"Winning Bid Rate") which would result in the number of shares subject to
Submitted Bids specifying such rate per annum or a lower rate per annum being
at least equal to the Available AMPS. If Sufficient Clearing Bids
have been made, the Winning Bid Rate will be the Applicable Rate for the next
Dividend Period for all shares of AMPS then outstanding.
If Sufficient Clearing Bids have not been made (other than because
all outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 28-Day
Dividend Period in the case of Series A AMPS, and the Applicable Rate
for such Dividend Period will be equal to the Maximum Applicable Rate. If
Sufficient Clearing Bids have not been made, Beneficial Owners that have
Submitted Sell Orders will not be able to sell in the Auction all, and may
not be able to sell any, shares of AMPS subject to such Submitted Sell
Orders. See "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares". Thus, under some circumstances, Beneficial
Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round
as described below, Submitted Bids and Submitted Sell Orders will be accepted
or rejected in the order of priority set forth in the Auction Procedures with
the result that Existing Holders and Potential Holders of AMPS will sell,
continue to hold and/or purchase shares of AMPS as set forth
below. Existing Holders that submit or are deemed to have submitted Hold
Orders will continue to hold the shares of AMPS subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Winning Bid Rate or a Submitted Sell
Order will sell the outstanding shares of AMPS subject to such Submitted
Bid or Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will purchase the number
of shares of AMPS subject to such Submitted Bid;
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(d) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bids, unless the
number of outstanding shares of AMPS subject to all such Submitted Bids
of Existing Holders is greater than the excess of the Available AMPS over the
number of shares of AMPS accounted for in clauses (b) and (c) above, in which
event each Existing Holder with such a Submitted Bid will sell a number of
outstanding shares of AMPS determined on a pro rata basis based on
the number of outstanding shares of AMPS subject to all such Submitted Bids
of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will purchase any Available
AMPS not accounted for in clause (b), (c) or (d) above on a pro rata
basis based on the shares of AMPS subject to all such Submitted Bids of
Potential Holders.
If Sufficient Clearing Bids have not been made (other than because
all outstanding shares of AMPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
continue to hold the outstanding shares of AMPS subject to such
Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
purchase the number of shares of AMPS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Maximum Applicable Rate or a Submitted
Sell Order will sell a number of outstanding shares of AMPS determined
on a pro rata basis based on the outstanding shares of AMPS subject to
all such Submitted Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any
Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
AMPS, the Auction Agent, in such manner as, in its sole discretion, it shall
determine, will round up or down the number of shares of AMPS being sold or
purchased on such Auction Date so that each share sold or purchased by each
Existing Holder or Potential Holder will be a whole share of AMPS. If any
Potential Holder would be entitled or required to purchase less than a whole
share of AMPS, the Auction Agent, in such manner as, in its sole discretion,
it shall determine, will allocate shares of AMPS for purchase among
Potential Holders so that only whole shares of AMPS are purchased by any such
Potential Holder, even if such allocation results in one or more of such
Potential Holders not purchasing any shares of AMPS.
Notification of Results; Settlement. The Auction Agent will advise
each Broker-Dealer who submitted a Bid or Sell Order in an Auction whether
such Bid or Sell Order was accepted or rejected in whole or in part and of
the Applicable Rate for the next Dividend Period for the related shares of
AMPS by telephone at approximately 3:00 P.M., New York City time, on the
Auction Date for such Auction. Each such Broker-Dealer that submitted an
Order for the account of a customer then will advise such customer whether
such Bid or Sell Order was accepted or rejected, will confirm purchases and
sales with each customer purchasing or selling shares of AMPS as a result of
the Auction and will advise each customer purchasing or selling shares of
AMPS to give instructions to its Agent Member of the Securities Depository
to pay the purchase price against delivery of such shares or to deliver such
shares against payment therefor as appropriate. If a customer selling shares
of AMPS as a result of an Auction shall fail to instruct its Agent Member to
deliver such shares, the Broker-Dealer that submitted such customer's Bid or
Sell Order will instruct such Agent Member to deliver such
shares against payment therefor. Each Broker-Dealer that submitted a Hold
Order in an Auction on behalf of a customer also will advise such customer of
the Applicable Rate for the next Dividend Period for the AMPS. The Auction
Agent will record each transfer of shares of AMPS on the record book
of Existing Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on
the day after each Auction Date, the transactions described above will be
executed through the Securities Depository, and the accounts
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of the respective Agent Members at the Securities Depository will be debited
and credited as necessary to effect the purchases and sales of shares of AMPS
as determined in such Auction. Purchasers will make payment through their
Agent Members in same-day funds to the Securities Depository against delivery
through their Agent Members; the Securities Depository will make
payment in accordance with its normal procedures, which now provide for
payment in same-day funds. If the procedures of the Securities Depository
applicable to AMPS shall be changed to provide for payment in next-day funds,
then purchasers may be required to make payment in next-day funds. If the
certificates for shares of AMPS are not held by the Securities
Depository or its nominee, payment will be made in same-day funds to the
Auction Agent against delivery of such certificates.
If any Existing Holder selling shares of AMPS in an Auction fails to
deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of AMPS in such Auction may deliver to such person a number
of whole shares of AMPS that is less than the number of shares that otherwise
was to be purchased by such person. In such event, the number of shares of
AMPS to be so delivered will be determined by such Broker-Dealer.
Delivery of such lesser number of shares will constitute good delivery. Each
Broker-Dealer Agreement also will provide that neither the Fund nor the
Auction Agent will have responsibility or liability with respect to the
failure of a Potential Beneficial Owner, Beneficial Owner or their
respective Agent Members to deliver shares of AMPS or to pay for shares of
AMPS purchased or sold pursuant to an Auction or otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from
funds provided by the Fund to each Broker-Dealer on the basis of the purchase
price of shares of AMPS placed by such Broker-Dealer at such Auction. The
service charge (i) for any 7-Day Dividend Period or 28-Day Dividend Period
shall be payable at the annual rate of 0.25% of the purchase
price of the shares of AMPS placed by such Broker-Dealer in any such Auction
and (ii) for any Special Dividend Period shall be determined by mutual
consent of the Fund and any such Broker-Dealer or Broker-Dealers and shall be
based upon a selling concession that would be applicable to an underwriting
of fixed or variable rate preferred shares with a similar final
maturity or variable rate dividend period, respectively, at the commencement
of the Dividend Period with respect to such Auction. For the purposes of the
preceding sentence, shares of AMPS will be placed by a Broker-Dealer if such
shares were (i) the subject of Hold Orders deemed to have been made by
Beneficial Owners that were acquired by such Beneficial Owners through such
Broker-Dealer or (ii) the subject of the following Orders submitted by such
Broker-Dealer: (A) a Submitted Bid of a Beneficial Owner that resulted in
such Beneficial Owner continuing to hold such shares as a result of the
Auction, (B) a Submitted Bid of a Potential Beneficial Owner that resulted in
such Potential Beneficial Owner purchasing such shares as a result of the
Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit
Orders in Auctions for its own account, unless the Fund notifies all
Broker-Dealers that they no longer may do so; provided that Broker-Dealers
may continue to submit Hold Orders and Sell Orders. If a Broker-Dealer
submits an Order for its own account in any Auction of any series of AMPS,
it may have knowledge of Orders placed through it in that Auction and
therefore have an advantage over other Bidders, but such Broker-Dealer would
not have knowledge of Orders submitted by other Broker-Dealers in that
Auction.
The Broker-Dealers intend to maintain a secondary trading market in
the AMPS outside of Auctions; however, they have no obligation to do so and
there can be no assurance that a secondary market for the AMPS will develop
or, if it does develop, that it will provide holders with a liquid trading
market (i.e., trading will depend on the presence of willing buyers and
sellers and the trading price is subject to variables to be determined at the
time of the trade by the Broker-Dealers). The AMPS will not be registered on
any stock exchange or on the National Association of Securities Dealers
Automated Quotation system. An increase in the level of interest rates
likely will have an adverse effect on the secondary market
price of the AMPS, and a selling shareholder may sell AMPS between Auctions
at a price per share of less than $25,000.
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DIVIDENDS
General. The holders of shares of each series of AMPS will be
entitled to receive, when, as and if declared by the Board of Directors of
the Fund, out of funds legally available therefor, cumulative cash dividends
on their shares, at the Applicable Rate determined as set forth below under
"Determination of Dividend Rate," payable on the respective dates set forth
below. Dividends on the shares of AMPS so declared and payable shall be paid
(i) in preference to and in priority over any dividends so declared and
payable on the Common Stock, and (ii) to the extent permitted under the Code
and to the extent available, out of net tax-exempt income earned on the
Fund's investments. To the extent permitted under the Code, dividends on
shares of AMPS, to the extent that they are derived from Municipal Bonds,
will be exempt from Federal income taxes, subject to possible application of
the alternative minimum tax. See "Taxes".
Dividends on the shares of AMPS will accumulate from the date on
which the Fund originally issues the shares of AMPS (the "Date of Original
Issue") and will be payable on the dates described below. Dividends on
shares of each series of AMPS with respect to the Initial Dividend Period
shall be payable on the Initial Dividend Payment Date with respect to each
series of AMPS. Following the Initial Dividend Payment Date for each series
of AMPS, dividends on each series of AMPS will be payable, at the option of
the Fund, either (i) with respect to any 7-Day Dividend Period, any 28-Day
Dividend Period and any Short Term Dividend Period of 35 or fewer days, on
the day next succeeding the last day thereof or (ii) with respect to any
Short Term Dividend Period of more than 35 days and with respect to any Long
Term Dividend Period, monthly on the first Business Day of each calendar
month during such Short Term Dividend Period or Long Term Dividend Period and
on the day next succeeding the last day thereof (each such date referred
to in clause (i) or (ii) being referred to herein as a "Normal Dividend
Payment Date"), except that if such Normal Dividend Payment Date is not a
Business Day, (i) the Dividend Payment Date shall be the first Business Day
next succeeding such Normal Dividend Payment Date if such Normal Dividend
Payment Date is a Monday, Tuesday, Wednesday or Thursday, or (ii) the
Dividend Payment Date shall be the first Business Day next preceding such
Normal Dividend Payment Date if such Normal Dividend Payment Date is a
Friday. If, however, in the case of clause (ii) in the preceding sentence,
the Securities Depository shall make available to its participants and
members in funds immediately available in New York City on Dividend Payment
Dates the amount due as dividends on such Dividend Payment Dates (and the
Securities Depository shall have so advised the Fund), and if the Normal
Dividend Payment Date is not a Business Day, then the Dividend Payment Date
shall be the next succeeding Business Day. Thus, following the Initial
Dividend Payment Date, dividends generally will be payable (in the case of
Dividend Periods which are not Special Dividend Periods) on each succeeding
____________ in the case of Series A AMPS. Although any particular Dividend
Payment Date may not occur on the originally scheduled date because of the
exceptions discussed above, the next succeeding Dividend Payment Date,
subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Board of Directors or a duly authorized committee
thereof shall fix the Dividend Payment Date. The Initial Dividend
Period, 7-Day Dividend Periods, 28-Day Dividend Periods and Special Dividend
Periods are hereinafter sometimes referred to as "Dividend Periods". Each
dividend payment date determined as provided above is hereinafter referred to
as a "Dividend Payment Date".
Prior to each Dividend Payment Date, the Fund is required to deposit
with the Auction Agent sufficient funds for the payment of declared
dividends. The Fund does not intend to establish any reserves for the
payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which
holder is expected to be the nominee of the Securities Depository. See
"Description of AMPS--The Auction--Securities Depository". The Securities
Depository will credit the accounts of the Agent Members of the Existing
Holders in accordance with the Securities Depository's normal procedures
which now provide for payment in next-day funds settled through the New York
Clearing House. Each of the initial Broker-Dealers, however, has indicated
to the Fund that such Broker-Dealer or one of its affiliates will make such
dividend payments available in same-day funds on each Dividend Payment Date
to customers that use such Broker-Dealer or affiliate as Agent Member. The
Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be
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declared and paid at any time, without reference to any regular Dividend
Payment Date, to the nominee of the Securities Depository. Any dividend
payment made on shares of AMPS first shall be credited against the earliest
declared but unpaid dividends accumulated with respect to such series.
Holders of shares of AMPS will not be entitled to any dividends,
whether payable in cash, property or stock, in excess of full cumulative
dividends except as described under "Additional Dividends" and "Non-Payment
Period; Late Charge" below. No interest will be payable in respect of any
dividend payment or payments on the shares of AMPS which may be in arrears.
The amount of cash dividends per share of any series of AMPS payable
(if declared) on the Initial Dividend Payment Date, each 7-Day Dividend
Period, each 28-Day Dividend Period and each Short Term Dividend Period shall
be computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding
and for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 365, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent. During any
Long Term Dividend Period, the amount of cash dividends per share of AMPS
payable (if declared) on any Dividend Payment Date shall be computed by
multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be such number of days in such part of such Dividend
Period that such share was outstanding and for which dividends are payable on
such Dividend Payment Date and the denominator of which will be 360,
multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent.
Notification of Dividend Period. With respect to each Dividend
Period that is a Special Dividend Period, the Fund, at its sole option and to
the extent permitted by law, by telephonic and written notice (a "Request
for Special Dividend Period") to the Auction Agent and to each Broker-Dealer,
may request that the next succeeding Dividend Period for the shares of AMPS
will be a number of days (other than 28 in the case of Series
A AMPS), evenly divisible by seven, and not fewer than seven nor more than
364 in the case of a Short Term Dividend Period or one whole year or more but
not greater than five years in the case of a Long Term Dividend Period,
specified in such notice, provided that the Fund may not give a Request for
Special Dividend Period (and any such request shall be null and void) unless,
for any Auction occurring after the initial Auction, Sufficient Clearing Bids
were made in the last occurring Auction and unless full cumulative dividends,
any amounts due with respect to redemptions, and any Additional Dividends
payable prior to such date have been paid in full.
Such Request for Special Dividend Period, in the case of a Short Term
Dividend Period, shall be given on or prior to the second Business Day but
not more than seven Business Days prior to an Auction Date for the AMPS and,
in the case of a Long Term Dividend Period, shall be given on or prior to the
second Business Day but not more than 28 days prior to an Auction Date for
the AMPS. Upon receiving such Request for Special Dividend Period, the
Broker-Dealers jointly shall determine whether given the factors set forth
below it is advisable that the Fund issue a Notice of Special Dividend Period
for a series of AMPS as contemplated by such Request for Special Dividend
Period and the Optional Redemption Price of the AMPS during such Special
Dividend Period and the Specific Redemption Provisions and shall
give the Fund and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination the Broker-Dealers will consider (i)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (ii) existing market supply and demand for
short-term and long-term securities, (iii) existing yield curves for
short-term and long-term securities comparable to the AMPS, (iv) industry and
financial conditions which may affect the AMPS, (v) the investment objective
of the Fund and (vi) the Dividend Periods and dividend rates at which current
and potential beneficial holders of the AMPS would remain or become
beneficial holders. If the Broker-Dealers shall not give the Fund and the
Auction Agent a Response by such second Business Day or if the Response
states that given the factors set forth above it is not advisable that the
Fund give a Notice of Special Dividend Period for the AMPS, the Fund may not
give a Notice of Special Dividend Period in respect of such Request for
Special Dividend Period. In the event the Response indicates that it is
advisable that the Fund give a Notice of Special Dividend Period for the
AMPS, the Fund, by no later than the second Business Day prior to such
Auction Date, may give a notice (a "Notice of Special Dividend Period")
to the Auction Agent, the Securities Depository and each Broker-Dealer,
which notice will specify (i) the duration of the Special Dividend Period,
(ii) the Optional Redemption Price as specified in the related Response and
(iii) the Specific Redemption Provisions, if any, as specified in the related
Response. The Fund also shall provide a
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copy of such Notice of Special Dividend Period to Moody's and S&P. The Fund
shall not give a Notice of Special Dividend Period, and, if such Notice of
Special Dividend Period shall have been given already, shall give telephonic
and written notice of its revocation (a "Notice of Revocation") to the
Auction Agent, each Broker-Dealer, and the Securities Depository on or prior
to the Business Day prior to the relevant Auction Date if (x) either the 1940
Act AMPS Asset Coverage is not satisfied or the Fund shall fail to maintain
S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount, in each
case on each of the two Valuation Dates immediately
preceding the Business Day prior to the relevant Auction Date on an actual
basis and on a pro forma basis giving effect to the proposed Special Dividend
Period (using as a pro forma dividend rate with respect to such Special
Dividend Period the dividend rate which the Broker-Dealers shall advise the
Fund is an approximately equal rate for securities similar to the
AMPS with an equal dividend period), provided that, in calculating the
aggregate Discounted Value of Moody's Eligible Assets for this purpose, the
Moody's Exposure Period shall be deemed to be one week longer, (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction
Agent by the close of business on the third Business Day preceding the
related Auction Date or (z) the Broker-Dealers jointly advise the Fund that
after consideration of the factors listed above they have concluded that it
is advisable to give a Notice of Revocation. The Fund also shall provide a
copy of such Notice of Revocation to Moody's and S&P. If the Fund is
prohibited from giving a Notice of Special Dividend Period as
a result of the factors enumerated in clause (x), (y) or (z) above or if the
Fund gives a Notice of Revocation with respect to a Notice of Special
Dividend Period, the next succeeding Dividend Period will be a 28-Day
Dividend Period in the case of Series A AMPS, provided that if the then
current Dividend Period is a Special Dividend Period of less than 28 days,
the next succeeding Dividend Period for the Series A AMPS will be the same
length as the current Dividend Period. In addition, in the event Sufficient
Clearing Bids are not made in any Auction or an Auction is not held for any
reason, the next succeeding Dividend Period will be a 28-Day Dividend Period
in the case of Series A AMPS, and the Fund may not again give a Notice of
Special Dividend Period (and any such attempted notice shall be null and
void) until Sufficient Clearing Bids have been made in an Auction with
respect to a 28-Day Dividend Period in the case of Series A AMPS.
Determination of Dividend Rate. The dividend rate on shares of each
series of AMPS during the period from and including the first Date of
Original Issue for each series of AMPS to but excluding the Initial Dividend
Payment Date (the "Initial Dividend Period") will be a rate per annum
determined by the Board of Directors of the Fund. Commencing on the first
Initial Dividend Payment Date for each series of AMPS, the Applicable Rate on
the shares of such series of AMPS for each Subsequent Dividend Period, which
Subsequent Dividend Period shall be a period commencing on and including a
Dividend Payment Date and ending on and including the calendar day prior to
the next Dividend Payment Date (or last Dividend Payment Date in a Dividend
Period if there is more than one Dividend Payment Date), shall
be equal to the rate per annum that results from the Auction with respect to
such Subsequent Dividend Period. The Initial Dividend Period and Subsequent
Dividend Period for each series of AMPS is referred to herein as a "Dividend
Period". Cash dividends shall be calculated as set forth above under
"Dividends--General".
Non-Payment Period; Late Charge. A Non-Payment Period will commence
if the Fund fails to
(i) declare, prior to the close of business on the second Business Day
preceding any Dividend Payment Date, for payment on or (to the extent
permitted as described below) within three Business Days after such Dividend
Payment Date to the persons who held such shares as of 12:00 noon, New York
City time, on the Business Day preceding such Dividend Payment Date, the full
amount of any dividend on shares of AMPS payable on such Dividend Payment
Date or (ii) deposit, irrevocably in trust, in same-day funds, with the
Auction Agent by 12:00 noon, New York City time, (A) on such Dividend Payment
Date the full amount of any cash dividend on such shares (if declared)
payable on such Dividend Payment Date or (B) on any redemption date for
shares of AMPS called for redemption, the Mandatory Redemption Price per
share of such AMPS or, in the case of an optional redemption, the Optional
Redemption Price per share. Such Non-Payment Period will consist of the
period commencing on and including the aforementioned Dividend Payment Date
or redemption date, as the case may be, and ending on and including the
Business Day on which, by 12:00 noon, New York City time, all unpaid cash
dividends and unpaid redemption prices shall have been so deposited or
otherwise shall have been made available to the applicable holders in same
day funds, provided that a Non-Payment Period for any series
of AMPS will not end unless the Fund shall have given at least five days' but
no more than 30 days' written notice of such deposit or availability to the
Auction Agent, the Securities Depository
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<PAGE>
and all holders of shares of AMPS of such series. Notwithstanding the
foregoing, the failure by the Fund to deposit funds as provided for by
clauses (ii) (A) or (ii) (B) above within three Business Days after any
Dividend Payment Date or redemption date, as the case may be, in each case to
the extent contemplated below, shall not constitute a "Non-Payment Period".
The Applicable Rate for each Dividend Period for shares of AMPS of any
series, commencing during a Non-Payment Period, will be equal to the
Non-Payment Period Rate; and each Dividend Period commencing after the first
day of, and during, a Non-Payment Period shall be a 28-Day Dividend Period in
the case of Series A AMPS, provided that if the preceding Dividend Period
for Series A AMPS is a Special Dividend Period of less than 28 days, the
Dividend Period commencing during the Non-Payment Period will be the same
length as such preceding Dividend Period. Any dividend on shares of AMPS due
on any Dividend Payment Date for such shares (if, prior to the close of
business on the second Business Day preceding such Dividend Payment Date, the
Fund has declared such dividend payable on such Dividend Payment Date to
the persons who held such shares as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to such shares not paid to such persons when due may be paid to
such persons in the same form of funds by 12:00 noon, New York City time, on
any of the first three Business Days after such Dividend Payment Date or due
date, as the case may be, provided that such amount is accompanied by a late
charge calculated for such period of non-payment at the Non-Payment Period
Rate applied to the amount of such non-payment based on the actual number of
days comprising such period divided by 365. In the case of a willful failure
of the Fund to pay a dividend on a Dividend Payment Date or to
redeem any shares of AMPS on the date set for such redemption, the preceding
sentence shall not apply and the Applicable Rate for the Dividend Period
commencing during the Non-Payment Period resulting from such failure shall be
the Non-Payment Period Rate. For the purposes of the foregoing, payment to a
person in same-day funds on any Business Day at any time will be
considered equivalent to payment to that person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall
be considered to have been made instead in the same form of funds and to the
same person before 12:00 noon, New York City time, on the next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable
Reference Rate (or 275% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend that net capital gains or other taxable income will be included
in such dividend on shares of AMPS), provided that the Board of Directors of
the Fund shall have the authority to adjust, modify, alter or change from
time to time the initial Non-Payment Period Rate if the Board of
Directors of the Fund determines and Moody's and S&P (and any Substitute
Rating Agency in lieu of Moody's or S&P in the event either of such parties
shall not rate the AMPS) advise the Fund in writing that such adjustment,
modification, alteration or change will not adversely affect their
then-current ratings on the AMPS.
Restrictions on Dividends and Other Payments. Under the 1940 Act,
the Fund may not declare dividends or make other distributions on shares of
Common Stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, as applicable (and after giving effect thereto),
asset coverage (as defined in the 1940 Act) with respect to the outstanding
shares of AMPS would be less than 200% (or such other percentage as in the
future may be required by law). The Fund estimates that, based on the
anticipated composition of its portfolio and current market conditions, asset
coverage with respect to shares of AMPS would be approximately _____%
immediately after the issuance of the shares of AMPS offered hereby in an
amount representing approximately 35% of the Fund's capital. Under the Code,
the Fund, among other things, must distribute at least 90% of its investment
company taxable income each year in order to maintain its qualification for
tax treatment as a regulated investment company. The foregoing limitations
on dividends, distributions and purchases under certain circumstances may
impair the Fund's ability to maintain such qualification. See "Taxes".
Upon any failure to pay dividends on shares of AMPS for two years or
more, the holders of the shares of AMPS will acquire certain additional
voting rights. See "Voting Rights" below. Such rights shall be the
exclusive remedy of the holders of shares of AMPS upon any failure to pay
dividends on shares of the Fund.
For so long as any shares of AMPS are outstanding, the Fund will not
declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options,
warrants or rights to subscribe for or purchase, Common Stock or other stock,
if any, ranking junior to shares
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of AMPS as to dividends or upon liquidation) in respect of Common Stock or
any other stock of the Fund ranking junior to or on a parity with shares of
AMPS as to dividends or upon liquidation, or call for redemption, redeem,
purchase or otherwise acquire for consideration any shares of Common Stock or
any other such junior stock (except by conversion into or exchange for stock
of the Fund ranking junior to AMPS as to dividends and upon liquidation) or
any such parity stock (except by conversion into or exchange
for stock of the Fund ranking junior to or on a parity with AMPS as to
dividends and upon liquidation), unless (A) immediately after such
transaction, the Fund would have S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount, and the 1940 Act AMPS Asset Coverage (see
"Asset Maintenance" and "Redemption" below) would be satisfied, (B) full
cumulative dividends on shares of AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent,
(C) any Additional Dividend required to be paid on or before the date of such
declaration or payment has been paid and (D) the Fund has redeemed the full
number of shares of AMPS required to be redeemed by any provision for
mandatory redemption contained in the Articles Supplementary.
Additional Dividends. If the Fund retroactively allocates any net
capital gains or other income subject to regular Federal income taxes to
shares of AMPS without having given advance notice thereof to the Auction
Agent as described above under "The Auction--Auction Date; Advance Notice of
Allocation of Taxable Income; Inclusion of Taxable Income in Dividends,"
which may only happen when such allocation is made as a result of the
redemption of all or a portion of the outstanding shares of AMPS or the
liquidation of the Fund (the amount of such allocation referred to herein as
a "Retroactive Taxable Allocation"), the Fund, within 90 days (and generally
within 60 days) after the end of the Fund's fiscal year for which a
Retroactive Taxable Allocation is made, will provide notice thereof to the
Auction Agent and to each holder of shares (initially Cede as nominee of the
Securities Depository) during such fiscal year at such holder's address as
the same appears or last appeared on the stock books of the Fund. The Fund,
within 30 days after such notice is given to the Auction Agent, will pay to
the Auction Agent (who then will distribute to such holders of shares of
AMPS), out of funds legally available therefor, an amount equal to the
aggregate Additional Dividend (as defined below) with respect to all
Retroactive Taxable Allocations made to such holders during the fiscal year
in question. See "Taxes".
An "Additional Dividend" means payment to a present or former holder
of shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with
respect to the fiscal year in question, would cause such holder's dividends
in dollars (after Federal income tax consequences) from the aggregate of
both the Retroactive Taxable Allocations and the Additional Dividend to be
equal to the dollar amount of the dividends which would have been received by
such holder if the amount of the aggregate Retroactive Taxable Allocations
had been excludable from the gross income of such holder. Such Additional
Dividend shall be calculated (i) without consideration being given to the
time value of money; (ii) assuming that no holder of shares of AMPS is
subject to the Federal alternative minimum tax with respect to dividends
received from the Fund; and (iii) assuming that each Retroactive Taxable
Allocation would be taxable in the hands of each holder of shares of
AMPS at the greater of: (a) the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or capital gains depending on
the taxable character of the distribution (including any surtax); or (b) the
maximum regular Federal corporate income tax rate applicable to ordinary
income or capital gains depending on the taxable character of the
distribution (disregarding in both (a) and (b) the phase out of, or
provision limiting, personal exemptions, itemized deductions, or the benefit
of lower tax brackets). Although the Fund generally intends to designate any
Additional Dividend as an exempt-interest dividend to the extent permitted by
applicable law, it is possible that all or a portion of any Additional
Dividend will be taxable to the recipient thereof. See "Taxes--Tax Treatment
of Additional Dividends". The Fund will not pay a further Additional Dividend
with respect to any taxable portion of an Additional Dividend.
If the Fund does not give advance notice of the amount of taxable
income to be included in a dividend on shares of AMPS in the related Auction,
as described above under "The Auction--Auction Date; Advance Notice
of Allocation of Taxable Income; Inclusion of Taxable Income in Dividends,"
the Fund may include such taxable income in a dividend on shares of AMPS if
it increases the dividend by an additional amount calculated as if such
income were a Retroactive Taxable Allocation and the additional amount were
an Additional Dividend.
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ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These
requirements are summarized below.
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities which are
stock, including the shares of AMPS (or such other
asset coverage as in the future may be specified in or under the 1940 Act as
the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of paying dividends on its
common stock) ("1940 Act AMPS Asset Coverage"). If the Fund fails to
maintain 1940 Act AMPS Asset Coverage and such failure is not cured as of the
last Business Day of the following month (the "1940 Act Cure Date"), the
Fund will be required under certain circumstances to redeem certain of the
shares of AMPS. See "Redemption" below.
The 1940 Act AMPS Asset Coverage immediately following the issuance
of AMPS offered hereby in an amount representing approximately 35% of the
Fund's capital (after giving effect to the deduction of offering expenses for
the AMPS of $_________), will be computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Value of Fund assets less
liabilities not constituting $
senior securities = = %
Senior securities $
representing indebtedness
plus liquidation
of the shares AMPS
</TABLE>
AMPS Basic Maintenance Amount. So long as shares of AMPS are
outstanding, the Fund will be required under the Articles Supplementary to
maintain as of each Business Day (a "Valuation Date") S&P Eligible Assets and
Moody's Eligible Assets each having in the aggregate a Discounted Value at
least equal to the AMPS Basic Maintenance Amount. If the Fund fails to
meet such requirement as of any Valuation Date and such failure is not cured
on or before the sixth Business Day after such Valuation Date (the "AMPS
Basic Maintenance Cure Date"), the Fund will be required under certain
circumstances to redeem certain of the shares of AMPS. Upon any failure to
maintain the required Discounted Value, the Fund will use its best efforts
to alter the composition of its portfolio to reattain a Discounted Value at
least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date. See "Redemption".
The AMPS Basic Maintenance Amount as of any Valuation Date is
defined as the dollar amount equal to (i) the sum of (A) the product of the
number of shares of AMPS outstanding on such Valuation Date multiplied by the
sum of $25,000 and any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
each share of AMPS outstanding to (but not including) the end of the current
Dividend Period that follows such Valuation Date in the event the then
current Dividend Period will end within 49 calendar days of such Valuation
Date or through the 49th day after such Valuation Date in the event the then
current Dividend Period will not end within 49 calendar days of such
Valuation Date; (C) in the event the then current Dividend Period will end
within 49 calendar days of such Valuation Date, the aggregate amount of cash
dividends that would accumulate at the Maximum Applicable Rate applicable to
a Dividend Period of 28 or fewer days on any shares of AMPS outstanding from
the end of such Dividend Period through the 49th day after such Valuation
Date, multiplied by the larger of the Moody's Volatility Factor and the S&P
Volatility Factor determined from time to time by Moody's and S&P,
respectively (except that if such Valuation Date occurs during a Non-Payment
Period, the cash dividend for purposes of calculation would accumulate at the
then current Non-Payment Period Rate); (D) the amount of anticipated Fund
expenses for the 90 days subsequent to such Valuation Date; (E) the amount of
the Fund's Maximum Potential Additional Dividend Liability as of such
Valuation Date; and (F) any current liabilities as of such Valuation Date to
the extent not reflected in any of (i) (A) through (i) (E) (including,
without limitation, and immediately upon
41
<PAGE>
determination, any amounts due and payable by the Fund pursuant to repurchase
agreements and any payable for Municipal Bonds purchased as of such Valuation
Date) less (ii) either (A) the Discounted Value of any Fund assets, or (B)
the face value of any of the Fund's assets if such assets mature prior to or
on the date of redemption of AMPS or payment of a liability and are either
securities issued or guaranteed by the United States Government or have a
rating assigned by Moody's of at least Aaa, P-1,
VMIG-1 or MIG-1 and, with respect to S&P, at least AAA, SP-1+ or A-1+, in
both cases irrevocably deposited by the Fund for the payment of the amount
needed to redeem shares of AMPS subject to redemption or to satisfy any of
(i) (B) through (i) (F). For purposes of the foregoing, "Maximum Potential
Additional Dividend Liability," as of any Valuation Date, means the aggregate
amount of Additional Dividends that would be due if the Fund were to make
Retroactive Taxable Allocations, with respect to any fiscal year, estimated
based upon dividends paid and the amount of undistributed realized
net capital gains and other taxable income earned by the Fund, as of the end
of the calendar month immediately preceding such Valuation Date and assuming
such Additional Dividends are fully taxable.
The Discount Factors and guidelines for determining the market value
of the Fund's portfolio holdings have been based on criteria established in
connection with rating the AMPS. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating
of a debt obligation, the higher the related discount factor) and the
frequency with which the relevant asset is marked to market. In no event
shall the Discounted Value of any asset of the Fund exceed its unpaid
principal balance or face amount as of the date of calculation. The Discount
Factor relating to any asset of the Fund and the AMPS Basic Maintenance
Amount, the assets eligible for inclusion in the calculation of the
Discounted Value of the Fund's portfolio and certain definitions and methods
of calculation relating thereto may be changed from time to time by the Fund,
without shareholder approval, but only in the event the Fund receives written
confirmation from S&P, Moody's and any Substitute Rating Agency that any such
changes would not impair the ratings then assigned to the shares of AMPS by
S&P or Moody's or any Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which
the Fund fails to maintain S&P Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount, the Fund is required to deliver to the Auction
Agent, Moody's and S&P a report with respect to the calculation of the AMPS
Basic Maintenance Amount and the value of its portfolio holdings as of the
date of such failure (an "AMPS Basic Maintenance Report"). Additionally, on
or before the third Business Day after the first day of a Special Dividend
Period, the Fund will deliver an AMPS Basic Maintenance Report to S&P and the
Auction Agent. The Fund also will deliver an AMPS Basic Maintenance Report
as of the twenty-fifth day of the last month of each fiscal quarter of the
Fund (or, if such day is not a Business Day, the next succeeding Business
Day) on or before the third Business Day after such day. Within ten Business
Days after delivery of such report relating to the twenty-fifth
day of the last month of each fiscal quarter of the Fund (or, if such day is
not a Business Day, the next succeeding Business Day), commencing on
____________ 25, 1996, the Fund will deliver a letter prepared by the Fund's
independent accountants regarding the accuracy of the calculations made by
the Fund in its most recent AMPS Basic Maintenance Report. Also, on or
before 5:00 p.m., New York City time, on the first Business Day after shares
of Common Stock are repurchased by the Fund, the Fund will complete and
deliver to S&P and Moody's an AMPS Basic Maintenance Report as of the close
of business on such date that Common Stock is repurchased. If any such
letter prepared by the Fund's independent accountants shows that an error was
made in the most recent AMPS Basic Maintenance Report, the calculation or
determination made by the Fund's independent accountants will be
conclusive and binding on the Fund.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and
under Maryland law, upon giving a Notice of Redemption, as provided below,
the Fund, at its option, may redeem shares of AMPS of any series, in whole or
in part, out of funds legally available therefor, at the Optional Redemption
Price per share on any Dividend Payment Date; provided that no share of AMPS
may be redeemed at the option of the Fund during (a) the Initial Dividend
Period with respect to a series of shares or (b) a Non-Call
Period to
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<PAGE>
which such share is subject. "Optional Redemption Price" means $25,000 per
share of AMPS plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) to the date fixed for redemption plus any
applicable redemption premium, if any, attributable to the designation of a
Premium Call Period. In addition, holders of AMPS may be entitled to receive
Additional Dividends in the event of redemption of such AMPS to the extent
provided herein. See "Description of AMPS--Dividends--Additional Dividends".
The Fund has the authority to redeem the AMPS for any reason and
may redeem all or part of the outstanding shares of AMPS if it anticipates
that the Fund's leveraged capital structure will result in a lower rate of
return to holders of Common Stock for any significant period of time than
that obtainable if the Common Stock were unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of
funds legally available therefor, at the Mandatory Redemption Price per
share, shares of AMPS to the extent permitted under the 1940 Act and Maryland
law, on a date fixed by the Board of Directors, if the Fund fails to maintain
S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or to satisfy the 1940 Act AMPS Asset Coverage and such
failure is not cured on or before the AMPS Basic Maintenance Cure Date or the
1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the
case may be. "Mandatory Redemption Price" means $25,000 per share of
AMPS plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) to the date fixed for redemption. In addition, holders
of AMPS may be entitled to receive Additional Dividends in the event
of redemption of such AMPS to the extent provided herein. See "Description
of AMPS--Dividends--Additional Dividends". The number of shares of AMPS to be
redeemed will be equal to the lesser of (a) the minimum number of shares of
AMPS the redemption of which, if deemed to have occurred immediately prior to
the opening of business on the Cure Date, together with all other shares of
the Preferred Stock subject to redemption or retirement, would result in the
Fund having S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount or satisfaction of the 1940 Act AMPS Asset Coverage,
as the case may be, on such Cure Date (provided that, if there is no such
minimum number of shares the redemption of which would have such result, all
shares of AMPS then outstanding will be redeemed), and (b) the maximum number
of shares of AMPS, together with all other shares of
Preferred Stock subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor on such redemption date.
In determining the number of shares of AMPS required to be redeemed in
accordance with the foregoing, the Fund shall allocate the number required to
be redeemed which would result in the Fund having S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount or satisfaction of
the 1940 Act AMPS Asset Coverage, as the case may be, pro rata among shares
of AMPS and other Preferred Stock subject to redemption pursuant to
provisions similar to those set forth below; provided that, shares of AMPS
which may not be redeemed at the option of the Fund due to the designation of
a Non-Call Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to satisfy
the number of shares required to be redeemed and (B) will be selected for
redemption in an ascending order of outstanding number of days in the
Non-Call Period (with shares with the lowest number of days to be redeemed
first) and by lot in the event of shares having an equal number of days in
such Non-Call Period. The Fund is required to effect such a mandatory
redemption not later than 35 days after such Cure Date, except that if the
Fund does not have funds legally available for the redemption of
all of the required number of shares of AMPS which are subject to mandatory
redemption or the Fund otherwise is unable to effect such redemption on or
prior to 35 days after such Cure Date, the Fund will redeem those shares of
AMPS which it was unable to redeem on the earliest practicable date on which
it is able to effect such redemption.
General. If shares of AMPS of any series are to be redeemed, a
notice of redemption will be mailed to each record holder of such shares of
AMPS (initially Cede as nominee of the Securities Depository) and to the
Auction Agent not less than 20 nor more than 30 days prior to the date fixed
for the redemption thereof. Each notice of redemption will include a
statement setting forth: (i) the redemption date, (ii) the aggregate number
of shares of AMPS of such series to be redeemed, (iii) the redemption price,
(iv) the place or places where shares of AMPS of such series are to be
surrendered for payment of the redemption price, (v) a statement that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date (except that holders may be entitled to Additional Dividends)
and (vi) the provision of the Articles Supplementary pursuant to which such
shares are being redeemed. The notice also will be published in The
43
<PAGE>
Wall Street Journal. No defect in the notice of redemption or in the mailing
or publication thereof will affect the validity of the redemption
proceedings, except as required by applicable law.
In the event that less than all of the outstanding shares of any
series of AMPS are to be redeemed, the series and number of shares to be
redeemed will be selected by lot or such other method as the Fund shall deem
fair and equitable, and the results thereof will be communicated to the
Auction Agent. The Auction Agent will give notice to the Securities
Depository, whose nominee will be the record holder of all shares of AMPS,
and the Securities Depository will determine the number of shares to be
redeemed from the account of the Agent Member of each Existing Holder. Each
Agent Member will determine the number of shares to be redeemed from the
account of each Existing Holder for which it acts as agent. An Agent Member
may select for redemption shares from the accounts of some Existing Holders
without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares, the
particular shares to be redeemed shall be selected by the Fund by lot or by
such other method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or
thereafter deposits in trust with the Auction Agent a cash sum sufficient to
redeem the shares of AMPS as to which notice of redemption has been given,
with irrevocable instructions and authority to pay the redemption price to
the record holders thereof, then upon the date of such deposit or, if no
such deposit is made, upon such date fixed for redemption (unless the Fund
shall default in making payment of the redemption price), all rights of the
holders of such shares called for redemption will cease and terminate, except
the right of such holders to receive the redemption price thereof and
any Additional Dividends, but without interest, and such shares no longer
will be deemed to be outstanding. The Fund will be entitled to receive, from
time to time, the interest, if any, earned on such moneys deposited with the
Auction Agent, and the holders of any shares so redeemed will have no claim
to any such interest. Any funds so deposited which are unclaimed at the end
of one year from such redemption date will be repaid, upon demand, to the
Fund, after which the holders of the shares of AMPS so called
for redemption may look only to the Fund for payment thereof.
So long as any shares of AMPS are held of record by the nominee of
the Securities Depository (initially Cede), the redemption price for such
shares will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it
to distribute the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for whom they are
acting as agent.
Notwithstanding the provisions for redemption described above, no
shares of AMPS shall be subject to optional redemption (i) unless all
dividends in arrears on the outstanding shares of AMPS, and all capital stock
of the Fund ranking on a parity with the AMPS with respect to the payment of
dividends or upon liquidation, have been or are being
contemporaneously paid or declared and set aside for payment and (ii) if
redemption thereof would result in the Fund's failure to maintain Moody's
Eligible Assets or S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of all series of AMPS will be
entitled to receive, out of the assets of the Fund available for distribution
to shareholders, before any distribution or payment is made
upon any shares of Common Stock or any other capital stock of the Fund
ranking junior in right of payment upon liquidation of AMPS, $25,000 per
share together with the amount of any dividends accumulated but unpaid
(whether or not earned or declared) thereon to the date of distribution, and
after such payment the holders of AMPS will be entitled to no other payments
except for any Additional Dividends. If such assets of the Fund shall be
insufficient to make the full liquidation payment on each outstanding series
of AMPS and liquidation payments on any other outstanding class or series of
Preferred Stock of the Fund ranking on a parity with the AMPS as to payment
upon liquidation, then such assets will be distributed among the holders of
each such series of AMPS and the holders of shares of such other class or
series ratably in proportion to the respective preferential amounts to which
they are entitled. After payment of the full amount of liquidation
distribution to which they are entitled, the holders of AMPS will not be
entitled to any further participation in any distribution of assets by the
Fund
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<PAGE>
except for any Additional Dividends. A consolidation, merger or share
exchange of the Fund with or into any other entity or entities or a sale,
whether for cash, shares of stock, securities or properties, of all or
substantially all or any part of the assets of the Fund shall not be deemed
or construed to be a liquidation, dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as
otherwise required by applicable law, holders of shares of AMPS will be
entitled to one vote per share on each matter submitted to a vote of
stockholders and will vote together with holders of shares of Common Stock as
a single class.
In connection with the election of the Fund's directors, holders of
shares of AMPS and any other Preferred Stock, voting as a separate class,
shall be entitled at all times to elect two of the Fund's directors, and the
remaining directors will be elected by holders of shares of Common Stock and
shares of AMPS and any other Preferred Stock, voting together as a single
class. In addition, if at any time dividends on outstanding shares of AMPS
shall be unpaid in an amount equal to at least two full years' dividends
thereon or if at any time holders of any shares of Preferred Stock are
entitled, together with the holders of AMPS, to elect a majority of the
directors of the Fund under the 1940 Act, then the number of directors
constituting the Board of Directors automatically shall be increased by the
smallest number that, when added to the two directors elected exclusively by
the holders of shares of AMPS and any other Preferred Stock as described
above, would constitute a majority of the Board of Directors as so increased
by such smallest number, and at a special meeting of shareholders which will
be called and held as soon as practicable, and at all subsequent meetings at
which directors are to be elected, the holders of shares of AMPS and any
other Preferred Stock, voting as a separate class, will be entitled to elect
the smallest number of additional directors that, together with the two
directors which such holders in any event will be entitled to elect,
constitutes a majority of the total number of directors of the Fund as so
increased. The terms of office of the persons who are directors at the time
of that election will continue. If the Fund thereafter shall pay, or declare
and set apart for payment in full, all dividends payable on all outstanding
shares of AMPS and any other Preferred Stock for all past Dividend Periods,
the additional voting rights of the holders of shares of AMPS and any other
Preferred Stock as described above shall cease, and the terms of office of
all of the additional directors elected by the holders of
shares of AMPS and any other Preferred Stock (but not of the directors with
respect to whose election the holders of Common Stock were entitled to vote
or the two directors the holders of shares of AMPS and any other Preferred
Stock have the right to elect in any event) will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast
by holders of outstanding shares of AMPS and any other Preferred Stock,
voting as a separate class, will be required to (i) authorize, create or
issue (other than with respect to the issuance of the AMPS authorized by the
Articles Supplementary), or increase the authorized or issued aggregate
stated capital amount of (other than with respect to the issuance of the AMPS
authorized by the Articles Supplementary), any class or series of stock
ranking prior to or on parity with any series of Preferred Stock with respect
to the payment of dividends or the distribution of assets on liquidation, or
increase the authorized aggregate stated capital amount of AMPS or any other
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 shares of AMPS or any other Preferred Stock. To the
extent permitted under the 1940 Act, in the event shares of more than one
series of AMPS are outstanding, the Fund shall not approve any of the actions
set forth in clause (i) or (ii) which adversely affects the contract
rights expressly set forth in the Charter of a holder of shares of a series
of AMPS differently than those of a holder of shares of any other series of
AMPS without the affirmative vote of at least a majority of votes entitled to
be cast by holders of the shares of AMPS of each series adversely affected
and outstanding at such time (each such adversely affected series voting
separately as a class). The Board of Directors, however, without shareholder
approval, may amend, alter or repeal any or all of the various rating agency
guidelines described herein in the event the Fund receives
confirmation from the rating agencies that any such amendment, alteration or
repeal would not impair the ratings then assigned to shares of AMPS. Unless
a higher percentage is provided for under "Description of Capital Stock--
Certain Provisions in the Charter," the affirmative vote of a majority of the
votes entitled to be cast by holders of outstanding shares of AMPS and any
other Preferred Stock, voting as a separate class, will be required to
approve any plan of reorganization (including bankruptcy proceedings)
adversely affecting
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<PAGE>
such shares or any action requiring a vote of security holders under Section
13(a) of the 1940 Act including, among other things, changes in the Fund's
investment objective or changes in the investment restrictions described as
fundamental policies under "Investment Objective and Policies". The class
vote of holders of shares of AMPS and any other Preferred Stock described
above in each case will be in addition to a separate vote of the requisite
percentage of shares of Common Stock and shares of AMPS and any other
Preferred Stock, voting together as a single class, necessary to authorize
the action in question.
The foregoing voting provisions will not apply to any series of AMPS
if, at or prior to the time when the act with respect to which such vote
otherwise would be required shall be effected, such shares shall have been
(i) redeemed or (ii) called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund
and may not be changed without the approval of the holders of a majority of
the Fund's outstanding shares of Common Stock and the outstanding shares of
AMPS and any other Preferred Stock, voting as a single class, and a majority
of the outstanding shares of AMPS and any other Preferred Stock, voting as a
separate class (which for this purpose and under the 1940 Act means the
lesser of (i) 67% of the shares of each class of capital stock represented at
a meeting at which more than 50% of the outstanding shares of each class of
capital stock are represented or (ii) more than 50% of the outstanding shares
of each class of capital stock. 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, as
amended (the "1933 Act"), 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
46
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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, put to the issuer or to 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.
Securities purchased in accordance with Rule 144A under the Securities Act
(each, a "Rule 144A security") and determined to be liquid by the Board of
Directors are not subject to the limitations set forth in this investment
restriction (e). Notwithstanding the fact that the Board may determine that
a Rule 144A security is liquid and not subject to limitations set forth in
this investment restriction (e), the State of Ohio does not recognize Rule
144A securities as securities that are free of restrictions as to resale.
To the extent required by Ohio law, the Fund will not invest more than 50% of
its total assets in securities of unseasoned issuers or in securities that
are restricted as to disposition, including Rule 144A securities.
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.
For so long as shares of AMPS are rated by Moody's, the Fund will
not change these additional investment restrictions unless it receives
written confirmation from Moody's that engaging in such transactions would
not impair the rating then assigned to the shares of AMPS by Moody's.
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.
47
<PAGE>
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 (63) President and Director(1)(2)--President of the
Investment Adviser (which term, as used herein, includes the Investment
Adviser's corporate predecessors) since 1977; President of Merrill Lynch
Asset Management, L.P. ("MLAM") (which term, as used herein, includes MLAM's
corporate predecessors) since 1977; 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.
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 02163. 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 (64)--Director(2)--9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990;
President and Chief Investment Officer of Verus Capital, Inc. from 1979 to
1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to
1990; Adjunct Professor, Columbia University Graduate School of Business,
1990; Adjunct Professor, Wharton School, The University of Pennsylvania,
1990; Partner, Small Cities CableVision since 1986.
KEVIN A. RYAN (63)--Director(2) 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder, current Director and Professor of The
Boston University Center for the Advancement of Ethics and Character;
Professor of Education at Boston University from 1982 until 1994; Formerly
taught on the faculties of The University of Chicago, Stanford University and
Ohio State University.
RICHARD R. WEST (57)--Director(2) 482 Tepi Drive, Southbury,
Connecticut 06488. Professor of Finance since 1984, and Dean from 1984 to
1993, New York University Leonard N. Stern School of Business Administration;
Professor of Finance at The Amos Tuck School of Business Administration from
1976 to 1984 and Dean from 1976 to 1983; Director of Vornado, Inc. (real
estate investment trust), Alexander's Inc. (real estate company), Bowne &
Co., Inc. (financial printer), and Smith Corona Corporation (manufacturer of
typewriters and word processors).
TERRY K. GLENN (54)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; 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; Vice President of
MLAM from 1980 to 1984; Senior Vice President of Princeton Services since
1993.
DONALD C. BURKE (35)--Vice President(1)(2)-- Vice President and
Director of Taxation of MLAM since 1990; employee of Deloitte & Touche LLP
from 1982 to 1990.
KENNETH A. JACOB-- (44)-Vice President(1)(2)--Vice President of MLAM
since 1984.
GERALD M. RICHARD (46)--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.
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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.
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 $154,400
Cynthia A. Montgomery(1) . . . $6,600 None $133,817
Charles C. Reilly(1) . . . . . $6,600 None $276,900
Kevin A. Ryan(1) . . . . . . . $6,600 None $154,400
Richard R. West(1) . . . . . . $7,600 None $300,900
</TABLE>
______________
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Forbes (36 funds and
portfolios); Ms. Montgomery (36 funds and portfolios); Mr. Reilly (53
funds and portfolios); Mr. Ryan (36 funds and portfolios); and Mr. West
(53 funds and portfolios).
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM, which is owned and
controlled by ML & Co., a financial services holding company. The Investment
Adviser provides the Fund with investment advisory and management
services. The Investment Adviser or MLAM acts as the investment adviser for
over 125 other registered investment companies. The Investment Adviser also
offers portfolio management and portfolio analysis services to individuals
and institutions. As of September 30, 1995, the Investment Adviser and MLAM
had a total of approximately $189.4 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.
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<PAGE>
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.
Robert A. DiMella is the portfolio manager for the Fund and is
primarily responsible for the day-to-day management of the Fund's portfolio.
Mr. DiMella has been an Assistant Vice President of MLAM since 1995 and a
portfolio manager of the Investment Adviser and MLAM since 1993. Prior to
joining MLAM, Mr. DiMella was an investment assistant with The Prudential
Insurance Company of America from 1992 to 1993, a research associate with
Portfolio Management Group from 1991 to 1992, and a financial reviewer with
PMG Financial Support from 1989 to 1991.
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 0.50 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 are
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. 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 the
shares of AMPS. 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
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<PAGE>
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 the shareholders representing 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 pursuant to Rule 17j-1 under 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 is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors 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.
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<PAGE>
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 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.
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 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.
The Internal Revenue Service (the "IRS"), in a revenue ruling, held
that certain auction rate Preferred Stock would be treated as stock for
Federal income tax purposes. The terms of the AMPS are substantially
similar, but not identical, to the auction rate Preferred Stock discussed in
the revenue ruling, and in the opinion of Brown & Wood, counsel to the Fund,
the shares of AMPS will constitute stock of the Fund and distributions with
respect to shares of AMPS (other than distributions in redemption of shares
of AMPS subject to Section 302(b) of the Code) will constitute dividends to
the extent of the Fund's current and accumulated earnings and profits as
calculated for Federal income tax purposes. Nevertheless, it is possible
that the IRS might take a contrary position, asserting, for example, that the
shares of AMPS constitute debt of the Fund. If this position were upheld,
the discussion of the treatment of distributions below would not
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<PAGE>
apply. Instead, distributions by the Fund to holders of shares of AMPS would
constitute interest, whether or not they exceeded the earnings and profits of
the Fund, would be included in full in the income of the recipient and would
be taxed as ordinary income. Counsel believes that such
a position, if asserted by the IRS, would be unlikely to prevail.
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. To the
extent that the dividends distributed to the Fund's shareholders are derived
from interest income exempt from tax under Code Section 103(a) and are
properly designated as exempt-interest dividends, they will be excludable
from a shareholder's gross income for Federal tax purposes. 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. Interest on indebtedness incurred or continued to purchase or
carry Fund shares is not deductible for Federal income tax purposes to the
extent attributable to exempt-interest dividends. 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, from an excess of net
long-term capital gains derived 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.
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 declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such
dividend was declared.
The IRS 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 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. Thus, the Fund is required to
allocate a portion of its net capital gains and other taxable income to the
shares of AMPS of each series. The Fund generally will notify the Auction
Agent of the amount of any net capital gains and other taxable income to be
included in any dividend on shares of AMPS prior to the Auction establishing
the Applicable Rate for such dividend. Except for the portion of any
dividend that it informs the Auction Agent will be treated as capital gains
or other taxable income, the Fund anticipates that the dividends paid on the
shares of AMPS will constitute
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exempt-interest dividends. The amount of net capital gains and ordinary
income allocable to shares of AMPS (the "taxable distribution") will depend
upon the amount of such gains and income realized by the Fund and the total
dividends paid by the Fund on shares of Common Stock and shares of AMPS
during a taxable year, but the taxable distribution generally is not
expected to be significant.
In the opinion of Brown & Wood, counsel to the Fund, under current
law the manner in which the Fund intends to allocate items of tax-exempt
income, net capital gains, and other taxable income, if any, between shares
of Common Stock and shares of AMPS will be respected for Federal income tax
purposes. However, the tax treatment of Additional Dividends may affect the
Fund's calculation of each class' allocable share of capital gains and other
taxable income. See "Tax Treatment of Additional Dividends". In addition,
there is currently no direct guidance from the IRS or other sources
specifically addressing whether the Fund's method for allocating tax-exempt
income, net capital gains, and other taxable income between shares of Common
Stock and shares of AMPS will be respected for Federal income tax purposes,
and it is possible that the IRS could disagree with counsel's opinion and
attempt to reallocate the Fund's net capital gains or other taxable income.
In the event of a reallocation, some of the dividends identified by the Fund
as exempt-interest dividends to holders of shares of AMPS may be
recharacterized as additional capital gains or other taxable income. In the
event of such recharacterization, the Fund would not be required to make
payments to such shareholders to offset the tax effect of such reallocation.
In addition, a reallocation may cause the Fund to be liable for income tax
and excise tax on any reallocated taxable income. Brown & Wood has advised
the Fund that, in its opinion, if the IRS were to challenge in court the
Fund's allocations of income and gain, the IRS would be unlikely to prevail.
A holder should be aware, however, that the opinion of Brown & Wood
represents only its best legal judgment and is not binding on the IRS or the
courts.
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 reflect 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.
If at any time when shares of AMPS 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 "Description of AMPS--Restrictions on Dividends
and Other Payments". 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, in its sole discretion, may
redeem shares of AMPS 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. See "Description of AMPS--Redemption".
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 IRS 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 IRS would agree that
dividends on the Preferred Stock are not preferential. If
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<PAGE>
the IRS 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.
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 on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Fund or who, to
the Fund's knowledge, have furnished an incorrect number. When establishing
an account, an investor must certify under penalty of perjury that such
number is correct and that such investor is not otherwise subject to backup
withholding.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
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 taxable income for corporate
shareholders (as described above) may subject corporate shareholders of the
Fund to the Environmental Tax.
TAX TREATMENT OF ADDITIONAL DIVIDENDS
If the Fund makes a Retroactive Taxable Allocation, it will pay
Additional Dividends to holders of shares of AMPS who are subject to the
Retroactive Taxable Allocation. See "Description of AMPS--Dividends--
Additional Dividends". The Federal income tax consequences of Additional
Dividends under existing law are uncertain. The Fund intends to treat a
holder as receiving a dividend distribution in the amount of any Additional
Dividend only as and when such Additional Dividend is paid. An Additional
Dividend generally will be designated by the Fund as an exempt-interest
divided except as otherwise required by applicable law. However, the IRS may
assert that all or part of an Additional Dividend is a taxable dividend
either in the taxable year for which the Retroactive Taxable Allocation is
made or in the taxable year in which the Additional Dividend is paid.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. 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 such option or financial futures contract will be treated as sold
for its fair market value on the last day of the taxable year and any gain or
loss attributable to Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and
55
<PAGE>
character of distributions to shareholders. The mark-to-market rules
outlined above, however, will not apply to certain transactions entered into
by the Fund solely to reduce the risk of changes in price or interest rates
with respect to its investments.
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 the related options.
One of the requirements for qualification as a RIC is that less than
30% of the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or financial futures contract.
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, judicial or administrative action either prospectively or
retroactively.
Shareholders are urged to consult their tax advisers regarding
specific questions as to Federal, foreign, state or local taxes.
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 AMPS 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 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.
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<PAGE>
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 were 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. In this regard, the Board of Directors has
reclassified 40,000 shares of unissued Common Stock as AMPS. For a
description of the shares of AMPS, see "Description of AMPS".
The following table shows the amount of (i) capital stock
authorized, (ii) capital stock held by the Fund for its own account and (iii)
capital stock outstanding for each class of authorized securities of the Fund
as of December __, 1995.
<TABLE>
<CAPTION> Amount
Outstanding
(Exclusive of
Amount Held Amount Held
By Fund By Fund For
Amount For Its Own Its
Title of Class Authorized Account Own Account
<S> <C> <C> <C>
Common Stock . . . . . . . . . . . . . . . . 199,960,000 -0- -0-
Auction Market Preferred Stock . . . . . . . 40,000 -0- -0-
</TABLE>
COMMON STOCK
Holders of Common Stock are entitled to share equally in dividends
declared by the Board of Directors payable to holders of Common Stock and in
the net assets of the Fund available for distribution to holders of Common
Stock after payment of the preferential amounts payable to holders of any
outstanding Preferred Stock. Neither holders of Common Stock nor holders of
Preferred Stock have pre-emptive or conversion rights and shares of Common
Stock are not redeemable. The outstanding shares of Common Stock are fully
paid and non-assessable.
Holders of Common Stock are entitled to one vote for each share held
and will vote with the holders of any outstanding shares of AMPS or other
Preferred Stock on each matter submitted to a vote of holders of Common
Stock, except as described under "Description of AMPS--Voting Rights".
Shareholders are entitled to one vote for each share held. The
shares of Common Stock, AMPS and any other Preferred Stock do not have
cumulative voting rights, which means that the holders of more than 50% of
the shares of Common Stock, AMPS and any other Preferred Stock voting for the
election of Directors can elect all of the Directors standing for
election by such holders, and, in such event, the holders of the remaining
shares of Common Stock, AMPS and any other Preferred Stock will not be able
to elect any of such Directors.
So long as any shares of AMPS or any other Preferred Stock are
outstanding, holders of Common Stock will not be entitled to receive any
dividends of or other distributions from the Fund unless all accumulated
dividends on outstanding shares of AMPS and any other Preferred Stock have
been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to such AMPS and any other Preferred Stock would be at least 200%
after giving effect to such distributions. See "Description of AMPS--
Restrictions on Dividends and Other Payments".
The Fund expects to engage in a continuous offering of its Common
Stock. No market presently exists for the Common Stock and it is not
currently expected that a secondary market will develop. Since the Common
Stock may not be considered readily marketable, the Board of Directors of the
Fund presently intends, but is not required, to make tender offers on a
quarterly basis to purchase the Common Stock from shareholders at the net
asset value per share. The repurchase of Common Stock pursuant to tender
offers may require that the Fund redeem all or a portion of outstanding
shares of Preferred Stock, including the AMPS. See "Description of AMPS -
Redemption".
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<PAGE>
The Fund will send unaudited reports at least semi-annually and
audited financial statements annually to all of its shareholders.
PREFERRED STOCK
Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of 40,000 shares of AMPS, designated respectively: 8,000 shares
of Series A AMPS, 8,000 shares of Series B AMPS, 8,000 shares of Series C
AMPS, 8,000 shares of Series D AMPS and 8,000 shares of Series E AMPS. See
"Description of AMPS". Under the 1940 Act, the Fund is permitted to have
outstanding more that one series of Preferred Stock as long as no single
series has priority over another series as to the distribution of assets of
the Fund or the payment of dividends. Neither holders of Common Stock nor
holders of Preferred Stock have pre-emptive rights to purchase any shares of
AMPS or any other Preferred Stock that might be issued. It is anticipated
that the net asset value per share of the AMPS will equal its original
purchase price per share plus accumulated dividends per share.
CERTAIN PROVISIONS OF THE CHARTER
The Fund's Charter includes 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 of the holders of capital stock may be removed only by action
of such holders, and a director elected by the holders of AMPS and any other
Preferred Stock may be removed only by action of AMPS and any other Preferred
Stock.
In addition, the Charter requires 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 any other corporation,
(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 all of the votes entitled to be cast by shareholders of the Fund,
voting as a single class, is required. Such 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, including the AMPS, 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 Charter. 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 the AMPS and any other 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, the affirmative vote of at least a majority of
outstanding shares of Preferred Stock of the Fund (including the AMPS),
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
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<PAGE>
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 (including the AMPS)
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.
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.
PLAN OF DISTRIBUTION
The AMPS are being offered on a continuing basis by the Fund through
Merrill Lynch, which has agreed to use its best efforts to solicit purchasers
of the AMPS.
The AMPS are being offered at the price of $25,000 per share and
Merrill Lynch will receive no commission or discount in connection with the
sale of AMPS. The Fund reserves the sole right to withdraw, cancel or modify
the offer without notice and may reject orders to purchase AMPS in whole or
in part. Merrill Lynch has the right, in its discretion reasonably
exercised, to reject any proposed purchase of AMPS in whole or in part.
Merrill Lynch will act in Auctions as a Broker-Dealer as set forth
under "Description of AMPS--The Auction--General--Broker-Dealer Agreements"
and will be entitled to fees for services as a Broker-Dealer as set forth
under "Description of AMPS--Broker-Dealers". Merrill Lynch also may provide
information to be used in ascertaining the Reference Rate.
Merrill Lynch is an affiliate of the Investment Adviser and may
receive a portion of the fee paid to the Investment Adviser pursuant to the
Administration Agreement for administrative services rendered in connection
with the shares of AMPS. See "Investment Advisory and Administrative
Arrangements".
The Fund anticipates that Merrill Lynch from time to time may act as
a broker in connection with the execution of the Fund's portfolio
transactions.
The Fund and the Investment Adviser have agreed to indemnify Merrill
Lynch against certain liabilities including liabilities under the 1933 Act.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the
shares of AMPS will be IBJ Schroder Bank & Trust Company. The transfer
agent, dividend disbursing agent and shareholder servicing agent for the
shares of Common Stock is Merrill Lynch Financial Data Services, Inc., 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, a wholly-owned
subsidiary of ML & Co.
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby
will be passed upon for the Fund and Merrill Lynch by Brown & Wood, One World
Trade Center, New York, New York 10048-0557. Brown
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<PAGE>
& Wood will 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
The statement of assets, liabilities and capital of the fund as of
October 5, 1995 included in this Prospectus has been so included in reliance
on the report of Deloitte & Touche LLP, independent auditors, given on their
authority as experts in auditing and accounting. The principal business
address of Deloitte & Touche LLP is 117 Campus Drive, Princeton, New Jersey
08540.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
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 October 5, 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 October 5, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 17, 1995
61
<PAGE>
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
OCTOBER 5, 1995
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Prepaid registration fees (Note 1) . . . . . . . . . . . . 114,578
Deferred organization expenses (Note 1) . . . . . . . . . $220,422
------
Total assets . . . . . . . . . . . . . . . . . . . . . 435,000
LIABILITIES
Accrued expenses (Note 1) . . . . . . . . . . . . . . . . . 335,000
-----
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares
authorized; 10,000 shares issued and outstanding (Note 1)
$ 1,000
Paid in Capital in excess of par . . . . . . . . . . . . . . 99,000
-----
Total Capital--Equivalent to $10.00 net asset value per
share of common stock (Note 1) . . . . . . . . . . . . . $100,000
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.
(the "Investment Adviser") of an aggregate of 10,000 shares
of Common Stock for $100,000 on October 5, 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 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
0.50 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.
62
<PAGE>
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
NOVEMBER ___, 1995
(TO COME)
63
<PAGE>
GLOSSARY
"'AA' (AA) Composite Commercial Paper Rate," on any Valuation Date,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by
Moody's or the equivalent of such rating by another nationally recognized
statistical rating organization, as such rate is made available on a discount
basis or otherwise by the Federal Reserve Bank of New York for the Business
Day immediately preceding such date, or (ii) in the event that the Federal
Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise
by Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
successors that are Commercial Paper Dealers, to the Auction Agent for the
close of business on the Business Day immediately preceding such date. If
one of the Commercial Paper Dealers does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Fund to provide such rate or rates
not being supplied by the Commercial Paper Dealer. If the number of Dividend
Period days shall be (i) 7 or more but fewer than 49 days, such rate shall be
the Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49
or more but fewer than 70 days, such rate shall be the Interest Equivalent of
the 60-day rate on such commercial paper; (iii) 70 or
more days but fewer than 85 days, such rate shall be the arithmetic average
of the Interest Equivalent of the 60-day and 90-day rates on such commercial
paper; (iv) 85 or more days but fewer than 99 days, such rate shall be the
Interest Equivalent of the 90-day rate on such commercial paper; (v) 99 or
more days but fewer than 120 days, such rate shall be the arithmetic average
of the Interest Equivalent of the 90-day and 120-day rates on such commercial
paper; (vi) 120 or more days but fewer than 141 days, such rate shall be the
Interest Equivalent of the 120-day rate on such commercial paper; (vii) 141
or more days but fewer than 162 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 120-day and 180-day
rates on such commercial paper; and (viii) 162 or more days but fewer than
183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Additional Dividend" has the meaning set forth on page __ of this
Prospectus.
"Agent Member" means the member of the Securities Depository that
will act on behalf of a Beneficial Owner of one or more shares of AMPS or on
behalf of a Potential Beneficial Owner.
"AMPS" means the Auction Market Preferred Stock, Series A, the
Auction Market Preferred Stock, Series B, the Auction Market Preferred Stock,
Series C, the Auction Market Preferred Stock, Series D and the Auction Market
Preferred Stock, Series E, each with a par value of $.10 per share and a
liquidation preference of $25,000 per share plus an amount equal
to accumulated but unpaid dividends thereon (whether or not earned or
declared), of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page __
of this Prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page
__ of this Prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page __
of this Prospectus.
"Anticipation Notes" means the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page __ of this
Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends
are payable on shares of AMPS for any Dividend Period.
"Articles Supplementary" means the Articles Supplementary of the
Fund specifying the powers, preferences and rights of the shares of AMPS.
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<PAGE>
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Schroder Bank & Trust Company unless and
until another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Directors of the Fund or a duly
authorized committee thereof enters into an agreement with the Fund to follow
the Auction Procedures for the purpose of determining the Applicable
Rate and to act as transfer agent, registrar, dividend disbursing agent and
redemption agent for the AMPS.
"Auction Agent Agreement" means the agreement entered into between
the Fund and the Auction Agent which provides, among other things, that the
Auction Agent will follow the Auction Procedures for the purpose of
determining the Applicable Rate.
"Auction Date" has the meaning set forth on page __ of this
Prospectus.
"Auction Procedures" means the procedures for conducting Auctions
set forth in Appendix C to this Prospectus.
"Available AMPS" has the meaning specified in Paragraph 10(d)(i) of
the Auction Procedures.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer (or if applicable, the Auction Agent) as
a holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Bid" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"Bidder" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"Board of Directors" or "Board" means the Board of Directors of the
Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted
by law to perform the functions required of a Broker-Dealer in the Auction
Procedures, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between
the Auction Agent and a Broker-Dealer, including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, pursuant to which such Broker-Dealer agrees to
follow the Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which
banks in The City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the
shares of AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including the Articles Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner &
Smith Incorporated and such other commercial paper dealer or dealers as the
Fund from time to time may appoint or, in lieu thereof, their respective
affiliates and successors.
"Common Stock" means the Common Stock, par value $.10 per share, of
the Fund.
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"Date of Original Issue" means, with respect to each share of AMPS,
the date on which such share first is issued by the Fund.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount
Factor, as the case may be.
"Discounted Value" of any asset of the Fund means (i) with respect
to an S&P Eligible Asset, the quotient of the market value thereof divided by
the applicable S&P Discount Factor and (ii) with respect to a Moody's
Eligible Asset, the lower of par and the quotient of the market value thereof
divided by the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page __ of this
Prospectus.
"Dividend Periods" has the meaning set forth on page __ of this
Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible
Assets, as the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as
may be permitted by the Fund that is listed as the holder of record of shares
of AMPS in the records of the Auction Agent.
"Forward Commitment" has the meaning set forth on page __ of this
Prospectus.
"Fund" means Merrill Lynch Municipal Strategy Fund, Inc., a Maryland
corporation that is the issuer of the AMPS.
"Hold Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"Initial Dividend Payment Date" means the Initial Dividend Payment
Date as determined by the Board of Directors of the Fund with respect to each
series of AMPS.
"Initial Dividend Period" means, with respect to the AMPS, the
period from and including the first Date of Original Issue for each series of
AMPS to but excluding the Initial Dividend Payment Date for each series of
AMPS.
"Initial Margin" means the amount of cash or securities deposited
with a broker as a margin payment at the time of purchase or sale of a
financial futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page __ of
this Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page __ of
this Prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate, whichever is greater.
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"Maximum Applicable Rate" has the meaning specified under
"Description of AMPS--The Auction--Orders by Beneficial Owners, Potential
Beneficial Owners, Existing Holders and Potential Holders" in the Prospectus.
"Maximum Potential Additional Dividend Liability" has the meaning
set forth on page __ of this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page __ of
this Prospectus.
"Moody's Eligible Assets" has the meaning set forth on page __ of
this Prospectus.
"Moody's Exposure Period" means a period that is the same length or
longer than the number of days used in calculating the cash dividend
component of the AMPS Basic Maintenance Amount and initially shall be the
period commencing on and including a given Valuation Date and ending 48 days
thereafter.
"Moody's Hedging Transactions" has the meaning set forth on page ___
of this Prospectus.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION> % Change in Moody's
Marginal Tax Rate Volatility Factor
<S> <C> <C>
5% 292%
>5% but 10% 313%
>10% but 15% 338%
>15% but 20% 364%
>20% but 25% 396%
>25% but 30% 432%
>30% but 35% 472%
>35% but 40% 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.
"Municipal Bonds" has the meaning set forth on page __ of this
Prospectus.
"Municipal Index" has the meaning set forth on page __ of this
Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended from
time to time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page __
of this Prospectus.
"1940 Act Cure Date" has the meaning set forth on page __ of this
Prospectus.
"Non-Call Period" has the meaning set forth under "Specific
Redemption Provisions" below.
"Non-Payment Period" has the meaning set forth on page __ of this
Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page ____ of
this Prospectus.
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"Notice of Revocation" has the meaning set forth on page ___ of this
Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on
page ___ of this Prospectus.
"Optional Redemption Price" has the meaning set forth on page ___ of
this Prospectus.
"Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or
a Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that
wishes to purchase such shares, or that is a Beneficial Owner that wishes to
purchase additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other person
as may be permitted by the Fund, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing
Holder, additional shares of AMPS).
"Preferred Stock" means Preferred Stock, par value $.10 per share,
of the Fund.
"Premium Call Period" has the meaning set forth under "Specific
Redemption Provisions" below.
"Receivables For Municipal Bonds Sold," for purposes of determining
S&P Eligible Assets, has the meaning set forth on page __ of this Prospectus.
"Receivables for Municipal Bonds Sold," for purposes of determining
Moody's Eligible Assets, has the meaning set forth on page __ of this
Prospectus.
"Reference Rate" means: (i) with respect to a Dividend Period or a
Short Term Dividend Period having 28 or fewer days, the higher of the
applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent of
the Short Term Municipal Bond Rate, (ii) with respect to any Short Term
Dividend Period, having more than 28 but fewer than 183 days, the applicable
"AA" Composite Commercial Paper Rate, (iii) with respect to any Short Term
Dividend Period having 183 or more but fewer than 364 days, the applicable
U.S. Treasury Bill Rate and (iv) with respect to any Long Term Dividend
Period, the applicable U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on
page ___ of this Prospectus.
"Response" has the meaning set forth on page ___ of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page
___ of this Prospectus.
"S&P" means Standard & Poor's Ratings Group or its successors.
"S&P Discount Factor" has the meaning set forth on page ___ of this
Prospectus.
"S&P Eligible Assets" has the meaning set forth on page ___ of this
Prospectus.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance
Cure Date, that the Fund has under the Articles Supplementary to cure any
failure to maintain, as of such Valuation Date, a Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount.
"S&P Hedging Transactions" has the meaning set forth on page __ of
this Prospectus.
"S&P Volatility Factor" means 277% or such other potential dividend
rate increase factor as S&P advises the Fund in writing is applicable.
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"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven
days.
"Short Term Dividend Period" has the meaning set forth on page __ of
this Prospectus.
"Special Dividend Period" has the meaning set forth on page __ of
this Prospectus.
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period, either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Fund, after consultation
with the Auction Agent and the Broker-Dealers, during which the
shares of AMPS subject to such Dividend Period shall not be subject to
redemption at the option of the Fund and (ii) a period (a "Premium Call
Period"), consisting of a number of whole years and determined by the Board
of Directors of the Fund, after consultation with the Auction Agent and the
Broker-Dealers, during each year of which the shares of AMPS subject to such
Dividend Period shall be redeemable at the Fund's option at a price per share
equal to $25,000 plus accumulated but unpaid dividends plus a premium
expressed as a percentage of $25,000, as determined by the Board of Directors
of the Fund after consultation with the Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning specified in Subsection
10(a)(x) of the Auction Procedures.
"Submitted Bid" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Submitted Hold Order" has the meaning specified in Subsection
10(d)(i) of the Auction Procedures.
"Submitted Order" has the meaning specified in Subsection 10(d)(i)
of the Auction Procedures.
"Submitted Sell Order" has the meaning specified in Subsection
10(d)(i) of the Auction Procedures.
"Subsequent Dividend Period" means each Dividend Period after the
Initial Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall
mean a nationally recognized statistical rating organization or two
nationally recognized statistical rating organizations, respectively,
selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated, or its
respective affiliates and successors, after consultation with the Fund, to
act as a substitute rating agency or substitute rating agencies, as the case
may be, to determine the credit ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning specified in Subsection
10(d)(i) of the Auction Procedures.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any
date means 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Kenny S&P 30 day High Grade Index (the
"Kenny Index"), or any successor index made available for the Business Day
immediately preceding such date but in any event not later than 8:30
A.M., New York City time, on such date by Kenny Information Systems Inc. or
any successor thereto, based upon 30-day yield evaluations at par of bonds
the interest on which is excludable for regular Federal income tax purposes
under the Code of "high grade" component issuers selected by Kenny
Information Systems Inc. or any such successor from time to time in its
discretion, which component issuers shall include, without limitation,
issuers of general obligation bonds but shall exclude any bonds the interest
on which constitutes an item of tax preference under Section 57(a) (5) of the
Code, or successor provisions, for purposes of the "alternative minimum tax,"
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal); provided, however, that if the Kenny Index is not made so available
by 8:30 A.M., New York City time, on such date by Kenny Information Systems
Inc. or any successor, the Taxable Equivalent of the Short-Term Municipal
Bond Rate shall mean the quotient of (A)
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<PAGE>
the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal). The
Fund may not utilize a successor index to the Kenny Index unless Moody's
and S&P provide the Fund with written confirmation that the use of such
successor index will not adversely affect the then-current respective Moody's
and S&P ratings of the AMPS.
"Treasury Bonds" has the meaning set forth on page __ of this
Prospectus.
"28-Day Dividend Period" means a Dividend Period consisting of 28
days.
"U.S. Treasury Bill Rate" on any date means (i) the Interest
Equivalent of the rate on the actively traded Treasury Bill with a maturity
most nearly comparable to the length of the related Dividend Period, as such
rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S.
Government Securities report for such Business Day, or (ii) if such yield as
so calculated is not available, the Alternate Treasury Bill Rate on such
date. "Alternate Treasury Bill Rate" on any date means the Interest
Equivalent of the yield as calculated by reference to the arithmetic average
of the bid price quotations of the actively traded Treasury Bill with a
maturity most nearly comparable to the length of the related Dividend Period,
as determined by bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as
calculated by reference to the bid price quotation of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as such bid price quotation is
published on the Business Day immediately preceding such date by the Federal
Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S.
Government Securities report for such Business Day, or (ii) if such yield as
so calculated is not available, the Alternate Treasury Note Rate on such
date. "Alternate Treasury Note Rate" on any date means the yield as
calculated by reference to the arithmetic average of the bid price
quotations of the actively traded, current coupon Treasury Note with a
maturity most nearly comparable to the length of the related Dividend Period,
as determined by the bid price quotations as of any time on the Business Day
immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" has the meaning set forth on page __ of this
Prospectus.
"Variation Margin" means, in connection with an outstanding
financial futures contract owned or sold by the Fund, the amount of cash or
securities paid to or received from a broker (subsequent to the Initial
Margin payment) from time to time as the price of such financial futures
contract fluctuates.
"Winning Bid Rate" has the meaning specified in Subsection 10(d)(i)
of the Auction Procedures.
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APPENDIX A
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 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.
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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 earnings 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 RATINGS 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.
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;
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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
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,
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<PAGE>
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.
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:
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.
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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.
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:
Improving
Stable
Declining
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Uncertain
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.
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.
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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.
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:
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.
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APPENDIX B
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the
procedures expected to be followed in connection with the settlement of each
Auction and will be incorporated by reference in the Auction Agent Agreement
and each Broker-Dealer Agreement. Nothing contained in this Appendix B
constitutes a representation by the Fund that in each Auction each party
referred to herein actually will perform the procedures described herein to
be performed by such party. Capitalized terms used herein shall have the
respective meanings specified in the glossary of this Prospectus or Appendix
C hereto, as the case may be.
(a) On each Auction Date, the Auction Agent shall notify by
telephone or through the Auction Agent's Processing System the Broker-Dealers
that participated in the Auction held on such Auction Date and submitted an
Order on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend
Period;
(ii) whether Sufficient Clearing Bids existed for the
determination of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted a Bid or a Sell Order on behalf of a Beneficial Owner, the
number of shares, if any, of AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Beneficial Owner, the number of
shares, if any, of AMPS to be purchased by such Potential Beneficial
Owner;
(v) if the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number of shares of AMPS to be purchased by
all Potential Beneficial Owners on
whose behalf such Broker-Dealer submitted a Bid, the name or names of one or
more Buyer's Broker-Dealers (and the name of the Agent Member, if any, of
each such Buyer's Broker-Dealer) acting for one or more purchasers of such
excess number of shares of AMPS and the number of such shares to be purchased
from one or more Beneficial Owners on whose behalf such
Broker-Dealer acted by one or more Potential Beneficial Owners on whose
behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of shares of AMPS to be
purchased by all Potential Beneficial Owners on whose behalf such
Broker-Dealer submitted a Bid exceeds the aggregate number of shares of
AMPS to be sold by all Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid or a Sell Order, the name or names of one or more Seller's
Broker-Dealers (and the name of the Agent Member, if any, of each such
Seller's Broker-Dealer) acting for one or more sellers of such excess number
of shares of AMPS and the number of such shares to be sold to one or more
Potential Beneficial Owners on whose behalf such Broker-Dealer acted by one
or more Beneficial Owners on whose behalf each of such Seller's
Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with
respect to the AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, instruct each Potential Beneficial Owner on whose behalf
such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Beneficial Owner's Agent Member to pay to such
Broker-Dealer (or its Agent Member) through the Securities Depository the
amount necessary to purchase the number of shares of AMPS to be purchased
pursuant to such Bid against receipt of such shares and advise such Potential
Beneficial Owner of the Applicable Rate for the next succeeding Dividend
Period;
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(ii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Sell Order that was accepted, in whole or in
part, or a Bid that was accepted, in whole or in part, to instruct such
Beneficial Owner's Agent Member to deliver to such Broker-Dealer (or its
Agent Member) through the Securities Depository the number of shares of AMPS
to be sold pursuant to such Order against payment therefor and advise any
such Beneficial Owner that will continue to hold shares of AMPS of the
Applicable Rate for the next succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Hold Order of the Applicable Rate for the next
succeeding Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such
Broker-Dealer submitted an Order of the Auction Date for the next
succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a)
above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and
at such time or times as in its sole discretion it may determine, allocate
any funds received by it pursuant to (b) (i) above and any shares of AMPS
received by it pursuant to (b) (ii) above among the Potential Beneficial
Owners, if any, on whose behalf such Broker-Dealer submitted Bids, the
Beneficial Owners, if any, on whose behalf such Broker-Dealer submitted Bids
that were accepted or Sell Orders, and any Broker-Dealer or Broker-Dealers
identified to it by the Auction Agent pursuant to (a) (v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instruct its Agent Member as provided in (b) (i) or (ii) above, as the
case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member
of the Securities Depository shall instruct its Agent Member to (A) pay
through the Securities Depository to the Agent Member of the Beneficial
Owner delivering shares to such Broker-Dealer pursuant to (b)(ii) above
the amount necessary to purchase such shares against receipt of such
shares, and (B) deliver such shares through the Securities Depository to
a Buyer's Broker-Dealer (or its Agent Member) identified to such
Seller's Broker-Dealer pursuant to (a)(v) above against payment
therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member
of the Securities Depository shall instruct its Agent Member to (A) pay
through the Securities Depository to a Seller's Broker-Dealer (or its Agent
Member) identified pursuant to (a) (vi) above the amount necessary to
purchase the shares to be purchased pursuant to (b)(i) above against receipt
of such shares, and (B) deliver such shares through the Securities
Depository to the Agent Member of the purchaser thereof against payment
therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d) (i) above
shall instruct the Securities Depository to execute the transactions
described in (b) (i) or (ii) above, and the Securities Depository shall
execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall
instruct the Securities Depository to execute the transactions described
in (d)(ii) above, and the Securities Depository shall execute
such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall
instruct the Securities Depository to execute the transactions described
in (d) (iii) above, and the Securities Depository shall execute such
transactions.
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(f) If a Beneficial Owner selling shares of AMPS in an Auction fails
to deliver such shares (by authorized book-entry), a Broker-Dealer may
deliver to the Potential Beneficial Owner on behalf of which it submitted a
Bid that was accepted a number of whole shares of AMPS that is less than the
number of shares that otherwise was to be purchased by such Potential
Beneficial Owner. In such event, the number of shares of AMPS to be so
delivered shall be determined solely by such Broker-Dealer. Delivery of such
lesser number of shares shall constitute good delivery. Notwithstanding the
foregoing terms of this paragraph (f), any delivery or non-delivery of shares
which shall represent any departure from the results of an Auction, as
determined by the Auction Agent, shall be of no effect unless and until the
Auction Agent shall have been notified of such delivery or non-delivery in
accordance with the provisions of the Auction Agent Agreement and the
Broker-Dealer Agreements.
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APPENDIX C
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the
Articles Supplementary relating to the AMPS, and will be incorporated by
reference in the Auction Agent Agreement and each Broker-Dealer Agreement.
The terms not defined below are defined in the forepart of this Prospectus.
Nothing contained in this Appendix C constitutes a representation by the Fund
that in each Auction each party referred to herein actually will
perform the procedures described herein to be performed by such party.
PARAGRAPH 10(A) CERTAIN DEFINITIONS.
As used in this Paragraph 10, the following terms shall have the
following meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned
pursuant to this Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day
preceding the first day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in
Paragraph 10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph
10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph
10(b)(i) below.
(vi) "Hold Order" shall have the meaning specified in
Paragraph 10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will
be the Applicable Percentage of the Reference Rate. The Applicable
Percentage will be determined based on (i) the lower of the credit
rating or ratings assigned on such date to such shares by Moody's and
S&P (or if Moody's or S&P or both shall not make such rating available,
the equivalent of either or both of such ratings by a Substitute Rating
Agency or two Substitute Rating Agencies or, in the event that only one such
rating shall be available, such rating) and (ii) whether the Fund has
provided modification to the Auction Agent prior to the Auction establishing
the Applicable Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on shares of AMPS as follows:
<TABLE>
<CAPTION> Applicable Applicable
Credit Ratings Percentage of Percentage of
Reference Rate--No Reference Rate--
Moody's S&P Notification Notification
<S> <C> <C> <C>
"aa3" or higher AA-- or Higher 110% 150%
"a3" or "a1" A-- to A+ 125% 160%
"baa3" to "baa1" BBB-- to BBB+ 150% 250%
Below "baa3" Below BBB-- 200% 275%
</TABLE>
The Fund shall take all reasonable action necessary to enable S&P
and Moody's to provide a rating for the AMPS. If either S&P or Moody's shall
not make such a rating available, or if neither S&P nor Moody's shall make
such a rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated
or its affiliates and successors, after consultation with the Fund, shall
select a nationally recognized statistical rating organization or two
nationally recognized statistical rating organizations to act as a Substitute
Rating Agency or Substitute Rating Agencies, as the case may be.
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(viii) "Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(ix) "Sell Order" shall have the meaning specified in
Paragraph 10(b)(i) below.
(x) "Submission Deadline" shall mean 1:00 P.M., New York City
time, on any Auction Date or such other time on any Auction Date as may
be specified by the Auction Agent from time to time as the time by which each
Broker-Dealer must submit to the Auction Agent in writing all Orders obtained
by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xii) "Submitted Hold Order" shall have the meaning specified
in Paragraph 10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified
in Paragraph 10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning
specified in Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in
Paragraph 10(d)(i) below.
PARAGRAPH 10(B) ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS,
EXISTING HOLDERS AND POTENTIAL HOLDERS.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Brokers-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of
shares subject to Orders submitted or deemed submitted to them by Beneficial
Owners and as Potential Holders in respect of shares subject to Orders
submitted to them by Potential Beneficial Owners. A Broker-Dealer may also
hold shares of AMPS in its own account as a Beneficial Owner. A Broker-Dealer
may thus submit Orders to the Auction Agent as a Beneficial Owner or a
Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its
customers. On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of outstanding shares, if any, of AMPS held
by such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for the next
succeeding Dividend Period;
(2) the number of outstanding shares, if any, of AMPS held
by such Beneficial Owner which such Beneficial Owner desires to
continue to hold, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Beneficial Owner, and/or
(3) the number of outstanding shares, if any, of AMPS held
by such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding Dividend
Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial
Owners that shall be maintained in good faith for the purpose of
conducting a competitive Auction, shall contact Potential Beneficial
Owners, including Persons that are not Beneficial Owners, on such list
to determine the number of outstanding shares, if any, of AMPS which
each such Potential Beneficial Owner offers to purchase, provided that
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the Applicable Rate for the next succeeding Dividend Period shall not be
less than the rate per annum specified by such Potential Beneficial
Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each
Potential Beneficial Owner placing an Order, including a Broker-Dealer acting
in such capacity for its own account, is hereinafter referred to as a
"Bidder"; an Order containing the information referred to in clause (A)(1) of
this Paragraph 10(b)(i) is hereinafter referred to as a "Hold Order"; an
Order containing the information referred to in clause (A)(2) or (B) of this
Paragraph 10(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this Paragraph
10(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby.
(ii) (A) A Bid by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be less
than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of AMPS
to be determined as set forth in Paragraph 10(e)(i)(D) if the Applicable
Rate determined on such Auction Date shall be equal to the rate per
annum specified therein; or
(3) a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(ii)(C) if such specified rate
per annum shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of outstanding shares of AMPS specified in such
Sell Order, or
(2) such number or a lesser number of outstanding shares of AMPS
to be determined as set forth in Paragraph 10(e)(ii)(C) if Sufficient
Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable
offer to purchase:
(1) the number of outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of AMPS
to be determined as set forth in Paragraph 10(e)(i)(E) if the Applicable
Rate determined on such Auction Date shall be equal to the rate per
annum specified therein.
PARAGRAPH 10(C) SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing or through the
Auction Agent's Auction Processing System to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Fund) as
an Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
specifying with respect to each Order:
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(A) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding shares of AMPS that are
the subject of such Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding shares, if any, of AMPS
subject to any Hold Order placed by such Existing Holder;
(2) the number of outstanding shares, if any, of AMPS
subject to any Bid placed by such Existing Holder and the rate per
annum specified in such Bid; and
(3) the number of outstanding shares, if any, of AMPS
subject to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate
per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more
than three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares
of AMPS held by an Existing Holder are not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent shall deem a Hold Order
(in the case of an Auction relating to a Dividend Period which is not a
Special Dividend Period) and a Sell Order (in the case of an Auction
relating to a Special Dividend Period) to have been submitted on behalf of
such Existing Holder covering the number of outstanding shares of AMPS held
by such Existing Holder and not subject to Orders submitted to the Auction
Agent.
(iv) If one or more Orders on behalf of an Existing Holder
covering in the aggregate more than the number of outstanding shares of AMPS
held by such Existing Holder are submitted to the Auction Agent, such Orders
shall be considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder
shall be considered valid up to and including the number of outstanding
shares of AMPS held by such Existing Holder; provided that if more than one
Hold Order is submitted on behalf of such Existing Holder and the number of
shares of AMPS subject to such Hold Orders exceeds the number of outstanding
shares of AMPS held by such Existing Holder, the number of shares of AMPS
subject to each of such Hold Orders shall be reduced pro rata so that such
Hold Orders, in the aggregate, cover exactly the number of outstanding shares
of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall
be considered valid, in the ascending order of their respective rates
per annum if more than one Bid is submitted on behalf of such Existing
Holder, up to and including the excess of the number of outstanding
shares of AMPS held by such Existing Holder over the number of shares of
AMPS subject to any Hold Order referred to in Paragraph 10(c)(iv)(A)
above (and if more than one Bid submitted on behalf of such Existing Holder
specifies the same rate per annum and together they cover more than the
remaining number of shares that can be the subject of valid Bids after
application of Paragraph 10(c)(iv)(A) above and of the foregoing portion of
this Paragraph 10(c)(iv)(B) to any Bid or Bids specifying a lower rate or
rates per annum, the number of shares subject to each of such Bids shall be
reduced pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of shares); and the number of shares, if any, subject to
Bids not valid under this Paragraph 10(c)(iv)(B) shall be treated as the
subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including
the excess of the number of outstanding shares of AMPS held by such
Existing Holder over the number of shares of AMPS subject
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to Hold Orders referred to in Paragraph 10(c)(iv)(A) and Bids referred
to in Paragraph 10(c)(iv)(B); provided that if more than one Sell Order
is submitted on behalf of any Existing Holder and the number of shares of
AMPS subject to such Sell Orders is greater than such excess, the number of
shares of AMPS subject to each of such Sell Orders shall be reduced pro rata
so that such Sell Orders, in the aggregate, cover exactly the number of
shares of AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum
and number of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
PARAGRAPH 10(D) DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE
AND APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date,
the Auction Agent shall assemble all Orders submitted or deemed submitted to
it by the Broker-Dealers (each such Order as submitted or deemed submitted by
a Broker-Dealer being hereinafter referred to individually as a "Submitted
Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may
be, or as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of AMPS
over the number of outstanding shares of AMPS that are the subject
of Submitted Hold Orders (such excess being hereinafter referred to as the
"Available AMPS");
(B) from the Submitted Orders whether the number of outstanding
shares of AMPS that are the subject of Submitted Bids by Potential Holders
specifying one or more rates per annum equal to or lower than the Maximum
Applicable Rate exceeds or is equal to the sum of:
(1) the number of outstanding shares of AMPS that are the
subject of Submitted Bids by Existing Holders specifying one or more
rates per annum higher than the Maximum Applicable Rate, and
(2) the number of outstanding shares of AMPS that are
subject to Submitted Sell Orders (if such excess or such equality
exists (other than because the number of outstanding shares of AMPS
in clauses (1) and (2) above are each zero because all of the outstanding
shares of AMPS are the subject of Submitted Hold Orders), such Submitted Bids
by Potential Holders hereinafter being referred to collectively as
"Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such Existing
Holders to continue to hold the shares of AMPS that are the subject of such
Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the shares of AMPS that
are the subject of such Submitted Bids, would result in the number of shares
subject to all Submitted Bids specifying the Winning Bid Rate or a lower rate
per annum being at least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to Paragraph 10(d)(i), the Auction Agent shall advise the Fund of
the Maximum Applicable Rate and, based on such determinations, the Applicable
Rate for the next succeeding Dividend Period
as follows:
85
<PAGE>
(A) if Sufficient Clearing Bids exist, that the Applicable Rate
for the next succeeding Dividend Period shall be equal to the Winning Bid
Rate;
(B) if Sufficient Clearing Bids do not exist (other than because
all of the outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend
Period shall be equal to the Maximum Applicable
Rate; or
(C) if all of the outstanding shares of AMPS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the Auction
automatically shall be the same length as the immediately preceding Dividend
Period and the Applicable Rate for the next succeeding Dividend Period shall
be equal to 59% of the Reference Rate (or 90% of such rate if the Fund has
provided notification to the Auction Agent prior to the Auction establishing
the Applicable Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on shares of AMPS) on the date of
the Auction.
PARAGRAPH 10(E) ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF SHARES.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and
the Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids
and Submitted Sell Orders shall be accepted or rejected in the following
order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be
accepted and the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is higher than the Winning Bid Rate
shall be accepted, thus requiring each such Existing Holder to sell the
outstanding shares of AMPS that are the subject of such Submitted Sell Order
or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holder specifying
any rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the outstanding
shares of AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders
specifying any rate per annum that is lower than the Winning Bid Rate
shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying
a rate per annum that is equal to the Winning Bid Rate shall
be rejected, thus entitling each such Existing Holder to continue to hold
the outstanding shares of AMPS that are the subject of such Submitted Bid,
unless the number of outstanding shares of AMPS subject to all such Submitted
Bids shall be greater than the number of outstanding shares of AMPS
("Remaining Shares") equal to the excess of the Available AMPS over the
number of outstanding shares of AMPS subject to Submitted Bids described in
Paragraph 10(e)(i)(B) and Paragraph 10(e)(i)(C), in which event the Submitted
Bids of each such Existing Holder shall be accepted, and each such
Existing Holder shall be required to sell outstanding shares of AMPS, but
only in an amount equal to the difference between (1) the number of
outstanding shares of AMPS then held by such Existing Holder subject to such
Submitted Bid and (2) the number of shares of AMPS obtained by multiplying
(x) the number of Remaining Shares by (y) a fraction the numerator of which
shall be the number of outstanding shares of AMPS held by such Existing
Holder subject to such Submitted Bid and the denominator of which shall be
the sum of the numbers of outstanding shares of AMPS subject to such
Submitted Bids made by all such Existing Holders that specified a rate per
annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders
specifying a rate per annum that is equal to the Winning Bid Rate shall
be accepted but only in an amount equal to the number of outstanding
shares of AMPS obtained by multiplying (x) the difference between the
Available AMPS and the number
86
<PAGE>
of outstanding shares of AMPS subject to Submitted Bids described in
Paragraph 10(e)(i)(B), Paragraph 10(e)(i)(C) and Paragraph 10(e)(i)(D)
by (y) a fraction the numerator of which shall be the number of
outstanding shares of AMPS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of outstanding
shares of AMPS subject to such Submitted Bids made by all such Potential
Holders that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the outstanding shares of AMPS are subject to Submitted Hold
Orders), subject to the provisions of Paragraph 10(e)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority
and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any
rate per annum that is equal to or lower than the Maximum Applicable
Rate shall be rejected, thus entitling such Existing Holder to continue
to hold the outstanding shares of AMPS that are the subject of such Submitted
Bid;
(B) the Submitted Bid of each Potential Holder specifying any
rate per annum that is equal to or lower than the Maximum Applicable
Rate shall be accepted, thus requiring such Potential Holder to purchase
the outstanding shares of AMPS that are the subject of such Submitted
Bid; and
(C) the Submitted Bids of each Existing Holder specifying any
rate per annum that is higher than the Maximum Applicable Rate shall be
accepted and the Submitted Sell Orders of each Existing Holder shall be
accepted, in both cases only in an amount equal to the difference between (1)
the number of outstanding shares of AMPS then held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and (2) the number of
shares of AMPS obtained by multiplying (x) the difference between the
Available AMPS and the aggregate number of outstanding shares of AMPS subject
to Submitted Bids described in Paragraph 10(e)(ii)(A) and Paragraph
10(e)(ii)(B) by (y) a fraction the numerator of which shall be the number of
outstanding shares of AMPS held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and the denominator of which shall be
the number of outstanding shares of AMPS subject to all such Submitted Bids
and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraph
10(e)(i) or Paragraph 10(e)(ii), any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of a share of AMPS on any Auction Date, the Auction
Agent shall, in such manner as in its sole discretion it shall determine,
round up or down the number of shares of AMPS to be purchased or sold by any
Existing Holder or Potential Holder on such Auction Date so that each
outstanding share of AMPS purchased or sold by each Existing Holder or
Potential Holder on such Auction Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph
10(e)(i), any Potential Holder would be entitled or required to purchase less
than a whole share of AMPS on any Auction Date, the Auction Agent, in such
manner as in its sole discretion it shall determine, shall allocate shares of
AMPS for purchase among Potential Holders so that only whole shares of AMPS
are purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not
purchasing any shares of AMPS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of the outstanding shares of AMPS to be purchased and the aggregate
number of outstanding shares of AMPS to be sold by such Potential Holders
and Existing Holders and, to the extent that such aggregate number of
outstanding shares to be purchased and such aggregate number of outstanding
shares to be sold differ, the Auction Agent shall determine to which other
Broker-Dealer or Broker-Dealers acting for one or more purchasers such
Broker-Dealer shall deliver, or from which other Broker-Dealer or
Broker-Dealers acting for one or more sellers such Broker-Dealer shall
receive, as the case may be, outstanding shares of AMPS.
87
<PAGE>
PARAGRAPH 10(F) MISCELLANEOUS.
The Fund may interpret the provisions of this Paragraph 10 to
resolve any inconsistency or ambiguity, remedy any formal defect or make any
other change or modification that does not substantially adversely affect the
rights of Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder
(A) may sell, transfer or otherwise dispose of shares of AMPS only pursuant
to a Bid or Sell Order in accordance with the procedures described in this
Paragraph 10 or to or through a Broker-Dealer, provided that in the case of
all transfers other than pursuant to Auctions such Beneficial Owner or
Existing Holder, its Broker-Dealer, if applicable, or its Agent Member
advises the Auction Agent of such transfer and (B) except as otherwise
required by law, shall have the ownership of the shares of AMPS held by it
maintained in book entry form by the Securities Depository in the account of
its Agent Member, which in turn will maintain records of such Beneficial
Owner's beneficial ownership. Neither the Fund nor any Affiliate (other than
Merrill Lynch, Pierce, Fenner & Smith Incorporated) shall submit an Order in
any Auction. Any Beneficial Owner that is an Affiliate (other than Merrill
Lynch, Pierce, Fenner & Smith Incorporated) shall not sell, transfer or
otherwise dispose of shares of AMPS to any Person other than the Fund. All of
the outstanding shares of AMPS shall be represented by one or more
certificates registered in the name of the nominee of the Securities
Depository unless otherwise required by law or unless there is no Securities
Depository. If there is no Securities Depository, at the Fund's option and
upon its receipt of such documents as it deems appropriate, any shares of
AMPS may be registered in the Stock Register in the name of the Beneficial
Owner thereof and such Beneficial Owner thereupon will be entitled to receive
certificates therefor and required to deliver certificates thereof or upon
transfer or exchange thereof.
88
<PAGE>
<TABLE>
<CAPTION>
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. MERRILL LYNCH MUNICIPAL
This Prospectus does not constitute an offering STRATEGY FUND,INC.
of any securities other than the registered
securities to which it relates or an offer to Auction Market Preferred Stock
any person in any State or jurisdiction of the
United States or any country where such offer
would be unlawful. ("AMPS"(Registered Trademark))
______________
TABLE OF CONTENTS __ Shares, Series A
Page
<S> <C>
Prospectus Summary . . . . . . . . . . . . 3
The Fund . . . . . . . . . . . . . . . . . 17 PROSPECTUS
Use of Proceeds . . . . . . . . . . . . . . 17
Capitalization . . . . . . . . . . . . . . 17
Portfolio Composition . . . . . . . . . . . 18
Investment Objective and
Policies . . . . . . . . . . . . . . . . 18
Description of AMPS . . . . . . . . . . . . 37
Investment Restrictions . . . . . . . . . . 58
Directors and Officers . . . . . . . . . . 60 Merrill Lynch & Co.
Investment Advisory and
Administrative Arrangements . . . . . . . 61
Portfolio Transactions . . . . . . . . . . 63
Taxes . . . . . . . . . . . . . . . . . . . 64
Net Asset Value . . . . . . . . . . . . . . 69
Description of Capital Stock . . . . . . . 69
Custodian . . . . . . . . . . . . . . . . . 71 January __, 1996
Plan of Distribution . . . . . . . . . . . 71
Transfer Agent, Dividend (Registered Trademark)Registered trademark of
Disbursing Agent and Registrar . . . . . . 72 Merrill Lynch & Co., Inc.
Legal Opinions . . . . . . . . . . . . . . 72
Experts . . . . . . . . . . . . . . . . . . 72
Independent Auditors' Report . . . . . . . 74
Statement of Assets,
Liabilities and Capital . . . . . . . . . 75
Schedule of Investments . . . . . . . . . . 77
Glossary . . . . . . . . . . . . . . . . . 78
Appendix A - Ratings of Municipal Bonds
and Commercial Paper . . . . . . . . . . . .
Appendix B - Settlement Procedures . . . . . .
Appendix C - Auction Procedures . . . . . . . .
</TABLE>
89
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of October 5, 1995
Schedule of Investments as of November __, 1995 (unaudited)
Statement of Assets, Liabilities and Capital as of November __, 1995
(unaudited)
(2) Exhibits:
(a) (1) -- Articles of Incorporation of the Registrant.(a)
(2) -- Articles of Amendment to the Articles of Incorporation
of the Registrant (name change).(a)
(3) -- Form of Articles Supplementary Creating the AMPS.
(b) -- By-Laws of the Registrant.(a)
(c) -- Not applicable.
(d) (1) -- Portions of the Articles of Incorporation, By-Laws and
the Articles Supplementary of the Registrant defining
the rights of holders of shares of the Registrant.(b)
(2) -- Form of specimen certificate for the Series A AMPS
of the Registrant.(c)
(e) -- Not applicable.
(f) -- Not applicable.
(g)(1) -- Form of Investment Advisory Agreement between the
Registrant and the Investment Adviser.(a)
(2) -- Form of Administration Agreement between the Registrant
and the Administrator.(a)
(h) -- Form of Distribution Agreement between the Registrant
and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
(i) -- Not applicable.
(j) -- Custodian Contract between the Registrant and The Bank
of New York.(a)
(k)(1) -- Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the
Registrant and Merrill Lynch Financial Data
Services, Inc.(a)
(2) -- Form of Auction Agent Agreement between the Registrant
and IBJ Schroder Bank & Trust Company.
(3) -- Form of Broker-Dealer Agreement.
(4) -- Form of Letter of Representations.
(5) - Form of License Agreement relating to the use of the
"Merrill Lynch" name.(a)
(l) -- Opinion and Consent of Brown & Wood, counsel to the
Registrant.(c)
(m) -- Not applicable.
(n) -- Consent of Deloitte & Touche LLP, independent auditors
for the Registrant.(c)
(o) -- Not applicable.
(p) -- Certificate of Fund Asset Management, L.P.(a)
(q) -- Not applicable.
(r) -- Financial Data Schedule.(c)
(a) Incorporated by reference to the Registrant's registration statement on
Form N-2, File No. 33-54655 (the "Common Stock Registration Statement").
1
<PAGE>
(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, previously
filed as Exhibit (a) to the Common Stock 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,
previously filed as Exhibit (b) to the Common Stock Registration Statement.
Reference is also made to the Form of Articles Supplementary filed hereto as
Exhibit (a)(3).
(c) To be filed by amendment.
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:
Registration fees $ *
Printing (other than stock certificates) *
Fees and expenses of qualifications under state
securities laws (including fees of
counsel). *
Legal fees and expenses *
Accounting fees and expenses *
Rating Agency fees *
Miscellaneous *
-------
Total $ *
* 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.
<TABLE>
<CAPTION> Number of
Record Holders
Title of Class at November 1, 1995
<S> <C>
Common Stock, $.10 par value . . . . . . . . . . . . . . . . . . . . . . 1
Preferred Stock, $.10 par value . . . . . . . . . . . . . . . . . . . . . 0
</TABLE>
________________
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
2
<PAGE>
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a) to the Common Stock Registration Statement, Article VI of the
Registrant's By-Laws, filed as Exhibit (b) to the Common Stock Registration
Statement, and the Investment Advisory Agreement, filed as Exhibit (g)(1) to
the Common Stock Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be provided to directors,
officers and controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant 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 Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
Reference is made to Section 9 of the Distribution Agreement, a form of
which is filed as Exhibit (h) 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 open-end investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill
Lynch 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., and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end investment
companies: Apex Municipal Fund, Inc. Corporate High Yield Fund, Inc.
Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc. Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, 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 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 open-end
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement,
Inc., Merrill
3
<PAGE>
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 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 Series Trust, Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch Utility Income Fund, Inc. and Merrill Lynch Variable Series Funds,
Inc.; and for the following closed-end investment companies: Convertible
Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, 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 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
Merrill Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deerlake 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 or her or its 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.
Giordano, Harvey, Hewitt and Monagle are directors or officers of one or more
of such companies.
Officers and Partners of the Investment Adviser are set forth below as
follows:
<TABLE>
<CAPTION> Other Substantial
Position(s) with the Business, Profession,
Name Investment Adviser 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 MLFDS
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 and
General Counsel and Secretary of MLAM; Senior Vice President,
Secretary General Counsel and Director of Princeton
Services; Director of MLFD
Ronald M. Kloss . . . . . . . Senior Vice President Senior Vice President and Controller of MLAM;
and Controller Senior Vice President and Controller of
Princeton Services
Stephen M.M. Miller . . . . . Senior Vice President Executive Vice President of Princeton
Administrators L.P.; Senior Vice President of
Princeton Services
Joseph T. Monagle . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Richard L. Reller . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Gerald M. Richard . . . . . . Senior Vice President andSenior Vice President and Treasurer of MLAM;
Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
5
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), the Investment Adviser (800 Scudders
Mill Road, Plainsboro, New Jersey 08536), and the Registrant's
custodian and transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
Registrant undertakes:
(1) To file during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the 1933 Act;
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in
the information set forth in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
1933 Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
6
<PAGE>
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 14th day of November, 1995.
MERRILL LYNCH MUNICIPAL STRATEGY FUND,
INC.
(Registrant)
By: /s/ Terry K. Glenn
---------------------------
(Terry K. Glenn, Executive Vice
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
<S> <C> <C>
/s/ Arthur Zeikel
President and Director November 14, 1995
(Arthur Zeikel)
(Principal Executive Officer
/s/ Gerald M. Richard
Treasurer (Principal Financial November 14, 1995
(Gerald M. Richard)
and Accounting Officer)
/s/ Ronald W. Forbes
Director November 14, 1995
(Ronald W. Forbes)
/s/ Cynthia A. Montgomery
Director November 14, 1995
(Cynthia A. Montgomery)
/s/ Charles C. Reilly
Director November 14, 1995
(Charles C. Reilly)
/s/ Kevin A. Ryan
Director November 14, 1995
(Kevin A. Ryan)
/s/ Richard R. West
Director November 14, 1995
(Richard R. West)
</TABLE>
7
<PAGE>
EXHIBIT INDEX
EXHIBITS DESCRIPTION PAGE
- - ------ ---------
---
(a)(2) --Form of Articles Supplementary creating the AMPS
(h) --Form of Distribution Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner &
Smith Incorporated
(k)(2) --Form of Auction Agent Agreement between the Registrant and IBJ
Schroder Bank & Trust Company
(k)(3) --Form of Broker-Dealer Agreement
(k)(4) --Form of Letter of Representations
8
<PAGE>
Draft
11/14/95
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
Articles Supplementary creating five series of
Auction Market Preferred Stock (registered trademark)
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC., a Maryland corporation
having its principal Maryland office in the City of Baltimore (the
"Corporation"), certifies to the State Department of Assessments and Taxation
of Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors
of the Corporation by article fifth of its Charter, the Board of Directors
has reclassified 40,000 authorized and unissued shares of common stock of the
Corporation as preferred stock of the Corporation and has authorized the
issuance of five series of preferred stock, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) thereon, to be
designated respectively: Auction Market Preferred Stock, Series A; Auction
Market Preferred Stock, Series B; Auction Market Preferred Stock, Series C;
Auction Market Preferred Stock, Series D; and Auction Market Preferred Stock,
Series E.
SECOND: The preferences, voting powers, restrictions, limitations as
to dividends, qualifications, and terms and conditions
- - ------------------
(registered trademark) Registered trademark of Merrill Lynch & Co., Inc.
1
<PAGE>
of redemption, of the shares of each such series of preferred stock are as
follows:
DESIGNATION
SERIES A: A series of 8,000 shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon,
is hereby designated "Auction Market Preferred Stock, Series A." Each share
of Auction Market Preferred Stock, Series A (sometimes referred to herein as
"Series A AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have
an Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of
the Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series A shall constitute
a separate series of preferred stock of the Corporation, and each share of
Auction Market Preferred Stock, Series A shall be identical.
SERIES B: A series of 8,000 shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon,
is hereby designated "Auction
2
<PAGE>
Market Preferred Stock, Series B." Each share of Auction Market Preferred
Stock, Series B (sometimes referred to herein as "Series B AMPS") shall be
issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an Initial
Dividend Rate and an Initial Dividend Payment Date as shall be determined in
advance of the issuance thereof by the Board of Directors of the Corporation
or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Articles Supplementary.
The Auction Market Preferred Stock, Series B shall constitute a separate
series of preferred stock of the Corporation, and each share of Auction
Market Preferred Stock, Series B shall be identical.
SERIES C: A series of 8,000 shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon
is hereby designated "Auction Market Preferred Stock, Series C." Each share
of Auction Market Preferred Stock, Series C (sometimes referred to herein as
"Series C AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have
an Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of
the Corporation or pursuant to their delegated authority; and have such other
3
<PAGE>
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series C shall constitute
a separate series of preferred stock of the Corporation, and each share of
Auction Market Preferred Stock, Series C shall be identical.
SERIES D: A series of 8,000 shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon
is hereby designated "Auction Market Preferred Stock, Series D." Each share
of Auction Market Preferred Stock, Series D (sometimes referred to herein as
"Series D AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have
an Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of
the Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series D shall constitute
a separate series of preferred stock of the Corporation, and each share of
Auction Market Preferred Stock, Series D shall be identical.
SERIES E: A series of 8,000 shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share
4
<PAGE>
plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon is hereby designated "Auction Market Preferred
Stock, Series E." Each share of Auction Market Preferred Stock, Series E
(sometimes referred to herein as "Series E AMPS") shall be issued on a date
to be determined by the Board of Directors of the Corporation or pursuant to
their delegated authority; have an Initial Dividend Rate and an Initial
Dividend Payment Date as shall be determined in advance of the issuance
thereof by the Board of Directors of the Corporation or pursuant to their
delegated authority; and have such other preferences, voting powers,
limitations as to dividends, qualifications and terms and conditions of
redemption as are set forth in these Articles Supplementary. The Auction
Market Preferred Stock, Series E shall constitute a separate series of
preferred stock of the Corporation, and each share of Auction Market
Preferred Stock, Series E shall be identical.
1. Definitions. (a) Unless the context or use indicates another or
-----------
different meaning or intent, in these Articles Supplementary the following
terms have the following meanings, whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date of
determination, means (i) the Interest Equivalent of the rate on
commercial paper placed on behalf of issuers whose corporate bonds are rated
"AA" by S&P or "Aa" by Moody's or the equivalent of such rating by another
nationally recognized rating agency, as such rate is made available on a
discount basis or otherwise by
5
<PAGE>
the Federal Reserve Bank of New York for the Business Day immediately
preceding such date, or (ii) in the event that the Federal Reserve Bank of
New York does not make available such a rate, then the arithmetic average of
the Interest Equivalent of the rate on commercial paper placed on behalf of
such issuers, as quoted on a discount basis or otherwise by Merrill Lynch,
Pierce, Fenner & Smith Incorporated or its successors that are Commercial
Paper Dealers, to the Auction Agent for the close of business on the Business
Day immediately preceding such date. If one of the Commercial Paper Dealers
does not quote a rate required to determine the "AA" Composite Commercial
Paper Rate, the "AA" Composite Commercial Paper Rate will be determined on
the basis of the quotation or quotations furnished by any Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by
the Corporation to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period Days shall be (i)
7 or more but fewer than 49 days, such rate shall be the Interest Equivalent
of the 30-day rate on such commercial paper; (ii) 49 or more but fewer than
70 days, such rate shall be the Interest Equivalent of the 60-day rate on
such commercial paper; (iii) 70 or more days but fewer than 85 days, such
rate shall be the arithmetic average of the Interest Equivalent on the 60-day
and 90-day rates on such commercial paper; (iv) 85 or more days but fewer
than 99 days, such rate shall be the Interest Equivalent of the 90-day rate
on such commercial paper; (v) 99 or more days but fewer than 120
6
<PAGE>
days, such rate shall be the arithmetic average of the Interest Equivalent
of the 90-day and 120-day rates on such commercial paper; (vi) 120 or more
days but fewer than 141 days, such rate shall be the Interest Equivalent of
the 120-day rate on such commercial paper; (vii) 141 or more days but fewer
than 162 days, such rate shall be the arithmetic average of the Interest
Equivalent of the 120-day and 180-day rates on such commercial paper; and
(viii) 162 or more days but fewer than 183 days, such rate shall be the
Interest Equivalent of the 180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c)
of these Articles Supplementary.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of
these Articles Supplementary.
"Adviser" means the Corporation's investment adviser which initially
shall be Fund Asset Management, L.P.
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner
& Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Corporation.
"Agent Member" means a member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of AMPS or a Potential
Beneficial Owner.
"AMPS" means, as the case may be, the Auction Market Preferred Stock,
Series A; Auction Market Preferred Stock, Series B; Auction Market Preferred
Stock, Series C; Auction Market
7
<PAGE>
Preferred Stock, Series D; or Auction Market Preferred Stock, Series E.
"AMPS Basic Maintenance Amount," as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS of each series and Other AMPS Outstanding on such Valuation Date
multiplied by the sum of (a) $25,000 and (b) any applicable redemption
premium attributable to the designation of a Premium Call Period; (B) the
aggregate amount of cash dividends (whether or not earned or declared) that
will have accumulated for each share of AMPS and Other AMPS Outstanding, in
each case, to (but not including) the end of the current Dividend Period for
each series of AMPS that follows such Valuation Date in the event the then
current Dividend Period will end within 49 calendar days of such Valuation
Date or through the 49th day after such Valuation Date in the event the then
current Dividend Period will not end within 49 calendar days of such
Valuation Date; (C) in the event the then current Dividend Period will end
within 49 calendar days of such Valuation Date, the aggregate amount of cash
dividends that would accumulate at the Maximum Applicable Rate applicable to
a Dividend Period of 28 or fewer days on any shares of AMPS and Other AMPS
Outstanding from the end of such Dividend Period through the 49th day after
such Valuation Date, multiplied by the larger of the Moody's Volatility
Factor and the S&P Volatility Factor, determined from time to time by Moody's
and S&P, respectively (except that if such Valuation Date occurs during a
Non-Payment Period, the cash
8
<PAGE>
dividend for purposes of calculation would accumulate at the then current
Non-Payment Period Rate); (D) the amount of anticipated expenses of the
Corporation for the 90 days subsequent to such Valuation Date; (E) the amount
of the Corporation's Maximum Potential Additional Dividend Liability as of
such Valuation Date; and (F) any current liabilities as of such Valuation
Date to the extent not reflected in any of (i)(A) through (i)(E) (including,
without limitation, and immediately upon determination, any amounts due and
payable by the Corporation pursuant to repurchase agreements and any payables
for Municipal Bonds purchased as of such Valuation Date) less (ii) either (A)
the Discounted Value of any of the Corporation's assets, or (B) the face
value of any of the Corporation's assets if such assets mature prior to or
on the date of redemption of AMPS or payment of a liability and are either
securities issued or guaranteed by the United States Government or Deposit
Securities, in both cases irrevocably deposited by the Corporation for the
payment of the amount needed to redeem shares of AMPS subject to redemption
or any of (i)(B) through (i)(F).
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance Amount (as required by
paragraph 7(a) of these Articles Supplementary) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any
9
<PAGE>
Vice President of the Corporation which sets forth, as of the related
Valuation Date, the assets of the Corporation, the Market Value and the
Discounted Value thereof (seriatim and in aggregate), and the AMPS Basic
Maintenance Amount.
"Anticipation Notes" shall mean the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph
10(a)(vii) of these Articles Supplementary.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend
Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Directors of the Corporation or a
duly authorized committee thereof enters into an agreement with the
Corporation to follow the Auction Procedures for the purpose of determining
the Applicable Rate and to act as transfer agent, registrar, dividend
disbursing agent and redemption agent for the AMPS and Other AMPS.
10
<PAGE>
"Auction Procedures" means the procedures for conducting Auctions set
forth in paragraph 10 of these Articles Supplementary.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or, if applicable, the Auction Agent) as
a holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 10 of these
Articles Supplementary, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of these Articles Supplementary.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which
banks in The City of New York are authorized or obligated by law to close.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including these Articles Supplementary), of the Corporation on
file in the State Department of Assessments and Taxation of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
11
<PAGE>
"Commercial Paper Dealers" means Merrill Lynch, Pierce,
Fenner & Smith Incorporated and such other commercial paper dealer or dealers
as the Corporation may from time to time appoint, or, in lieu of any thereof,
their respective affiliates or successors.
"Common Stock" means the common stock, par value $.10 per share, of the
Corporation.
"Corporation" means Merrill Lynch Municipal Strategy Fund, Inc., a
Maryland corporation.
"Date of Original Issue" means, with respect to any share of AMPS or
Other AMPS, the date on which the Corporation originally issues such share.
"Deposit Securities" means cash and Municipal Bonds rated at least Aaa,
P-1, VMIG-1 or MIG-1 by Moody's or AAA, A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par
and the quotient of the Market Value thereof divided by the applicable
Moody's Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set forth
in paragraph 2(b)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day
Dividend Period, any 28-Day Dividend Period and any Special Dividend Period.
12
<PAGE>
"Existing Holder" means a Broker-Dealer or any such other Person as may
be permitted by the Corporation that is listed as the holder of record of
shares of AMPS in the Stock Books.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of
these Articles Supplementary.
"Holder" means a Person identified as a holder of record of shares of
AMPS in the Stock Register.
"Independent Accountant" means a nationally recognized accountant, or
firm of accountants, that is, with respect to the Corporation, an independent
public accountant or firm of independent public accountants under the
Securities Act of 1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date
as determined by the Board of Directors of the Corporation with respect to
each series of AMPS or other AMPS, as the case may be.
"Initial Dividend Period," with respect to each series of AMPS, has the
meaning set forth in paragraph 2(c)(i) of these Articles Supplementary and,
with respect to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to each series of AMPS, means the
rate per annum applicable to the Initial Dividend Period for such series of
AMPS and, with respect to Other AMPS, has the equivalent meaning.
13
<PAGE>
"Initial Margin" means the amount of cash or securities deposited with
a broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
"Long Term Dividend Period" means a Special Dividend Period consisting
of a specified period of one whole year or more but not greater than five
years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption and excluding Additional
Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Corporation shall be the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value
portfolio securities at the quoted bid prices or the mean between the quoted
bid and asked price or the yield equivalent when quotations are not readily
available. Securities for which quotations are not readily available shall
be valued at fair value as determined by the Pricing Service using methods
which include consideration of:
14
<PAGE>
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and
general market conditions. The Pricing Service may employ electronic data
processing techniques and/or a matrix system to determine valuations. In the
event the Pricing Service is unable to value a security, the security shall
be valued at the lower of two dealer bids obtained by the Corporation from
dealers who are members of the National Association of Securities Dealers,
Inc. and who make a market in the security, at least one of which shall be
in writing. Futures contracts and options are valued at closing prices for
such instruments established by the exchange or board of trade 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.
"Maximum Applicable Rate," with respect to AMPS, has the meaning set
forth in paragraph 10(a)(vii) of these Articles Supplementary and, with
respect to Other AMPS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due
if the Corporation were to make Retroactive Taxable Allocations, with respect
to any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by
the Corporation, as of the end of the calendar month
15
<PAGE>
immediately preceding such Valuation Date and assuming such Additional
Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any Municipal Bond which constitutes a Moody's Eligible
Asset, the percentage determined by reference to (a) the rating by Moody's
or S&P on such Bond and (b) the Moody's Exposure Period, in accordance with
the table set forth below:
Rating Category
--------------------------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VM1G-1*** SP
----------------------- ---- --- ---- ---- ------- ---------
1+***
7 weeks or less............ 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks... 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks... 158 169 179 209 242 138 150
- - ---------------
* Moody's rating.
** Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
*** Municipal Bonds rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's,
rated SP-1+ or A-1+ by S&P which do not mature or have a demand feature at
par exercisable within the Moody's Exposure Period and which do not have a
long-term rating. For the purposes of the definition of Moody's Eligible
Assets, these securities will have an assumed rating of "A" by Moody's.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term Municipal Bonds so long as such Municipal Bonds are
rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand
feature at par exercisable within the Moody's Exposure Period, and the
Moody's Discount Factor for such Bonds will be 125% if such Bonds are not
rated by Moody's but are rated A-1+ or SP-1+ or AA by S&P and mature or have
a demand feature at par exercisable within the Moody's Exposure Period, and
(ii) no Moody's Discount Factor will be
16
<PAGE>
applied to cash or to Receivables for Municipal Bonds Sold. "Receivables for
Municipal Bonds Sold," for purposes of calculating Moody's Eligible Assets
as of any Valuation Date, means no more than the aggregate of the following:
(i) the book value of receivables for Municipal Bonds sold as of or prior to
such Valuation Date if such receivables are due within five Business Days of
such Valuation Date, and if the trades which generated such receivables are
(x) settled through clearing house firms with respect to which the
Corporation has received prior written authorization from Moody's or (y) with
counterparties having a Moody's long-term debt rating of at least Baa3; and
(ii) the Moody's Discounted Value of Municipal Bonds sold as of or prior to
such Valuation Date which generated receivables, if such receivables are due
within five Business Days of such Valuation Date but do not comply with
either of conditions (x) or (y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for Municipal Bonds
Sold or a Municipal Bond that (i) pays interest in cash, (ii) is publicly
rated Baa or higher by Moody's or, if not rated by Moody's but rated by S&P,
is rated at least BBB- by S&P (provided that, for purposes of determining the
Moody's Discount Factor applicable to any such S&P-rated Municipal Bond, such
Municipal Bond (excluding any short-term Municipal Bond) will be deemed to
have a Moody's rating which is one full rating category lower than its S&P
rating), (iii) does not have its Moody's rating suspended by Moody's; and
(iv) is part of an issue
17
<PAGE>
of Municipal Bonds of at least $10,000,000. In addition, Municipal Bonds in
the Corporation's portfolio must be within the following diversification
requirements in order to be included within Moody's Eligible Assets:
Maximum State
Minimum Maximum or Territory
Issue Size Underlying Concentration
Rating ($ Millions) Obligor (%)(1) (%)(1)(3)
- - ------ ------------ -------------- -------------
Aaa 10 100 100
Aa 10 20 60
A 10 10 40
Baa 10 6 20
Other(2) 10 4 12
- - -----------------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) are each limited to 10% of Moody's Eligible Assets. For
diversification purposes, Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above,
any Municipal Bond backed by the guaranty, letter of credit or insurance
issued by a third party will be deemed to be issued by such third party if
the issuance of such third party credit is the sole determinant of the rating
on such Bond.
When the Corporation sells a Municipal Bond and agrees to repurchase it
at a future date, the Discounted Value of such Bond will constitute a Moody's
Eligible Asset and the amount the Corporation is required to pay upon
repurchase of such Bond will count as a liability for purposes of calculating
the AMPS Basic Maintenance Amount. When the Corporation purchases a
Municipal Bond and agrees to sell it at a future date to another party, cash
receivable by the Corporation thereby will constitute a
18
<PAGE>
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such Bond will constitute a Moody's
Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Corporation for the payment
of dividends or redemption.
"Moody's Exposure Period" means a period that is the same length or
longer than the number of days used in calculating the cash dividend
component of the AMPS Basic Maintenance Amount and shall initially be the
period commencing on and including a given Valuation Date and ending 48 days
thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph
8(b) of these Articles Supplementary.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted
but not yet implemented, the Moody's Volatility Factor shall be as follows:
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<PAGE>
% Change in
Marginal Tax Moody's Volatility
Rate Factor
------------ ------------------
5% 292%
>5% but 10% 313%
>10% but 15% 338%
>15% but 20% 364%
>20% but 25% 396%
>25% but 30% 432%
>30% but 35% 472%
>35% but 40% 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the
Corporation in writing is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the
Corporation's Registration Statement on Form N-2 (File Nos. 33-_____ and 811-
07203) on file with the Securities and Exchange Commission, as such
Registration Statement may be amended from time to time, as well as short-
term municipal obligations.
"Municipal Index" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in
section 18(h) of the 1940 Act, of at least 200% with respect to all
outstanding senior securities of the Corporation which are stock, including
all outstanding shares of AMPS and Other AMPS (or such other asset coverage
as may in the future be specified in or under the 1940 Act as the minimum
asset coverage
20
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for senior securities which are stock of a closed-end investment company as
a condition of paying dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of
these Articles Supplementary) as of the last Business Day of each month,
means the last Business Day of the following month.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Non-Payment Period" means, with respect to each series of AMPS, any
period commencing on and including the day on which the Corporation shall
fail to (i) declare, prior to the close of business on the second Business
Day preceding any Dividend Payment Date, for payment on or (to the extent
permitted by paragraph 2(c)(i) of these Articles Supplementary) within three
Business Days after such Dividend Payment Date to the Holders as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date, the full amount of any dividend on shares of AMPS payable on such
Dividend Payment Date or (ii) deposit, irrevocably in trust, in same-day
funds, with the Auction Agent by 12:00 noon, New York City time, (A) on such
Dividend Payment Date the full amount of any cash dividend on such shares
payable (if declared) on such Dividend Payment Date or (B) on any redemption
date for any shares of AMPS called for redemption, the Mandatory Redemption
Price per share of such AMPS or, in the case of an optional redemption, the
Optional
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<PAGE>
Redemption Price per share, and ending on and including the Business Day on
which, by 12:00 noon, New York City time, all unpaid cash dividends and
unpaid redemption prices shall have been so deposited or shall have otherwise
been made available to Holders in same-day funds; provided that, a
Non-Payment Period shall not end unless the Corporation shall have given at
least five days' but no more than 30 days' written notice of such deposit or
availability to the Auction Agent, all Existing Holders (at their addresses
appearing in the Stock Books) and the Securities Depository. Notwithstanding
the foregoing, the failure by the Corporation to deposit funds as provided
for by clauses (ii)(A) or (ii)(B) above within three Business Days after any
Dividend Payment Date or redemption date, as the case may be, in each case
to the extent contemplated by paragraph 2(c)(i) of these Articles
Supplementary, shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Corporation has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS), provided that the Board of Directors of the Corporation
shall have the authority to adjust, modify, alter or change from time to time
the initial Non-Payment Period Rate if the Board of Directors of the
Corporation determines and Moody's and S&P (and
22
<PAGE>
any Substitute Rating Agency in lieu of Moody's or S&P in the event either
of such parties shall not rate the AMPS) advise the Corporation in writing
that such adjustment, modification, alteration or change will not adversely
affect their then current ratings on the AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of these Articles Supplementary.
"Notice of Redemption" means any notice with respect to the redemption
of shares of AMPS pursuant to paragraph 4 of these Articles Supplementary.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii)
of these Articles Supplementary.
"Notice of Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Optional Redemption Price" means $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends plus any
applicable redemption premium attributable to the designation of a Premium
Call Period.
"Other AMPS" means the auction rate preferred stock of the Corporation,
other than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, shares of
AMPS theretofore issued by the Corporation except, without duplication, (A)
any shares of AMPS theretofore cancelled or delivered to the Auction Agent
for cancellation, or redeemed by the Corporation, or as to which a Notice of
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<PAGE>
Redemption shall have been given and moneys shall have been deposited in
trust by the Corporation pursuant to paragraph 4(c) and (B) any shares of
AMPS as to which the Corporation or any Affiliate thereof shall be an
Existing Holder, provided that shares of AMPS held by an Affiliate shall be
deemed outstanding for purposes of calculating the AMPS Basic Maintenance
Amount and (ii) with respect to shares of other Preferred Stock, has the
equivalent meaning.
"Parity Stock" means the AMPS and each other outstanding series of
Preferred Stock the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
proportion to the full respective preferential amounts to which they are
entitled, without preference or priority one over the other.
"Person" means and includes an individual, a partnership, a corporation,
a trust, an unincorporated association, a joint venture or other entity or
a government or any agency or political subdivision thereof.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that
wishes to purchase such shares, or that is a Beneficial Owner that wishes to
purchase additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other Person as
may be permitted by the Corporation, including any
24
<PAGE>
Existing Holder, who may be interested in acquiring shares of AMPS (or, in
the case of an Existing Holder, additional shares of AMPS).
"Preferred Stock" means the preferred stock, par value $.10 per share,
of the Corporation, and includes AMPS and Other AMPS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Pricing Service" means J.J. Kenny or any pricing service designated by
the Board of Directors of the Corporation provided the Corporation obtains
written assurance from S&P and Moody's that such designation will not impair
the rating then assigned by S&P and Moody's to the AMPS.
"Quarterly Valuation Date" means the twenty-fifth day of the last month
of each fiscal quarter of the Corporation (or, if such day is not a Business
Day, the next succeeding Business Day) in each fiscal year of the
Corporation, commencing _______ 25, 1996.
"Receivables for Municipal Bonds Sold" for Moody's has the meaning set
forth under the definition of Moody's Discount Factor, and for S&P has the
meaning set forth under the definition of S&P Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable
"AA" Composite Commercial Paper Rate and the Taxable Equivalent of the Short-
Term Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period
having more than 28 but fewer than 183 days, the applicable "AA" Composite
25
<PAGE>
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Response" has the meaning set forth in paragraph 2(c)(iii) of these
Articles Supplementary.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.
"Right," with respect to each series of AMPS, has the meaning set forth
in paragraph 2(e) of these Articles Supplementary and, with respect to Other
AMPS, has the equivalent meaning.
"S&P" means Standard & Poor's Ratings Group or its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a) the rating by S&P or Moody's on
such Bond and (b) the S&P Exposure Period, in accordance with the tables set
forth below:
26
<PAGE>
Rating Category
---------------
S&P Exposure Period AAA* AA* A* BBB*
- - ------------------- -------------------
40 Business Days 190% 195% 210% 250%
22 Business Days 170 175 190 230
10 Business Days 155 160 175 215
7 Business Days 150 155 170 210
3 Business Days 130 135 150 190
- - -------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Bonds will be 115%, so long as such Municipal Bonds are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
in 30 days or less, or 125% if such Municipal Bonds are not rated by S&P but
are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, such short-term
Municipal Bonds rated by Moody's but not rated by S&P having a demand feature
exercisable in 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution
having a short-term rating of at least A-1+ from S&P; and further provided
that such short-term Municipal Bonds rated by Moody's but not rated by S&P
may comprise no more than 50% of short-term Municipal Bonds that qualify as
S&P Eligible Assets and (ii) no S&P Discount Factor will be applied to cash
or to Receivables for Municipal Bonds Sold. "Receivables for Municipal Bonds
Sold," for purposes of calculating S&P's Eligible Assets as of any Valuation
Date, means the book value of receivables for Municipal Bonds sold as of or
prior to such Valuation Date if such receivables are due within five Business
27
<PAGE>
Days of such Valuation Date. For purposes of the foregoing, Anticipation
Notes rated SP-1+ or, if not rated by S&P, rated VMIG-1 by Moody's, which do
not mature or have a demand feature exercisable in 30 days and which do not
have a long-term rating, shall be considered to be short-term Municipal
Bonds.
"S&P Eligible Asset" means cash, Receivables for Municipal Bonds Sold
or a Municipal Bond that (i) is issued by any of the 50 states, the
territories and their subdivisions, counties, cities, towns, villages, and
school districts, agencies, such as authorities and special districts created
by the states, and certain federally sponsored agencies such as local housing
authorities (payments made on these bonds are exempt from regular federal
income taxes and are generally exempt from state and local taxes in the state
of issuance), (ii) is interest bearing and pays interest at least semi-
annually; (iii) is payable with respect to principal and interest in United
States Dollars; (iv) is publicly rated BBB or higher by S&P or, except in the
case of Anticipation Notes that are grant anticipation notes or bond
anticipation notes which must be rated by S&P to be included in S&P Eligible
Assets, if not rated by S&P but rated by Moody's, is rated at least A by
Moody's (provided that such Moody's-rated Municipal Bonds will be included
in S&P Eligible Assets only to the extent the Market Value of such Municipal
Bonds does not exceed 50% of the aggregate Market Value of the S&P Eligible
Assets; and further provided that, for purposes of determining the S&P
Discount Factor applicable to any such Moody's-rated
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<PAGE>
Municipal Bond, such Municipal Bond will be deemed to have an S&P rating
which is one full rating category lower than its Moody's rating); (v) is not
subject to a covered call or covered put option written by the Corporation;
(vi) is not part of a private placement of Municipal Bonds; and (vii) is part
of an issue of Municipal Bonds with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million (but
in no event below $10 million), is issued by an issuer with a total of at
least $50 million of securities outstanding. Notwithstanding the foregoing:
(1) Municipal Bonds of any one issuer or guarantor (excluding bond
insurers) will be considered S&P Eligible Assets only to the extent the
Market Value of such Municipal Bonds does not exceed 10% of the aggregate
Market Value of the S&P Eligible Assets, provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the Market Value of such
Municipal Bonds exceeds 5% of the aggregate Market Value of the S&P Eligible
Assets;
(2) Municipal Bonds guaranteed or insured by any one bond insurer
will be considered S&P Eligible Assets only to the extent the Market Value
of such Municipal Bonds does not exceed 25% of the aggregate Market Value of
the S&P Eligible Assets; and
(3) Municipal Bonds issued by issuers in any one state or
territory will be considered S&P Eligible Assets only to the extent the
Market Value of such Municipal Bonds does not
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<PAGE>
exceed 20% of the aggregate Market Value of S&P Eligible Assets.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance
Cure Date, that the Corporation has under these Articles Supplementary to
cure any failure to maintain, as of such Valuation Date, the Discounted Value
for its portfolio at least equal to the AMPS Basic Maintenance Amount (as
described in paragraph 7(a) of these Articles Supplementary).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a)
of these Articles Supplementary.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Corporation in writing is applicable.
"Securities Depository" means The Depository Trust Company or any
successor company or other entities elected by the Corporation as securities
depository for the shares of AMPS that agrees to follow the procedures
required to be followed by such securities depository in connection with the
shares of AMPS.
"Service" means the United States Internal Revenue Service.
"7-Day Dividend Period" means, with respect to Series E AMPS, a Dividend
Period consisting of seven days.
"Short Term Dividend Period" means a Special Dividend Period consisting
of a specified number of days (other than 28 in the case of Series A AMPS,
Series B AMPS, Series C AMPS and Series D
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<PAGE>
AMPS and other than seven in the case of Series E AMPS), evenly divisible by
seven and not fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than 28 in the case of Series A AMPS, Series
B AMPS, Series C AMPS and Series D AMPS and other than seven in the case of
Series E AMPS), evenly divisible by seven, and not fewer than seven nor more
than 364 or (ii) a specified period of one whole year or more but not greater
than five years (in each case subject to adjustment as provided in paragraph
2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Corporation, after
consultation with the Auction Agent and the Broker-Dealers, during which the
shares of AMPS subject to such Dividend Period shall not be subject to
redemption at the option of the Corporation and (ii) a period (a "Premium
Call Period"), consisting of a number of whole years and determined by the
Board of Directors of the Corporation, after consultation with the Auction
Agent and the Broker-Dealers, during each year of which the shares of AMPS
subject to such Dividend Period shall be redeemable at the Corporation's
option at a price per share equal to $25,000 plus accumulated but unpaid
dividends plus a premium expressed as a percentage of $25,000, as determined
by the Board of Directors of the Corporation after consultation with the
Auction Agent and the Broker-Dealers.
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<PAGE>
"Stock Books" means the books maintained by the Auction Agent setting
forth at all times a current list, as determined by the Auction Agent, of
Existing Holders of the AMPS.
"Stock Register" means the register of Holders maintained on behalf of
the Corporation by the Auction Agent in its capacity as transfer agent and
registrar for the AMPS.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect
to Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or,
in lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by
Merrill Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and
successors, after consultation with the Corporation, to act as the substitute
rating agency or substitute rating agencies, as the case may be, to determine
the credit ratings of the shares of AMPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index") or any successor
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<PAGE>
index, made available for the Business Day immediately preceding such date
but in any event not later than 8:30 A.M., New York City time, on such date
by Kenny Information Systems Inc. or any successor thereto, based upon 30-day
yield evaluations at par of bonds the interest on which is excludable for
regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny Information Systems Inc. or any such successor from
time to time in its discretion, which component issuers shall include,
without limitation, issuers of general obligation bonds but shall exclude any
bonds the interest on which constitutes an item of tax preference under
Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not
made so available by 8:30 A.M., New York City time, on such date by Kenny
Information Systems Inc. or any successor, the Taxable Equivalent of the
Short-Term Municipal Bond Rate shall mean the quotient of (A) the per annum
rate expressed on an interest equivalent basis equal to the most recent Kenny
Index so made available for any preceding Business Day, divided by (B) 1.00
minus the Marginal Tax Rate (expressed as a decimal). The Corporation may
not utilize a successor index to the Kenny Index unless Moody's and S&P
provide the Corporation with written confirmation that the use of such
successor index will not adversely affect the then current respective Moody's
and S&P ratings of the AMPS.
33
<PAGE>
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"28-Day Dividend Period" means, with respect to Series A AMPS, Series
B AMPS, Series C AMPS and Series D AMPS, a Dividend Period consisting of 28
days.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent
of the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Bill Rate on such date. "Alternate
Treasury Bill Rate" on any date means the Interest Equivalent of the yield
as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as determined by bid
price quotations as of any time on the Business Day immediately preceding
such date, obtained from at least three recognized primary U.S. Government
securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated
by reference to the bid price quotation of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend
34
<PAGE>
Period, as such bid price quotation is published on the Business Day
immediately preceding such date by the Federal Reserve Bank of New York in
its Composite 3:30 P.M. Quotations for U.S. Government Securities report for
such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note
Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by the bid price
quotations as of any time on the Business Day immediately preceding such
date, obtained from at least three recognized primary U.S. Government
securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the
Corporation is maintaining the AMPS Basic Maintenance Amount, each Business
Day commencing with the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Corporation, the amount of cash or securities
paid to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Dividend Coverage Amount,
Independent Accountant, Initial
35
<PAGE>
Margin, Market Value, Maximum Potential Additional Dividend Liability,
Moody's Discount Factor, Moody's Eligible Asset, Moody's Exposure Period,
Moody's Hedging Transactions, Moody's Volatility Factor, S&P Discount Factor,
S&P Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P
Volatility Factor, Valuation Date and Variation Margin have been determined
by the Board of Directors of the Corporation in order to obtain a "aaa"
rating from Moody's and a AAA rating from S&P on the AMPS on their Date of
Original Issue; and the Board of Directors of the Corporation shall have the
authority, without shareholder approval, to amend, alter or repeal from time
to time the foregoing definitions and the restrictions and guidelines set
forth thereunder if Moody's and S&P or any Substitute Rating Agency advises
the Corporation in writing that such amendment, alteration or repeal will not
adversely affect their then current ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when,
---------
as and if declared by the Board of Directors of the Corporation, out of funds
legally available therefor, cumulative dividends each consisting of (i) cash
at the Applicable Rate, (ii) a Right to receive cash as set forth in
paragraph 2(e) below, and (iii) any additional amounts as set forth in
paragraph 2(f) below, and no more, payable on the respective dates set forth
below. Dividends on the shares of AMPS so declared and payable shall be paid
(i) in preference to and in priority over any dividends declared and payable
on the Common Stock, and (ii)
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<PAGE>
to the extent permitted under the Code and to the extent available, out of
net tax-exempt income earned on the Corporation's investments. To the extent
permitted under the Code, dividends on shares of AMPS will be designated as
exempt-interest dividends. For the purposes of this section, the term "net
tax-exempt income" shall exclude capital gains of the Corporation.
(b) (i) Cash dividends on shares of AMPS shall accumulate from the
Date of Original Issue and shall be payable, when, as and if declared by the
Board of Directors, out of funds legally available therefor, commencing on
the Initial Dividend Payment Date with respect to each series of AMPS.
Following the Initial Dividend Payment Date for each series of AMPS,
dividends on each series of AMPS will be payable, at the option of the
Corporation, either (i) with respect to any 7-Day Dividend Period, any 28-Day
Dividend Period and any Short Term Dividend Period of 35 or fewer days on the
day next succeeding the last day thereof, or (ii) with respect to any Short
Term Dividend Period of more than 35 days and with respect to any Long Term
Dividend Period, monthly on the first Business Day of each calendar month
during such Short Term Dividend Period or Long Term Dividend Period and on
the day next succeeding the last day thereof (each such date referred to in
clause (i) or (ii) being herein referred to as a "Normal Dividend Payment
Date"), except that if such Normal Dividend Payment Date is not a Business
Day, then (i) the Dividend Payment Date shall be the first Business Day next
37
<PAGE>
succeeding such Normal Dividend Payment Date if such Normal Dividend Payment
Date is a Monday, Tuesday, Wednesday or Thursday, or (ii) the Dividend
Payment Date shall be the first Business Day next preceding such Normal
Dividend Payment Date if such Normal Dividend Payment Date is a Friday. If,
however, in the case of clause (ii) in the preceding sentence, the Securities
Depository shall make available to its participants and members in funds
immediately available in New York City on Dividend Payment Dates the amount
due as dividends on such Dividend Payment Dates (and the Securities
Depository shall have so advised the Corporation), and if the Normal Dividend
Payment Date is not a Business Day, then the Dividend Payment Date shall be
the next succeeding Business Day. Although any particular Dividend Payment
Date may not occur on the originally scheduled date because of the exceptions
discussed above, the next succeeding Dividend Payment Date, subject to such
exceptions, will occur on the next following originally scheduled date. If
for any reason a Dividend Payment Date cannot be fixed as described above,
then the Board of Directors shall fix the Dividend Payment Date. The Initial
Dividend Period, 7-Day Dividend Periods, 28-Day Dividend Periods and Special
Dividend Periods are hereinafter sometimes referred to as Dividend Periods.
Each dividend payment date determined as provided above is hereinafter
referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in
the Stock Register as of 12:00 noon, New York City
38
<PAGE>
time, on the Business Day preceding the Dividend Payment Date. Dividends in
arrears for any past Dividend Period may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the Holders as
they appear on the Stock Register on a date, not exceeding 15 days prior to
the payment date therefor, as may be fixed by the Board of Directors of the
Corporation.
(c) (i) During the period from and including the first Date of
Original Issue for each series of AMPS to but excluding the Initial Dividend
Payment Date for each series of AMPS (the "Initial Dividend Period"), the
Applicable Rate shall be the Initial Dividend Rate. Commencing on the
Initial Dividend Payment Date for each series of AMPS, the Applicable Rate
for each subsequent dividend period (hereinafter referred to as a "Subsequent
Dividend Period"), which Subsequent Dividend Period shall commence on and
include a Dividend Payment Date and shall end on and include the calendar day
prior to the next Dividend Payment Date (or last Dividend Payment Date in a
Dividend Period if there is more than one Dividend Payment Date), shall be
equal to the rate per annum that results from implementation of the Auction
Procedures.
The Applicable Rate for each Dividend Period commencing during a
Non-Payment Period shall be equal to the Non-Payment Period Rate; and each
Dividend Period, commencing after the first day of, and during, a Non-Payment
Period shall be a 28-Day Dividend Period in the case of Series A AMPS, Series
B AMPS,
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Series C AMPS and Series D AMPS and a 7-Day Dividend Period in the case of
Series E AMPS, provided that if the preceding Dividend Period for Series A
AMPS, Series B AMPS, Series C AMPS or Series D AMPS is a Special Dividend
Period of less than 28 days, the Dividend Period commencing during a Non-
Payment Period will be the same length as such preceding Dividend Period.
Except in the case of the willful failure of the Corporation to pay a
dividend on a Dividend Payment Date or to redeem any shares of AMPS on the
date set for such redemption, any amount of any dividend due on any Dividend
Payment Date (if, prior to the close of business on the second Business Day
preceding such Dividend Payment Date, the Corporation has declared such
dividend payable on such Dividend Payment Date to the Holders of such shares
of AMPS as of 12:00 noon, New York City time, on the Business Day preceding
such Dividend Payment Date) or redemption price with respect to any shares
of AMPS not paid to such Holders when due may be paid to such Holders in the
same form of funds by 12:00 noon, New York City time, on any of the first
three Business Days after such Dividend Payment Date or due date, as the case
may be, provided that, such amount is accompanied by a late charge calculated
for such period of non-payment at the Non-Payment Period Rate applied to the
amount of such non-payment based on the actual number of days comprising such
period divided by 365. In the case of a willful failure of the Corporation
to pay a dividend on a Dividend Payment Date or to redeem any shares of AMPS
on the date set for such redemption, the preceding sentence
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<PAGE>
shall not apply and the Applicable Rate for the Dividend Period commencing
during the Non-Payment Period resulting from such failure shall be the Non-
Payment Period Rate. For the purposes of the foregoing, payment to a person
in same-day funds on any Business Day at any time shall be considered
equivalent to payment to such person in New York Clearing House (next-day)
funds at the same time on the preceding Business Day, and any payment made
after 12:00 noon, New York City time, on any Business Day shall be considered
to have been made instead in the same form of funds and to the same person
before 12:00 noon, New York City time, on the next Business Day.
(ii) The amount of cash dividends per share of any series of AMPS pay-
able (if declared) on the Initial Dividend Payment Date, each 7-Day Dividend
Period, each 28-Day Dividend Period and each Short Term Dividend Period shall
be computed by multiplying the Applicable Rate for such Dividend Period by
a fraction, the numerator of which will be the number of days in such
Dividend Period or part thereof that such share was outstanding and the
denominator of which will be 365, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent. During any
Long Term Dividend Period, the amount of cash dividends per share of AMPS
payable (if declared) on any Dividend Payment Date shall be computed by
multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be such number of days in such part of such Dividend
Period that such share was outstanding and for
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<PAGE>
which dividends are payable on such Dividend Payment Date and the denominator
of which will be 360, multiplying the amount so obtained by $25,000, and
rounding the amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Corporation may, at its sole option and to the extent permitted
by law, by telephonic and written notice (a "Request for Special Dividend
Period") to the Auction Agent and to each Broker-Dealer, request that the
next succeeding Dividend Period for a series of AMPS be a number of days
(other than 28 in the case of Series A AMPS, Series B AMPS, Series C AMPS and
Series D AMPS and other than seven in the case of Series E AMPS), evenly
divisible by seven, and not fewer than seven nor more than 364 in the case
of a Short Term Dividend Period or one whole year or more but not greater
than five years in the case of a Long Term Dividend Period, specified in such
notice, provided that the Corporation may not give a Request for Special
Dividend Period of greater than 28 days (and any such request shall be null
and void) unless, for any Auction occurring after the initial Auction,
Sufficient Clearing Bids were made in the last occurring Auction and unless
full cumulative dividends, any amounts due with respect to redemptions, and
any Additional Dividends payable prior to such date have been paid in full.
Such Request for Special Dividend Period, in the case of a Short Term
Dividend Period, shall be given on or prior to the second Business Day but
not more than seven Business Days prior to an Auction Date for a
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<PAGE>
series of AMPS and, in the case of a Long Term Dividend Period, shall be
given on or prior to the second Business Day but not more than 28 days prior
to an Auction Date for the AMPS. Upon receiving such Request for Special
Dividend Period, the Broker-Dealer(s) shall jointly determine whether, given
the factors set forth below, it is advisable that the Corporation issue a
Notice of Special Dividend Period for the series of AMPS as contemplated by
such Request for Special Dividend Period and the Optional Redemption Price
of the AMPS during such Special Dividend Period and the Specific Redemption
Provisions and shall give the Corporation and the Auction Agent written
notice (a "Response") of such determination by no later than the second
Business Day prior to such Auction Date. In making such determination the
Broker-Dealer(s) will consider (1) existing short-term and long-term market
rates and indices of such short-term and long-term rates, (2) existing market
supply and demand for short-term and long-term securities, (3) existing yield
curves for short-term and long-term securities comparable to the AMPS, (4)
industry and financial conditions which may affect the AMPS, (5) the
investment objective of the Corporation, and (6) the Dividend Periods and
dividend rates at which current and potential beneficial holders of the AMPS
would remain or become beneficial holders. If the Broker-Dealer(s) shall not
give the Corporation and the Auction Agent a Response by such second Business
Day or if the Response states that given the factors set forth above it is
not advisable that the Corporation give a
43
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Notice of Special Dividend Period for the series of AMPS, the Corporation may
not give a Notice of Special Dividend Period in respect of such Request for
Special Dividend Period. In the event the Response indicates that it is
advisable that the Corporation give a Notice of Special Dividend Period for
the series of AMPS, the Corporation may by no later than the second Business
Day prior to such Auction Date give a notice (a "Notice of Special Dividend
Period") to the Auction Agent, the Securities Depository and each Broker--
Dealer which notice will specify (i) the duration of the Special Dividend
Period, (ii) the Optional Redemption Price as specified in the related
Response and (iii) the Specific Redemption Provisions, if any, as specified
in the related Response. The Corporation shall also provide a copy of such
Notice of Special Dividend Period to Moody's and S&P. The Corporation shall
not give a Notice of Special Dividend Period and, if the Corporation has
given a Notice of Special Dividend Period, the Corporation is required to
give telephonic and written notice of its revocation (a "Notice of
Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction Date
if (x) either the 1940 Act AMPS Asset Coverage is not satisfied or the
Corporation shall fail to maintain S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount, in each case on each of the two Valuation Dates
immediately preceding the Business Day prior to
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the relevant Auction Date on an actual basis and on a pro forma basis giving
effect to the proposed Special Dividend Period (using as a pro forma dividend
rate with respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Corporation is an approximately equal rate
for securities similar to the AMPS with an equal dividend period), provided
that, in calculating the aggregate Discounted Value of Moody's Eligible
Assets for this purpose, the Moody's Exposure Period shall be deemed to be
one week longer, (y) sufficient funds for the payment of dividends payable
on the immediately succeeding Dividend Payment Date have not been irrevocably
deposited with the Auction Agent by the close of business on the third
Business Day preceding the related Auction Date or (z) the Broker-Dealer(s)
jointly advise the Corporation that after consideration of the factors listed
above they have concluded that it is advisable to give a Notice of
Revocation. The Corporation shall also provide a copy of such Notice of
Revocation to Moody's and S&P. If the Corporation is prohibited from giving
a Notice of Special Dividend Period as a result of any of the factors
enumerated in clause (x), (y) or (z) above or if the Corporation gives a
Notice of Revocation with respect to a Notice of Special Dividend Period for
any series of AMPS, the next succeeding Dividend Period for that series will
be a 28-Day Dividend Period in the case of Series A AMPS, Series B AMPS,
Series C AMPS and Series D AMPS and a 7-Day Dividend Period in the case of
Series E AMPS, provided that if the then current
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Dividend Period for Series A AMPS, Series B AMPS, Series C AMPS and Series
D AMPS is a Special Dividend Period of less than 28 days, the next succeeding
Dividend Period for such series of AMPS will be the same length as such
current Dividend Period. In addition, in the event Sufficient Clearing Bids
are not made in the applicable Auction or such Auction is not held for any
reason, such next succeeding Dividend Period will be a 28-Day Dividend Period
(in the case of Series A AMPS, Series B AMPS, Series C AMPS and Series D
AMPS) or a 7-Day Dividend Period (in the case of Series E AMPS) and the
Corporation may not again give a Notice of Special Dividend Period for the
AMPS (and any such attempted notice shall be null and void) until Sufficient
Clearing Bids have been made in an Auction with respect to a 28-Day Dividend
Period (in the case of Series A AMPS, Series B AMPS, Series C AMPS and Series
D AMPS) or a 7-Day Dividend Period (in the case of Series E AMPS).
(d) (i) Holders shall not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
and applicable late charges, as herein provided, on the shares of AMPS
(except for Additional Dividends as provided in paragraph 2(e) hereof and
additional payments as provided in paragraph 2(f) hereof). Except for the
late charge payable pursuant to paragraph 2(c)(i) hereof, no interest, or sum
of money in lieu of interest, shall be payable in respect of any dividend
payment on the shares of AMPS that may be in arrears.
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<PAGE>
(ii) For so long as any share of AMPS is Outstanding, the Corporation
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Stock or
other stock, if any, ranking junior to the shares of AMPS as to dividends or
upon liquidation) in respect of the Common Stock or any other stock of the
Corporation ranking junior to or on a parity with the shares of AMPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the Common Stock or any
other such junior stock (except by conversion into or exchange for stock of
the Corporation ranking junior to the shares of AMPS as to dividends and upon
liquidation) or any other such Parity Stock (except by conversion into or
exchange for stock of the Corporation ranking junior to or on a parity with
the shares of AMPS as to dividends and upon liquidation), unless (A)
immediately after such transaction, the Corporation shall have S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount and the
Corporation shall maintain the 1940 Act AMPS Asset Coverage, (B) full
cumulative dividends on shares of AMPS and shares of Other AMPS due on or
prior to the date of the transaction have been declared and paid or shall
have been declared and sufficient funds for the payment thereof deposited
with the Auction Agent, (C) any Additional Dividend
47
<PAGE>
required to be paid under paragraph 2(e) below on or before the date of such
declaration or payment has been paid and (D) the Corporation has redeemed the
full number of shares of AMPS required to be redeemed by any provision for
mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate,
(ii) an uncertificated right (a "Right") to receive an Additional Dividend
(as defined below), and (iii) any additional amounts as set forth in
paragraph 2(f) below. Each Right shall thereafter be independent of the
share or shares of AMPS on which the dividend was paid. The Corporation
shall cause to be maintained a record of each Right received by the
respective Holders. A Right may not be transferred other than by operation
of law. If the Corporation retroactively allocates any net capital gains or
other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
in paragraph 2(f) hereof solely by reason of the fact that such allocation
is made as a result of the redemption of all or a portion of the outstanding
shares of AMPS or the liquidation of the Corporation (the amount of such
allocation referred to herein as a "Retroactive Taxable Allocation"), the
Corporation will, within 90 days (and generally within 60 days) after the end
of the Corporation's fiscal year for which a Retroactive Taxable Allocation
is made, provide notice thereof to the Auction Agent and to each holder of
a Right applicable to such shares of AMPS
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<PAGE>
(initially Cede & Co. as nominee of the Depository Trust Company) during such
fiscal year at such holder's address as the same appears or last appeared on
the Stock Books of the Corporation. The Corporation will, within 30 days
after such notice is given to the Auction Agent, pay to the Auction Agent
(who will then distribute to such holders of Rights), out of funds legally
available therefor, an amount equal to the aggregate Additional Dividend with
respect to all Retroactive Taxable Allocations made to such holders during
the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect
to the fiscal year in question, would cause such holder's dividends in
dollars from the aggregate of both the Retroactive Taxable Allocations and
the Additional Dividend to be equal to the dollar amount of the dividends
which would have been received by such holder if the amount of the aggregate
Retroactive Taxable Allocations would have been excludable from the gross
income of such holder. Such Additional Dividend shall be calculated (i)
without consideration being given to the time value of money; (ii) assuming
that no holder of shares of AMPS is subject to the Federal alternative
minimum tax with respect to dividends received from the Corporation; and
(iii) assuming that each Retroactive Taxable Allocation would be taxable in
the hands of each holder of shares of AMPS at the greater of: (x) the
maximum marginal regular
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<PAGE>
Federal individual income tax rate applicable to ordinary income or capital
gains depending on the taxable character of the distribution (including any
surtax); or (y) the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income or capital gains depending on the taxable
character of the distribution (disregarding in both (x) and (y) the phase out
of, or provision limiting, personal exemptions, itemized deductions, or the
benefit of lower tax brackets).
(f) Except as provided below, whenever the Corporation intends to
include any net capital gains or other income subject to regular Federal
income taxes in any dividend on shares of AMPS, the Corporation will notify
the Auction Agent of the amount to be so included at least five Business Days
prior to the Auction Date on which the Applicable Rate for such dividend is
to be established. The Corporation may also include such income in a
dividend on shares of a series of AMPS without giving advance notice thereof
if it increases the dividend by an additional amount calculated as if such
income was a Retroactive Taxable Allocation and the additional amount was an
Additional Dividend, provided that the Corporation will notify the Auction
Agent of the additional amounts to be included in such dividend at least five
Business Days prior to the applicable Dividend Payment Date.
(g) No fractional shares of AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or winding
------------------
up of the Corporation, whether voluntary or involuntary, the Holders shall
be entitled to receive, out of the
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<PAGE>
assets of the Corporation available for distribution to shareholders, before
any distribution or payment is made upon any Common Stock or any other
capital stock ranking junior in right of payment upon liquidation to the
AMPS, the sum of $25,000 per share plus accumulated but unpaid dividends
(whether or not earned or declared) thereon to date of distribution, and
after such payment the holders of AMPS will be entitled to no other payments
other than Additional Dividends as provided in paragraph 2(e) hereof. If
upon any liquidation, dissolution or winding up of the Corporation, the
amounts payable with respect to the AMPS and any other Outstanding class or
series of Preferred Stock of the Corporation ranking on a parity with the
AMPS as to payment upon liquidation are not paid in full, the Holders and the
holders of such other class or series will share ratably in any such
distribution of assets in proportion to the respective preferential amounts
to which they are entitled. After payment of the full amount of the
liquidating distribution to which they are entitled, the Holders will not be
entitled to any further participation in any distribution of assets by the
Corporation except for any Additional Dividends. A consolidation, merger or
statutory share exchange of the Corporation with or into any other
corporation or entity or a sale, whether for cash, shares of stock,
securities or properties, of all or substantially all or any part of the
assets of the Corporation shall not be deemed or construed to be a
liquidation, dissolution or winding up of the Corporation.
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<PAGE>
4. Redemption. (a) Shares of AMPS shall be redeemable by the
----------
Corporation as provided below:
(i) To the extent permitted under the 1940 Act and Maryland law,
upon giving a Notice of Redemption, the Corporation at its option may redeem
shares of AMPS, in whole or in part, out of funds legally available therefor,
at the Optional Redemption Price per share, on any Dividend Payment Date;
provided that no share of AMPS may be redeemed at the option of the
Corporation during (A) the Initial Dividend Period with respect to a series
of shares or (B) a Non-Call Period to which such share is subject. In
addition, holders of AMPS which are redeemed shall be entitled to receive
Additional Dividends to the extent provided herein. The Corporation may not
give a Notice of Redemption relating to an optional redemption as described
in this paragraph 4(a)(i) unless, at the time of giving such Notice of
Redemption, the Corporation has available Deposit Securities with maturity
or tender dates not later than the day preceding the applicable redemption
date and having a value not less than the amount due to Holders by reason of
the redemption of their shares of AMPS on such redemption date.
(ii) The Corporation shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per share, shares of AMPS to the
extent permitted under the 1940 Act and Maryland law, on a date fixed by the
Board of Directors, if the Corporation fails to maintain S&P Eligible
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<PAGE>
Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount as provided
in paragraph 7(a) or to satisfy the 1940 Act AMPS Asset Coverage as provided
in paragraph 6 and such failure is not cured on or before the AMPS Basic
Maintenance Cure Date or the 1940 Act Cure Date (herein collectively referred
to as a "Cure Date"), as the case may be. In addition, holders of AMPS so
redeemed shall be entitled to receive Additional Dividends to the extent
provided herein. The number of shares of AMPS to be redeemed shall be equal
to the lesser of (i) the minimum number of shares of AMPS the redemption of
which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, together with all shares of other Preferred Stock
subject to redemption or retirement, would result in the Corporation having
S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount
or satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, on
such Cure Date (provided that, if there is no such minimum number of shares
of AMPS and shares of other Preferred Stock the redemption of which would
have such result, all shares of AMPS and shares of other Preferred Stock then
Outstanding shall be redeemed), and (ii) the maximum number of shares of
AMPS, together with all shares of other Preferred Stock subject to redemption
or
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<PAGE>
retirement, that can be redeemed out of funds expected to be legally
available therefor on such redemption date. In determining the number of
shares of AMPS required to be redeemed in accordance with the foregoing, the
Corporation shall allocate the number required to be redeemed which would
result in the Corporation having S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount or satisfaction of the 1940 Act AMPS Asset
Coverage, as the case may be, pro rata among shares of AMPS of all series,
Other AMPS and other Preferred Stock subject to redemption pursuant to
provisions similar to those contained in this paragraph 4(a)(ii); provided
that, shares of AMPS which may not be redeemed at the option of the
Corporation due to the designation of a Non-Call Period applicable to such
shares (A) will be subject to mandatory redemption only to the extent that
other shares are not available to satisfy the number of shares required to
be redeemed and (B) will be selected for redemption in an ascending order of
outstanding number of days in the Non-Call Period (with shares with the
lowest number of days to be redeemed first) and by lot in the event of shares
having an equal number of days in such Non-Call Period. The Corporation
shall effect such redemption on a Business Day which is not later than 35
days after such Cure Date, except that if the Corporation does not have funds
legally
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<PAGE>
available for the redemption of all of the required number of shares of
AMPS and shares of other Preferred Stock which are subject to mandatory
redemption or the Corporation otherwise is unable to effect such redemption
on or prior to 35 days after such Cure Date, the Corporation shall redeem
those shares of AMPS which it is unable to redeem on the earliest practicable
date on which it is able to effect such redemption out of funds legally
available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares
of AMPS may be redeemed pursuant to paragraph 4(a)(i) of these Articles
Supplementary (i) unless all dividends in arrears on all remaining
outstanding shares of Parity Stock shall have been or are being
contemporaneously paid or declared and set apart for payment and (ii) if
redemption thereof would result in the Corporation's failure to maintain
Moody's Eligible Assets or S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount. In the
event that less than all the outstanding shares of a series of AMPS are to
be redeemed and there is more than one Holder, the shares of that series of
AMPS to be redeemed shall be selected by lot or such other method as the
Corporation shall deem fair and equitable.
(c) Whenever shares of AMPS are to be redeemed, the Corporation, not
less than 20 nor more than 30 days prior to the date fixed for redemption,
shall mail a notice ("Notice of Redemption") by first-class mail, postage
prepaid, to each Holder
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of shares of AMPS to be redeemed and to the Auction Agent. The Corporation
shall cause the Notice of Redemption to also be published in the eastern and
national editions of The Wall Street Journal. The Notice of Redemption shall
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set forth (i) the redemption date, (ii) the amount of the redemption price,
(iii) the aggregate number of shares of AMPS of such series to be redeemed,
(iv) the place or places where shares of AMPS of such series are to be
surrendered for payment of the redemption price, (v) a statement that
dividends on the shares to be redeemed shall cease to accumulate on such
redemption date (except that holders may be entitled to Additional Dividends)
and (vi) the provision of these Articles Supplementary pursuant to which such
shares are being redeemed. No defect in the Notice of Redemption or in the
mailing or publication thereof shall affect the validity of the redemption
proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Corporation shall have deposited in trust
with the Auction Agent a cash amount equal to the redemption payment for the
shares of AMPS as to which such Notice of Redemption has been given with
irrevocable instructions and authority to pay the redemption price to the
Holders of such shares, then upon the date of such deposit or, if no such
deposit is made, then upon such date fixed for redemption (unless the
Corporation shall default in making the redemption payment), all rights of
the Holders of such shares as shareholders of the Corporation by reason of
the ownership of such shares will cease
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and terminate (except their right to receive the redemption price in respect
thereof and any Additional Dividends, but without interest), and such shares
shall no longer be deemed outstanding. The Corporation shall be entitled to
receive, from time to time, from the Auction Agent the interest, if any, on
such moneys deposited with it and the Holders of any shares so redeemed shall
have no claim to any of such interest. In case the Holder of any shares, so
called for redemption shall not claim the redemption payment for his shares
within one year after the date of redemption, the Auction Agent shall, upon
demand, pay over to the Corporation such amount remaining on deposit and the
Auction Agent shall thereupon be relieved of all responsibility to the Holder
of such shares called for redemption and such Holder thereafter shall look
only to the Corporation for the redemption payment.
5. Voting Rights. (a) General. Except as otherwise provided in the
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Charter or By-Laws, each Holder of shares of AMPS shall be entitled to one
vote for each share held on each matter submitted to a vote of shareholders
of the Corporation, and the holders of outstanding shares of Preferred Stock,
including AMPS, and of shares of Common Stock shall vote together as a single
class; provided that, at any meeting of the shareholders of the Corporation
held for the election of directors, the holders of outstanding shares of
Preferred Stock, including AMPS, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of capital stock
of the Corporation, to elect two directors of the Corporation. Subject to
paragraph
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5(b) hereof, the holders of outstanding shares of capital stock of the
Corporation, including the holders of outstanding shares of Preferred Stock,
including AMPS, voting as a single class, shall elect the balance of the
directors.
(b) Right to Elect Majority of Board of Directors. During any period
---------------------------------------------
in which any one or more of the conditions described below shall exist (such
period being referred to herein as a "Voting Period"), the number of
directors constituting the Board of Directors shall be automatically
increased by the smallest number that, when added to the two directors
elected exclusively by the holders of shares of Preferred Stock, would
constitute a majority of the Board of Directors as so increased by such
smallest number; and the holders of shares of Preferred Stock shall be
entitled, voting separately as one class (to the exclusion of the holders of
all other securities and classes of capital stock of the Corporation), to
elect such smallest number of additional directors, together with the two
directors that such holders are in any event entitled to elect. A Voting
Period shall commence:
(i) if at any time accumulated dividends (whether or not earned
or declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of AMPS equal to at least two
full years' dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the
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Auction Agent for the payment of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Stock
are entitled to elect a majority of the directors of the Corporation under
the 1940 Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting
of such voting rights in the Holders upon the further occurrence of any of
the events described in this paragraph 5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as
---------------------------------------------------
any shares of AMPS are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of Preferred
Stock Outstanding at the time, voting separately as one class: (i)
authorize, create or issue (other than with respect to the issuance of the
AMPS authorized hereby), or increase the authorized or issued aggregate
stated capital amount of (other than with respect to the issuance of the AMPS
authorized hereby), 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 aggregate stated capital amount of AMPS or any other 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
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in the Charter of holders of shares of AMPS or any other Preferred Stock.
To the extent permitted under the 1940 Act, in the event shares of more than
one series of AMPS are outstanding, the Corporation shall not approve any of
the actions set forth in clause (i) or (ii) which adversely affects the
contract rights expressly set forth in the Charter of a Holder of shares of
a series of AMPS differently than those of a Holder of shares of any other
series of AMPS without the affirmative vote of the holders of at least a
majority of the shares of AMPS of each series adversely affected and
outstanding at such time (each such adversely affected series voting
separately as a class). The Corporation shall notify Moody's and S&P ten
Business Days prior to any such vote described in clause (i) or (ii). Unless
a higher percentage is provided for under the Charter, the affirmative vote
of the holders of a majority of the outstanding shares of Preferred Stock,
including AMPS, voting together as a single class, will be required to
approve any plan of reorganization (including bankruptcy proceedings)
adversely affecting such shares or any action requiring a vote of security
holders under Section 13(a) of the 1940 Act. The class vote of holders of
shares of Preferred Stock, including AMPS, described above will in each case
be in addition to a separate vote of the requisite percentage of shares of
Common Stock and shares of Preferred Stock, including AMPS, voting together
as a single class necessary to authorize the action in question.
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(d) Voting Procedures.
-----------------
(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Stock to elect additional directors as
described in paragraph 5(b) above, the Corporation shall call a special
meeting of such holders and instruct the Auction Agent to mail a notice of
such special meeting to such holders, such meeting to be held not less than
10 nor more than 20 days after the date of mailing of such notice. If the
Corporation fails to send such notice to the Auction Agent or if the
Corporation does not call such a special meeting, it may be called by any
such holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the close
of business on the fifth Business Day preceding the day on which such notice
is mailed. At any such special meeting and at each meeting held during a
Voting Period, such Holders, voting together as a class (to the exclusion of
the holders of all other securities and classes of capital stock of the
Corporation), shall be entitled to elect the number of directors prescribed
in paragraph 5(b) above. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of such holders present in person or by proxy
shall have the power to adjourn the meeting without notice, other than by an
announcement at the meeting, to a date not more than 120 days after the
original record date.
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(ii) For purposes of determining any rights of the Holders to vote
on any matter or the number of shares required to constitute a quorum,
whether such right is created by these Articles Supplementary, by the other
provisions of the Charter, by statute or otherwise, a share of AMPS which is
not Outstanding shall not be counted.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of Holders and holders of other
Preferred Stock to elect directors shall continue, notwithstanding the
election at such meeting by the Holders and such other holders of the number
of directors that they are entitled to elect, and the persons so elected by
the Holders and such other holders, together with the two incumbent directors
elected by the Holders and such other holders of Preferred Stock and the
remaining incumbent directors elected by the holders of the Common Stock and
Preferred Stock, shall constitute the duly elected directors of the
Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the
terms of office of the additional directors elected by the Holders and
holders of other Preferred Stock pursuant to paragraph 5(b) above shall
terminate, the remaining directors shall constitute the directors of the
Corporation and the voting rights of the Holders and such other holders to
elect additional directors pursuant to
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paragraph 5(b) above shall cease, subject to the provisions of the last
sentence of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders
----------------
of shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
remedy of the Holders shall be the right to vote for directors pursuant to
the provisions of this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders
-------------------------------
of AMPS is required pursuant to the provisions of Section 13(a) of the 1940
Act, the Corporation shall, not later than ten Business Days prior to the
date on which such vote is to be taken, notify S&P and Moody's that such vote
is to be taken and the nature of the action with respect to which such vote
is to be taken and, not later than ten Business Days after the date on which
such vote is taken, notify S&P and Moody's of the result of such vote.
6. 1940 Act AMPS Asset Coverage. The Corporation shall maintain, as
----------------------------
of the last Business Day of each month in which any share of AMPS is
outstanding, the 1940 Act AMPS Asset Coverage.
7. AMPS Basic Maintenance Amount. (a) The Corporation shall
-----------------------------
maintain, on each Valuation Date, and shall verify to its satisfaction that
it is maintaining on such Valuation Date, (i) S&P Eligible Assets having an
aggregate Discounted Value equal to
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or greater than the AMPS Basic Maintenance Amount and (ii) Moody's Eligible
Assets having an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount. Upon any failure to maintain the required
Discounted Value, the Corporation will use its best efforts to alter the
composition of its portfolio to reattain a Discounted Value at least equal
to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic
Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Corporation fails to satisfy the AMPS
Basic Maintenance Amount, the Corporation shall complete and deliver to the
Auction Agent, and Moody's and S&P, as the case may be, a complete AMPS Basic
Maintenance Report as of the date of such failure, which will be deemed to
have been delivered to the Auction Agent if the Auction Agent receives a copy
or telecopy, telex or other electronic transcription thereof and on the same
day the Corporation mails to the Auction Agent for delivery on the next
Business Day the complete AMPS Basic Maintenance Report. The Corporation
will deliver an AMPS Basic Maintenance Report to the Auction Agent and
Moody's and S&P, as the case may be, on or before 5:00 p.m., New York City
time, on the third Business Day after a Valuation Date on which the
Corporation cures its failure to maintain Moody's Eligible Assets or S&P
Eligible Assets, as the case may be, with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount or on which the
Corporation fails to
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<PAGE>
maintain Moody's Eligible Assets or S&P Eligible Assets, as the case may be,
with an aggregate Discounted Value which exceeds the AMPS Basic Maintenance
Amount by 5% or more. The Corporation will also deliver an AMPS Basic
Maintenance Report to the Auction Agent, Moody's and S&P as of each Quarterly
Valuation Date on or before the third Business Day after such date.
Additionally, on or before 5:00 p.m., New York City time, on the third
Business Day after the first day of a Special Dividend Period, the
Corporation will deliver an AMPS Basic Maintenance Report to S&P and the
Auction Agent. The Corporation shall also provide Moody's and S&P with an
AMPS Basic Maintenance Report when specifically requested by either Moody's
or S&P. A failure by the Corporation to deliver an AMPS Basic Maintenance
Report under this paragraph 7(b) shall be deemed to be delivery of an AMPS
Basic Maintenance Report indicating the Discounted Value for S&P Eligible
Assets and Moody's Eligible Assets of the Corporation is less than the AMPS
Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an AMPS
Basic Maintenance Report in accordance with paragraph 7(b) above relating to
a Quarterly Valuation Date, the Independent Accountant will confirm in
writing to the Auction Agent, S&P and Moody's (i) the mathematical accuracy
of the calculations reflected in such Report (and in any other AMPS Basic
Maintenance Report, randomly selected by the Independent Accountant, that was
delivered by the Corporation during the
65
<PAGE>
quarter ending on such Quarterly Valuation Date), (ii) that, in such Report
(and in such randomly selected Report), the Corporation correctly determined
the assets of the Corporation which constitute S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, at such Quarterly Valuation Date in
accordance with these Articles Supplementary, (iii) that, in such Report (and
in such randomly selected Report), the Corporation determined whether the
Corporation had, at such Quarterly Valuation Date (and at the Valuation Date
addressed in such randomly selected Report) in accordance with these Articles
Supplementary, S&P Eligible Assets of an aggregate Discounted Value at least
equal to the AMPS Basic Maintenance Amount and Moody's Eligible Assets of an
aggregate Discounted Value at least equal to the AMPS Basic Maintenance
Amount, (iv) with respect to the S&P ratings on Municipal Bonds, the issuer
name, issue size and coupon rate listed in such Report, that the Independent
Accountant has requested that S&P verify such information and the Independent
Accountant shall provide a listing in its letter of any differences, (v) with
respect to the Moody's ratings on Municipal Bonds, the issuer name, issue
size and coupon rate listed in such Report, that such information has been
verified by Moody's (in the event such information is not verified by
Moody's, the Independent Accountant will inquire of Moody's what such
information is, and provide a listing in its letter of any differences), (vi)
with respect to the bid or mean price (or such alternative permissible factor
used in calculating the Market
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<PAGE>
Value) provided by the custodian of the Corporation's assets to the
Corporation for purposes of valuing securities in the Corporation's
portfolio, the Independent Accountant has traced the price used in such
Report to the bid or mean price listed in such Report as provided to the
Corporation and verified that such information agrees (in the event such
information does not agree, the Independent Accountant will provide a listing
in its letter of such differences) and (vii) with respect to such
confirmation to Moody's, that the Corporation has satisfied the requirements
of paragraph 9(b) of these Articles Supplementary (such confirmation is
herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above relating to any Valuation Date on which the Corporation
failed to maintain S&P Eligible Assets with an aggregate Discounted Value and
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount, and relating to the AMPS
Basic Maintenance Cure Date with respect to such failure, the Independent
Accountant will provide to the Auction Agent, S&P and Moody's an Accountant's
Confirmation as to such AMPS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such
Accountant's Confirmation as
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<PAGE>
required to be delivered, or shows that a lower aggregate Discounted Value
for the aggregate of all S&P Eligible Assets or Moody's Eligible Assets, as
the case may be, of the Corporation was determined by the Independent
Accountant, the calculation or determination made by such Independent
Accountant shall be final and conclusive and shall be binding on the
Corporation, and the Corporation shall accordingly amend and deliver the AMPS
Basic Maintenance Report to the Auction Agent, S&P and Moody's promptly
following receipt by the Corporation of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of the shares of AMPS, the Corporation
will complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report
as of the close of business on such Date of Original Issue. Within five
Business Days of such Date of Original Issue, the Independent Accountant will
confirm in writing to S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report and (ii) that the aggregate Discounted
Value of S&P Eligible Assets and the aggregate Discounted Value of Moody's
Eligible Assets reflected thereon equals or exceeds the AMPS Basic
Maintenance Amount reflected thereon. Also, on or before 5:00 p.m., New York
City time, on the first Business Day after shares of Common Stock are
repurchased by the Corporation, the Corporation will complete and deliver to
S&P and Moody's an AMPS Basic Maintenance Report
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<PAGE>
as of the close of business on such date that Common Stock is repurchased.
(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the
effect of any such alteration would be to cause the Corporation to have
Moody's Eligible Assets with an aggregate Discounted Value, as of the
immediately preceding Valuation Date, less than the AMPS Basic Maintenance
Amount as of such Valuation Date; provided, however, that in the event that,
as of the immediately preceding Valuation Date, the aggregate Discounted
Value of Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount
by five percent or less, the Adviser will not alter the composition of the
Corporation's portfolio in a manner reasonably expected to reduce the
aggregate Discounted Value of Moody's Eligible Assets unless the Corporation
shall have confirmed that, after giving effect to such alteration, the
aggregate Discounted Value of Moody's Eligible Assets would exceed the AMPS
Basic Maintenance Amount.
8. Certain Other Restrictions.
(a) For so long as any shares of AMPS are rated by S&P, the
Corporation-------------------------- will not purchase or sell futures
contracts, write, purchase or sell options on futures contracts or write put
options (except covered put options) or call options (except covered call
options) on portfolio securities unless it receives written confirmation from
S&P that engaging in such transactions
69
<PAGE>
will not impair the ratings then assigned to the shares of AMPS by S&P,
except that the Corporation may purchase or sell futures contracts based on
the Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds or Notes ("Treasury Bonds") and write, purchase or sell put
and call options on such contracts (collectively, "S&P Hedging
Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a
futures contract or option held by the Corporation by the Corporation's
taking an opposite position thereto ("Closing Transactions")), which would
cause the Corporation at the time of such transaction to own or have sold the
least of (A) more than 1,000 outstanding futures contracts based on the
Municipal Index, (B) outstanding futures contracts based on the Municipal
Index exceeding in number 25% of the quotient of the Market Value of the
Corporation's total assets divided by $100,000 or (C) outstanding futures
contracts based on the Municipal Index exceeding in number 10% of the average
number of daily traded futures contracts based on the Municipal Index in the
30 days preceding the time of effecting such transaction as reported by The
Wall Street Journal;
-----------------------
(ii) the Corporation will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause
the Corporation at the time
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<PAGE>
of such transaction to own or have sold the lesser of (A) outstanding
futures contracts based on Treasury Bonds and on the Municipal Index
exceeding in number 25% of the quotient of the Market Value of the
Corporation's total assets divided by $100,000 or (B) outstanding futures
contracts based on Treasury Bonds exceeding in number 10% of the average
number of daily traded futures contracts based on Treasury Bonds in the 30
days preceding the time of effecting such transaction as reported by The Wall
Street Journal;
-----------------------
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract which the Corporation owns or has sold
or any outstanding option thereon owned by the Corporation in the event (A)
the Corporation does not have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount
on two consecutive Valuation Dates and (B) the Corporation is required to pay
Variation Margin on the second such Valuation Date;
(iv) the Corporation will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month prior to
the delivery month under the terms of such futures contract or option thereon
unless the Corporation holds the securities deliverable under such terms; and
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(v) when the Corporation writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or
short-term, fixed-income securities in a segregated account with the
Corporation's custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of or on behalf of
the Corporation's broker with respect to such futures contract or option
equals the Market Value of the futures contract or option, or, in the event
the Corporation writes a futures contract or option thereon which requires
delivery of an underlying security, it shall hold such underlying security
in its portfolio.
For purposes of determining whether the Corporation has S&P Eligible
Assets with a Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an amount equal
to (i) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned
by the Corporation plus (ii) 25% of the aggregate settlement value, as marked
to market, of any outstanding futures contracts based on Treasury Bonds which
contracts are owned by the Corporation.
(b) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not buy or sell futures contracts, write,
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<PAGE>
purchase or sell call options on futures contracts or purchase put options
on futures contracts or write call options (except covered call options) on
portfolio securities unless it receives written confirmation from Moody's
that engaging in such transactions would not impair the ratings then assigned
to the shares of AMPS by Moody's, except that the Corporation may purchase
or sell exchange-traded futures contracts based on the Municipal Index or
Treasury Bonds and purchase, write or sell exchange-traded put options on
such futures contracts and purchase, write or sell exchange-traded call
options on such futures contracts (collectively, "Moody's Hedging
Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing Transactions)
which would cause the Corporation at the time of such transaction to own or
have sold (A) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The
---
Wall Street Journal or (B) outstanding futures contracts based on the
- - -------------------
Municipal Index having a Market Value exceeding the Market Value of all
Municipal Bonds constituting Moody's Eligible Assets owned by the Corporation
(other than Moody's Eligible Assets already subject to a Moody's Hedging
Transaction);
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(ii) the Corporation will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions) which
would cause the Corporation at the time of such transaction to own or have
sold (A) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 40% of the aggregate Market Value of Moody's
Eligible Assets owned by the Corporation and rated Aa by Moody's (or, if not
rated by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding
futures contracts based on Treasury Bonds having an aggregate Market Value
exceeding 80% of the aggregate Market Value of all Municipal Bonds
constituting Moody's Eligible Assets owned by the Corporation (other than
Moody's Eligible Assets already subject to a Moody's Hedging Transaction) and
rated Baa or A by Moody's (or, if not rated by Moody's but rated by S&P,
rated A or AA by S&P) (for purposes of the foregoing clauses (i) and (ii),
the Corporation shall be deemed to own the number of futures contracts that
underlie any outstanding options written by the Corporation);
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
--------
Street Journal is less than 5,000;
- - --------------
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(iv) the Corporation will engage in a Closing Transaction to close
out any outstanding futures contract by no later than the fifth Business Day
of the month in which such contract expires and will engage in a Closing
Transaction to close out any outstanding option on a futures contract by no
later than the first Business Day of the month in which such option expires;
(v) the Corporation will engage in Moody's Hedging Transactions
only with respect to futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Corporation will not engage in options and futures
transactions for leveraging or speculative purposes and will not write any
call options or sell any futures contracts for the purpose of hedging the
anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Corporation will not enter into an option or futures
transaction unless, after giving effect thereto, the Corporation would
continue to have Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Corporation
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is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Corporation which are either exchange-traded and "readily
reversible" or which expire within 49 days after the date as of which such
valuation is made shall be valued at the lesser of (a) Discounted Value and
(b) the exercise price of the call option written by the Corporation; (ii)
assets subject to call options written by the Corporation not meeting the
requirements of clause (i) of this sentence shall have no value; (iii) assets
subject to put options written by the Corporation shall be valued at the
lesser of (A) the exercise price and (B) the Discounted Value of the subject
security; (iv) futures contracts shall be valued at the lesser of (A)
settlement price and (B) the Discounted Value of the subject security,
provided that, if a contract matures within 49 days after the date as of
which such valuation is made, where the Corporation is the seller the
contract may be valued at the settlement price and where the Corporation is
the buyer the contract may be valued at the Discounted Value of the subject
securities and (v) where delivery may be made to the Corporation with any
security of a class of securities, the Corporation shall assume that it will
take delivery of the security with the lowest Discounted Value.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the following amounts shall be subtracted from the
aggregate
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Discounted Value of the Moody's Eligible Assets held by the Corporation: (i)
10% of the exercise price of a written call option; (ii) the exercise price
of any written put option; (iii) where the Corporation is the seller under
a futures contract, 10% of the settlement price of the futures contract; (iv)
where the Corporation is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract; (v) the
settlement price of the underlying futures contract if the Corporation writes
put options on a futures contract; and (vi) 105% of the Market Value of the
underlying futures contracts if the Corporation writes call options on a
futures contract and does not own the underlying contract.
(c) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not enter into any contract to purchase securities for a
fixed price at a future date beyond customary settlement time (other than
such contracts that constitute Moody's Hedging Transactions that are
permitted under paragraph 8(b) of these Articles Supplementary), except that
the Corporation may enter into such contracts to purchase newly-issued
securities on the date such securities are issued ("Forward Commitments"),
subject to the following limitations:
(i) the Corporation will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities rated
P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a Market Value that equals or exceeds the
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amount of the Corporation's obligations under any Forward Commitments
to which it is from time to time a party or long-term fixed income securities
with a Discounted Value that equals or exceeds the amount of the
Corporation's obligations under any Forward Commitment to which it is from
time to time a party; and
(ii) the Corporation will not enter into a Forward Commitment
unless, after giving effect thereto the Corporation would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Corporation is a party and of all securities deliverable to the
Corporation pursuant to such Forward Commitments shall be zero.
(d) For so long as shares of AMPS are rated by S&P or Moody's, the
Corporation will not, unless it has received written confirmation from S&P
and/or Moody's, as the case may be, that such action would not impair the
ratings then assigned to shares of AMPS by S&P and/or Moody's, as the case
may be, (i) borrow money except for the purpose of clearing transactions in
portfolio securities (which borrowings shall under any circumstances be
limited to the lesser of $10 million and an amount equal to 5% of the Market
Value of the Corporation's
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assets at the time of such borrowings and which borrowings shall be repaid
within 60 days and not be extended or renewed and shall not cause the
aggregate Discounted Value of Moody's Eligible Assets and S&P Eligible Assets
to be less than the AMPS Basic Maintenance Amount), (ii) engage in short
sales of securities, (iii) lend any securities, (iv) issue any class or
series of stock ranking prior to or on a parity with the AMPS with respect
to the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Corporation, (v) reissue any AMPS previously
purchased or redeemed by the Corporation, (vi) merge or consolidate into or
with any other corporation or entity, (vii) change the Pricing Service or
(viii) engage in reverse repurchase agreements.
9. Notice. All notices or communications, unless otherwise specified
------
in the By-Laws of the Corporation or these Articles Supplementary, shall be
sufficiently given if in writing and delivered in person or mailed by
first-class mail, postage prepaid. Notice shall be deemed given on the
earlier of the date received or the date seven days after which such notice
is mailed.
10. Auction Procedures. (a) Certain definitions. As used in this
------------------ -------------------
paragraph 10, the following terms shall have the following meanings, unless
the context otherwise requires:
(i) "AMPS" means the shares of AMPS being auctioned pursuant to
this paragraph 10.
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(ii) "Auction Date" means the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph
10(d)(i) below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i)
below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will
be determined based on (i) the lower of the credit rating or ratings assigned
on such date to such shares by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the equivalent of either or both of
such ratings by a Substitute Rating Agency or two Substitute Rating Agencies
or, in the event that only one such rating shall be available, such rating)
and (ii) whether the Corporation has provided notification to the Auction
Agent prior to the Auction establishing the Applicable Rate for any dividend
pursuant to paragraph 2(f) hereof that net capital gains or other taxable
income will be included in such dividend on shares of AMPS as follows:
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Applicable Applicable
Percentage of Percentage of
Reference Reference
Credit Ratings Rate - Rate -
- - -----------------------------------
Moody's S&P No Notification Notification
- - -------------- ---------------- --------------- ------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
The Corporation shall take all reasonable action necessary to enable S&P
and Moody's to provide a rating for each series of AMPS. If either S&P or
Moody's shall not make such a rating available, or neither S&P nor Moody's
shall make such a rating available, Merrill Lynch, Pierce, Fenner & Smith
Incorporated or its affiliates and successors, after consultation with the
Corporation, shall select a nationally recognized statistical rating
organization or two nationally recognized statistical rating organizations
to act as a Substitute Rating Agency or Substitute Rating Agencies, as the
case may be.
(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on
any Auction Date or such other time on any Auction Date as may be specified
by the Auction Agent from time to time as the time by which each
Broker-Dealer must submit to the Auction Agent in writing all orders obtained
by it for the Auction to be conducted on such Auction Date.
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(xi) "Submitted Bid" has the meaning specified in paragraph
10(d)(i) below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in
paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
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(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
------------------------------------------------------------------
Holders and Potential Holders.
- - -----------------------------
(i) Unless otherwise permitted by the Corporation, Beneficial
Owners and Potential Beneficial Owners may only participate in Auctions
through their Broker-Dealers. Broker-Dealers will submit the Orders of their
respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves as Existing Holders in
respect of shares subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of shares subject to
Orders submitted to them by Potential Beneficial Owners. A Broker-Dealer may
also hold shares of AMPS in its own account as a Beneficial Owner. A Broker-
Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner or
a Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its
customers. On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of Outstanding shares, if any, of AMPS held
by such Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for the next succeeding Dividend
Period;
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(2) the number of Outstanding shares, if any, of AMPS held
by such Beneficial Owner which such Beneficial Owner desires to continue to
hold, provided that the Applicable Rate for the next succeeding Dividend
Period shall not be less than the rate per annum specified by such Beneficial
Owner; and/or
(3) the number of Outstanding shares, if any, of AMPS held
by such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial
Owners that shall be maintained in good faith for the purpose of conducting
a competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the number
of Outstanding shares, if any, of AMPS which each such Potential Beneficial
Owner offers to purchase, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter
referred to as an
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"Order" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order, including a Broker-Dealer acting in such capacity for its own
account, is hereinafter referred to as a "Bidder"; an Order containing the
information referred to in clause (A)(1) of this paragraph 10(b)(i) is
hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this paragraph 10(b)(i)
is hereinafter referred to as a "Bid"; and an Order containing the
information referred to in clause (A)(3) of this paragraph 10(b)(i) is
hereinafter referred to as a "Sell Order". Inasmuch as a Broker-Dealer
participates in an Auction as an Existing Holder or a Potential Holder only
to represent the interests of a Beneficial Owner or Potential Beneficial
Owner, whether it be its customers or itself, all discussion herein relating
to the consequences of an Auction for Existing Holders and Potential Holders
also applies to the underlying beneficial ownership interests represented
thereby.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of AMPS specified in such Bid
if the Applicable Rate determined on such Auction Date shall be less than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 10(e)(i)(D) if the Applicable Rate
determined on such
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Auction Date shall be equal to the rate per annum specified therein; or
(3) a lesser number of Outstanding shares of AMPS to be determined
as set forth in paragraph 10(e)(ii)(C) if such specified rate per annum shall
be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do
not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of AMPS specified in such
Sell Order; or
(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 10(e)(ii)(C) if Sufficient
Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an
irrevocable offer to purchase:
(1) the number of Outstanding shares of AMPS specified
in such Bid if the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares
of AMPS to be determined as set forth in paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to the rate
per annum specified therein.
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(c) Submission of Orders by Broker-Dealers to Auction Agent.
-------------------------------------------------------
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the
Corporation) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Corporation);
(B) the aggregate number of Outstanding shares of AMPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of AMPS subject
to any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of AMPS subject
to any Bid placed by such Existing Holder and the rate per annum specified
in such Bid; and
(3) the number of Outstanding shares, if any, of AMPS subject
to any Sell Order placed by such Existing Holder; and
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(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of
AMPS held by an Existing Holder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period which is not a Special
Dividend Period) and a Sell Order (in the case of an Auction relating to a
Special Dividend Period) to have been submitted on behalf of such Existing
Holder covering the number of Outstanding shares of AMPS held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in
the aggregate more than the number of Outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder
shall be considered valid up to and including the number of Outstanding
shares of AMPS held by such Existing Holder; provided that if more than one
Hold Order is submitted on behalf of such Existing Holder and the
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number of shares of AMPS subject to such Hold Orders exceeds the number
of Outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders shall be reduced pro rata
so that such Hold Orders, in the aggregate, will cover exactly the number of
Outstanding shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per annum
if more than one Bid is submitted on behalf of such Existing Holder, up to
and including the excess of the number of Outstanding shares of AMPS held by
such Existing Holder over the number of shares of AMPS subject to any Hold
Order referred to in paragraph 10(c)(iv)(A) above (and if more than one Bid
submitted on behalf of such Existing Holder specifies the same rate per annum
and together they cover more than the remaining number of shares that can be
the subject of valid Bids after application of paragraph 10(c)(iv)(A) above
and of the foregoing portion of this paragraph 10(c)(iv)(B) to any Bid or
Bids specifying a lower rate or rates per annum, the number of shares subject
to each of such Bids shall be reduced pro rata so that such Bids, in the
aggregate, cover exactly such remaining number of shares); and the number of
shares, if any, subject to Bids not valid under this
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<PAGE>
paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including
the excess of the number of Outstanding shares of AMPS held by such Existing
Holder over the number of shares of AMPS subject to Hold Orders referred to
in paragraph 10(c)(iv)(A) and Bids referred to in paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of AMPS subject to such Sell Orders
is greater than such excess, the number of shares of AMPS subject to each of
such Sell Orders shall be reduced pro rata so that such Sell Orders, in the
aggregate, cover exactly the number of shares of AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum
and number of shares of AMPS specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid
------------------------------------------------------
Rate and Applicable Rate.
- - ------------------------
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each
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such Order as submitted or deemed submitted by a Broker-Dealer being
hereinafter referred to individually as a "Submitted Hold Order", a
"Submitted Bid" or a "Submitted Sell Order", as the case may be, or as a
"Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of AMPS
over the number of Outstanding shares of AMPS that are the subject of
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available AMPS");
(B) from the Submitted Orders whether the number of Outstanding
shares of AMPS that are the subject of Submitted Bids by Potential Holders
specifying one or more rates per annum equal to or lower than the Maximum
Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of AMPS that are the
subject of Submitted Bids by Existing Holders specifying one or more rates
per annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of AMPS that are subject
to Submitted Sell Orders (if such excess or such equality exists (other than
because the number of Outstanding shares of AMPS in clauses (1) and (2) above
are each zero because all of the Outstanding shares of AMPS are the subject
of Submitted Hold Orders), such Submitted Bids by Potential Holders being
hereinafter referred to collectively as "Sufficient Clearing Bids"); and
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(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other Submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such Existing
Holders to continue to hold the shares of AMPS that are the subject of such
Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the Potential
Holders to purchase the shares of AMPS that are the subject of such Submitted
Bids,
would result in the number of shares subject to all Submitted Bids specifying
the Winning Bid Rate or a lower rate per annum being at least equal to the
Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to paragraph 10(d)(i), the Auction Agent shall advise the
Corporation of the Maximum Applicable Rate and, based on such determinations,
the Applicable Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate
for the next succeeding Dividend Period shall be equal to the Winning Bid
Rate;
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(B) if Sufficient Clearing Bids do not exist (other than because
all of the Outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend Period
shall be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding shares of AMPS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the Auction
shall automatically be the same length as the immediately preceding Dividend
Period and the Applicable Rate for the next succeeding Dividend Period shall
be equal to 59% of the Reference Rate (or 90% of such rate if the Corporation
has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph 2(f)
hereof that net capital gains or other taxable income will be included in
such dividend on shares of AMPS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
-----------------------------------------------
Orders and Allocation of Shares. Based on the determinations made pursuant
to paragraph 10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as
set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids
and Submitted Sell Orders shall be accepted or
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rejected in the following order of priority and all other Submitted Bids
shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be
accepted and the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is higher than the Winning Bid Rate shall be accepted,
thus requiring each such Existing Holder to sell the Outstanding shares of
AMPS that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the Outstanding
shares of AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying
a rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the Outstanding
shares of AMPS that are the subject of such Submitted Bid, unless the number
of Outstanding shares of AMPS subject to all such Submitted Bids shall be
greater than the number of Outstanding shares of AMPS ("Remaining Shares")
equal to the excess of the Available AMPS over the number of Outstanding
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shares of AMPS subject to Submitted Bids described in paragraph
10(e)(i)(B) and paragraph 10(e)(i)(C), in which event the Submitted Bids of
each such Existing Holder shall be accepted, and each such Existing Holder
shall be required to sell Outstanding shares of AMPS, but only in an amount
equal to the difference between (1) the number of Outstanding shares of AMPS
then held by such Existing Holder subject to such Submitted Bid and (2) the
number of shares of AMPS obtained by multiplying (x) the number of Remaining
Shares by (y) a fraction the numerator of which shall be the number of
Outstanding shares of AMPS held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the sum of the number of
Outstanding shares of AMPS subject to such Submitted Bids made by all such
Existing Holders that specified a rate per annum equal to the Winning Bid
Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying
a rate per annum that is equal to the Winning Bid Rate shall be accepted but
only in an amount equal to the number of Outstanding shares of AMPS obtained
by multiplying (x) the difference between the Available AMPS and the number
of Outstanding shares of AMPS subject to Submitted Bids described in
paragraph 10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph 10(e)(i)(D) by (y)
a fraction the numerator of which shall be the number of Outstanding shares
of AMPS subject to such Submitted Bid and the denominator of which
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shall be the sum of the number of Outstanding shares of AMPS subject to
such Submitted Bids made by all such Potential Holders that specified rates
per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding shares of AMPS are subject to Submitted Hold Orders),
subject to the provisions of paragraph 10(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate shall
be rejected, thus entitling such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the Outstanding
shares of AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be accepted
and the Submitted Sell Orders of each Existing Holder shall be accepted, in
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both cases only in an amount equal to the difference between (1) the
number of Outstanding shares of AMPS then held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and (2) the number of
shares of AMPS obtained by multiplying (x) the difference between the
Available AMPS and the aggregate number of Outstanding shares of AMPS subject
to Submitted Bids described in paragraph 10(e)(ii)(A) and paragraph
10(e)(ii)(B) by (y) a fraction the numerator of which shall be the number of
Outstanding shares of AMPS held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and the denominator of which shall be
the number of Outstanding shares of AMPS subject to all such Submitted Bids
and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph 10(e)(i)
or paragraph 10(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of AMPS on any Auction Date, the Auction Agent shall, in
such manner as in its sole discretion it shall determine, round up or down
the number of shares of AMPS to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date so that each Outstanding share of
AMPS purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be a whole share of AMPS.
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(iv) If, as a result of the procedures described in paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a
whole share of AMPS on any Auction Date, the Auction Agent shall, in such
manner as in its sole discretion it shall determine, allocate shares of AMPS
for purchase among Potential Holders so that only whole shares of AMPS are
purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
any shares of AMPS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of Outstanding shares of AMPS to be purchased and the aggregate number
of the Outstanding shares of AMPS to be sold by such Potential Holders and
Existing Holders and, to the extent that such aggregate number of Outstanding
shares to be purchased and such aggregate number of Outstanding shares to be
sold differ, the Auction Agent shall determine to which other Broker-Dealer
or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one
or more sellers such Broker-Dealer shall receive, as the case may be,
Outstanding shares of AMPS.
(f) Miscellaneous. The Corporation may interpret the provisions of
-------------
this paragraph 10 to resolve any inconsistency or ambiguity, remedy any
formal defect or make any other change or
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modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid
or Sell Order in accordance with the procedures described in this paragraph
10 or to or through a Broker-Dealer, provided that in the case of all
transfers other than pursuant to Auctions such Beneficial Owner or Existing
Holder, its Broker-Dealer, if applicable, or its Agent Member advises the
Auction Agent of such transfer and (B) except as otherwise required by law,
shall have the ownership of the shares of AMPS held by it maintained in book
entry form by the Securities Depository in the account of its Agent Member,
which in turn will maintain records of such Beneficial Owner's beneficial
ownership. Neither the Corporation nor any Affiliate shall submit an Order
in any Auction. Any Beneficial Owner that is an Affiliate shall not sell,
transfer or otherwise dispose of shares of AMPS to any Person other than the
Corporation. All of the Outstanding shares of AMPS of a series shall be
represented by one or more certificates registered in the name of the nominee
of the Securities Depository unless otherwise required by law or unless there
is no Securities Depository. If there is no Securities Depository, at the
Corporation's option and upon its receipt of such documents as it deems
appropriate, any shares of AMPS may be registered in the Stock Register in
the name of the Beneficial Owner thereof and such Beneficial Owner thereupon
will
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be entitled to receive certificates therefor and required to deliver
certificates therefor upon transfer or exchange thereof.
11. Securities Depository; Stock Certificates. (a) If there is a
-----------------------------------------
Securities Depository, one or more certificates for all of the shares of AMPS
of each series shall be issued to the Securities Depository and registered
in the name of the Securities Depository or its nominee. Additional
certificates may be issued as necessary to represent shares of AMPS. All
such certificates shall bear a legend to the effect that such certificates
are issued subject to the provisions restricting the transfer of shares of
AMPS contained in these Articles Supplementary. Unless the Corporation shall
have elected, during a Non-Payment Period, to waive this requirement, the
Corporation will also issue stop-transfer instructions to the Auction Agent
for the shares of AMPS. Except as provided in paragraph (b) below, the
Securities Depository or its nominee will be the Holder, and no Beneficial
Owner shall receive certificates representing its ownership interest in such
shares.
(b) If the Applicable Rate applicable to all shares of AMPS of a series
shall be the Non-Payment Period Rate or there is no Securities Depository,
the Corporation may at its option issue one or more new certificates with
respect to such shares (without the legend referred to in paragraph 11(a))
registered in the names of the Beneficial Owners or their nominees and
rescind the stop-transfer instructions referred to in paragraph 11(a) with
respect to such shares.
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IN WITNESS WHEREOF, MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC. has
caused these presents to be signed in its name and on its behalf by a duly
authorized officer, and its corporate seal to be hereunto affixed and
attested by its Secretary, and the said officers of the Corporation further
acknowledge said instrument to be the corporate act of the Corporation, and
state under the penalties of perjury that to the best of their knowledge,
information and belief the matters and facts herein set forth with respect
to approval are true in all material respects, all on ___________, 1996.
MERRILL LYNCH MUNICIPAL STRATEGY
FUND, INC.
By _____________________________
Name:
Title:
Attest:
___________________________
Mark B. Goldfus
Secretary
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Draft of 11/10/95
$__________
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
(a Maryland corporation)
AUCTION MARKET PREFERRED STOCK(Registered Trademark) ("AMPS"(Registered
Trademark))
_______ Shares Series A
Liquidation Preference $25,000 Per Share
DISTRIBUTION AGREEMENT
----------------------
January __, 1996
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1305
Dear Sirs:
Merrill Lynch Municipal Strategy Fund, Inc., a Maryland corporation
(the "Fund"), and Fund Asset Management, L.P., a Delaware limited
partnership (the "Adviser"), each confirms its agreement with Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Distributor"), with respect to the sale by the Fund through the
Distributor of up to ___ shares of Auction Market Preferred Stock, Series
A of the Fund with a par value of $.10 per share and a liquidation
preference of $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) (the "Shares").
______________________
(Registered Trademark) Registered trademark of Merrill Lynch & Co., Inc.
1
<PAGE>
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as
an investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"), and a registration statement on Form N-2 (No. 33-_____)
and such amendments thereto as may have been required to the date hereof
for the registration of the Shares under the Securities Act of 1933, as
amended (the "1933 Act"), the 1940 Act, and the rules and regulations of
the Commission under the 1933 Act and the 1940 Act (the "Rules and
Regulations"), and the offering of the Shares on a continuous basis in
accordance with Rule 415 of the rules and regulations under the 1933 Act.
Such registration statement has been declared effective by the Commission.
Such registration statement (as amended at the time it became effective)
and the prospectus constituting a part thereof, and any prospectus
supplement and pricing supplement relating to the Shares, are referred to
hereinafter as the "Registration Statement" and the "Prospectus,"
respectively, except that if any revised prospectus shall be provided to
the Distributor by the Fund for use in connection with the offering of the
Shares, the term "Prospectus" shall refer to each such revised prospectus
from and after the time it first is provided to the Distributor for such
use.
SECTION 1. Appointment as Distributor.
--------------------------
(a) Appointment. Subject to the terms and conditions stated herein,
-----------
the Fund hereby agrees that the Shares will be sold exclusively through
the Distributor. The Fund agrees that it will not appoint any other
distributors to act on its behalf, or to assist it, in the sale of the
Shares.
(b) Sale of Shares. The Fund shall not sell or approve the
--------------
solicitation of purchases of Shares in excess of the amount which shall be
authorized by the Fund from time to time or in excess of the aggregate
number of Shares registered pursuant to the Registration Statement. The
Distributor shall have no responsibility for maintaining records with
respect to the aggregate number of Shares sold, or of otherwise monitoring
the availability of Shares for sale, under the Registration Statement.
(c) Reliance. The Fund and the Distributor agree that any Shares
--------
purchased by the Distributor shall be purchased in reliance on the
representations, warranties, covenants and agreements of the Fund
contained herein and on the terms and conditions and in the manner
provided herein.
SECTION 2. Representations and Warranties. (a) The Fund and the
------------------------------
Adviser each severally represents and warrants to the Distributor as of
the date hereof, as of the date of each acceptance by the Fund of an offer
to purchase the Shares, as of the date of each delivery of Shares (the
"Settlement Date") and
2
<PAGE>
as of any time that the Registration Statement or the Prospectus shall be
amended or supplemented (each of the times referenced above being referred
to herein as a "Representation Date") as follows:
(i) At the time the Registration Statement became effective and
as of each Representation Date, the Registration Statement complied, and as
of each Representation Date will comply in all material respects with the
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and
did not and will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading. As of
the date hereof and as of each Representation Date the Prospectus does not
and will not contain an untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
-------- -------
subsection shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Fund in writing by the
Distributor expressly for use in the Registration Statement or in the
Prospectus.
(ii) The accountants who certified the statement of assets,
liabilities and capital included in the Registration Statement are
independent public accountants as required by the 1933 Act and the Rules and
Regulations.
(iii) The financial statements included in the Registration
Statement present fairly the financial position of the Fund as at the date
indicated and the results of its operations for the period specified; such
financial statements have been prepared in conformity with generally accepted
accounting principles; and the information in the Prospectus under the
headings "Description of Capital Stock" and "Portfolio Composition" has been
fairly presented.
(iv) Since the respective dates as of which information is
given in the Registration Statement and in the Prospectus, except as
otherwise stated therein,
(A) there has been no material adverse change in the condition,
financial or otherwise, of the Fund, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary course
of business, and (B) there have been no transactions entered into by the Fund
which are material to the Fund other than those in the ordinary course of
business.
3
<PAGE>
(v) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Maryland with corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Registration
Statement; the Fund is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required; and the Fund has no subsidiaries.
(vi) The Fund is registered with the Commission under the 1940
Act as a closed-end, non-diversified, management investment company, and no
order of suspension or revocation of such registration has been issued or
proceedings therefor initiated or threatened by the Commission.
(vii) The outstanding shares of common stock, par value $.10 per
share (the "Common Shares"), have been duly authorized and validly issued and
are fully paid and nonassessable; the Shares have been duly authorized
for issuance and sale to the Distributor pursuant to this Agreement and, when
issued and delivered by the Fund pursuant to this Agreement against payment
of the applicable consideration, will be validly issued and fully paid and
nonassessable; the Common Shares and the Shares conform in all material
respects to all statements relating thereto contained in the Registration
Statement; and the issuance of the Shares to be purchased by the Distributor
is not subject to preemptive rights.
(viii) The Fund is not in violation of its charter, as amended
(the "Charter"), or its by-laws, as amended (the "By-Laws"), or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which it is a
party or by which it or its properties may be bound; and the execution and
delivery of this Agreement and the Investment Advisory Agreement, the
Administration Agreement, the Custody Agreement, the Auction Agent Agreement
and the Depository Agreement referred to in the Registration Statement (as
used herein, the "Advisory Agreement," the "Administration Agreement," the
"Auction Agreement," the "Custody Agreement" and the "Depository Agreement,"
respectively), and the consummation of the transactions contemplated herein
and therein, will not conflict with or constitute a breach of, or a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Fund pursuant to any material
contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Fund is a party or
by which it may be bound or to which any of the property
4
<PAGE>
or assets of the Fund is subject, nor will such action result in any
violation of the provisions of the Charter or the By-Laws of the Fund or, to
the best knowledge of the Fund and the Adviser, any law, administrative
regulation or administrative or court decree; and no consent, approval,
authorization or order of any court or governmental authority or agency is
required for the consummation by the Fund of the transactions contemplated
by this Agreement, the Advisory Agreement, the Administration Agreement, the
Custody Agreement, the Auction Agreement and the Depository Agreement,
except such as has been obtained under the 1940 Act or as may be required
under the 1933 Act or state securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the Distributor.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in the
Prospectus, and the Fund has not received any notice of proceedings relating
to the revocation or modification of any such licenses, permits, covenants,
orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending or,
to the knowledge of the Fund or the Adviser, threatened against or affecting
the Fund, which might result in any material adverse change in the condition,
financial or otherwise, business affairs or business prospects of the Fund,
or might materially and adversely affect the properties or assets of the
Fund; and there are no material contracts or documents of the Fund which are
required to be filed as exhibits to the Registration Statement by the 1933
Act, the 1940 Act or the Rules and Regulations which have not been so filed.
(xi) The Fund owns or possesses, or can acquire on reasonable
terms, adequate trademarks, service marks and trade names necessary to
conduct the business now operated by it, and the Fund has not received any
notice of infringement of or conflict with asserted rights of others with
respect to any trademarks, service marks or trade names which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would materially and adversely affect the conduct of the business,
operations, financial condition or income of the Fund.
(xii) The Fund intends to, and will, direct the investment of
the proceeds of the offering described in the
5
<PAGE>
Registration Statement in such a manner as to comply with the
requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended ("Subchapter M of the Code"), and intends to qualify as a
regulated investment company under Subchapter M of the Code.
(xiii) This Agreement, the Advisory Agreement, the Administration
Agreement and the Custody Agreement each has been duly authorized,
executed and delivered by the Fund, and each complies with all applicable
provisions of the 1940 Act.
(xiv) The Auction Agreement and the Depository Agreement each
has been duly authorized for execution and delivery by the Fund and, when
executed and delivered by the Fund, will constitute a valid and binding
obligation of the Fund, enforceable in accordance with its terms, subject,
as to enforcement, to bankruptcy, insolvency, reorganization or other laws
relating to or affecting creditors' rights and to general equitable
principles.
(b) The Adviser represents and warrants to the Distributor as of the
date hereof and as of each Representation Date as follows:
(i) The Adviser has been duly organized as a limited
partnership under the laws of the State of Delaware with power and
authority to conduct its business as described in the Registration
Statement and Prospectus.
(ii) The Adviser is duly registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"), and is not prohibited by the Advisers Act or the 1940 Act, or the
rules and regulations under such acts, from acting under the Advisory
Agreement for the Fund as contemplated by the Prospectus.
(iii) This Agreement has been duly authorized, executed and
delivered by the Adviser; the Advisory Agreement and the Administration
Agreement are in full force and effect and constitute valid and binding
obligations of the Adviser, enforceable in accordance with their terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization or
other laws relating to or affecting creditors' rights and to general
equitable principles; and neither the execution and delivery of this
Agreement nor the performance by the Adviser of its obligations hereunder or
under the Advisory Agreement or under the Administration Agreement will
conflict with, or result in a breach of, any of the terms and provisions of,
or constitute, with or without the giving of notice or the lapse of time or
both, a default under, any agreement or instrument to which the Adviser is a
party or
6
<PAGE>
by which it is bound, or any law, order, rule or regulation
applicable to it of any jurisdiction, court, Federal or state regulatory
body, administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Adviser or its respective
properties or operations.
(iv) The Adviser has the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Prospectus.
(c) Any certificate signed by any officer of the Fund or the Adviser
and delivered to the Distributor shall be deemed a representation and
warranty by the Fund or the Adviser, as the case may be, to the
Distributor, as to the matters covered thereby.
SECTION 3. Sale and Delivery to the Distributor.
------------------------------------
(a) On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, when
agreed to by the Fund and the Distributor, the Distributor will use its
reasonable efforts to solicit offers to purchase the Shares at the price
per share equal to $25,000 (the "Liquidation Preference"). All Shares
sold through the Distributor will be sold at a price per share equal to
the Liquidation Preference unless otherwise agreed by the Fund and the
Distributor. The Distributor shall have the right to buy from the Fund
and the Fund will sell to the Distributor, at a price per share equal to
the Liquidation Preference unless otherwise agreed by the Fund and the
Distributor, the Shares needed to fill orders for Shares placed with the
Distributor by investors. The Fund may accept or reject any proposed
purchase of Shares in whole or in part.
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made on Settlement Dates as shall be agreed upon
by the Distributor and the Fund. Payment shall be made to the Fund by a
Federal Funds check or checks or similar same-day funds payable to the
order of the Fund, against delivery to the Distributor of the certificates
for the Shares to be purchased by it. The Shares shall be represented by
one or more certificates registered in the name of Cede & Co., as nominee
for The Depository Trust Company.
SECTION 4. Covenants of the Fund. The Fund covenants with the
---------------------
Distributor as follows:
(a) The Fund will notify the Distributor immediately, and will
confirm the notice in writing, (i) of the effectiveness of any amendment
to the Registration Statement, (ii) the transmittal to the Commission for
filing of any amendment or supplement to
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<PAGE>
the Prospectus, (iii) of the receipt of any comments from the Commission,
(iv) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or
for additional information, (v) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or
the initiation of any proceedings for that purpose and (vi) of the
issuance by the Commission of an order of suspension or revocation of the
notification on Form N-8A of registration of the Fund as an investment
company under the 1940 Act or initiation of any proceeding for that
purpose. The Fund will make every reasonable effort to prevent the
issuance of any stop order described in subsection (v) hereunder or any
order of suspension or revocation described in subsection (vi) hereunder
and, if any such stop order or order of suspension or revocation is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) The Fund will give the Distributor notice of its intention to
file any amendment to the Registration Statement or any amendment or
supplement to the Prospectus, whether pursuant to the 1940 Act, the 1933
Act, or otherwise, and will furnish the Distributor with copies of any
such amendment or supplement a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such
amendment or supplement to which the Distributor or counsel for the
Distributor reasonably shall object.
(c) The Fund will deliver to the Distributor, as soon as
practicable, two signed copies of any amendment to the Registration
Statement with two sets of the exhibits filed therewith, and also will
deliver to the Distributor a conformed copy of any amendment to the
Registration Statement.
(d) The Fund will furnish to the Distributor such number of copies
of the Prospectus (as amended or supplemented) as the Distributor
reasonably may request for the purposes contemplated by the 1933 Act or
the rules and regulations thereunder.
(e) If any event shall occur as a result of which it is necessary,
in the opinion of counsel for the Distributor, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of
the circumstances existing at the time it is delivered to a purchaser, the
Fund forthwith will amend or supplement the Prospectus by preparing and
furnishing to the Distributor a reasonable number of copies of an
amendment or amendments of, or a supplement or supplements to, the
Prospectus (in form and substance satisfactory to counsel for the
Distributor), so that, as so amended or supplemented, the Prospectus will
not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances
8
<PAGE>
existing at the time the Prospectus is delivered to a purchaser, not
misleading.
(f) The Fund will endeavor, in cooperation with the Distributor, to
qualify the Shares for offering and sale under the applicable securities
laws of such states and other jurisdictions of the United States as the
Distributor may designate, and will maintain such qualifications in effect
for as long as may be required for the distribution of the Shares. The
Fund will file such statements and reports as may be required by the laws
of each jurisdiction in which the Shares have been qualified as above
provided. The Fund will promptly advise the Distributor of the receipt by
the Fund of any notification with respect to the suspension of the
qualification of the Shares for sale in any such state or jurisdiction or
the initiating or threatening of any proceeding for such purpose.
(g) The Fund will make generally available to its security holders
as soon as practicable, but no later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the Rules and Regulations) covering a
twelve-month period beginning not later than the first day of the Fund's
fiscal quarter next following the "effective" date (as defined in said
Rule 158) of the Registration Statement.
(h) The Fund will use its best efforts to maintain its qualification
as a regulated investment company under Subchapter M of the Code.
SECTION 5. Covenants of the Distributor. The Distributor covenants
----------------------------
and agrees with the Fund that no later than the second business day
succeeding each Settlement Date, it will provide the Fund and the Auction
Agent (as defined in the Prospectus) with a list of the persons to whom it
has sold Shares on such Settlement Date, the number of Shares sold to each
such person and the number of Shares it is holding as of the date of such
notice.
SECTION 6. Payment of Expenses. The Fund will pay all expenses
-------------------
incident to the performance of its obligations under this Agreement,
including, but not limited to, expenses relating to (i) the printing and
filing of the registration statement as originally filed and of each
amendment thereto, (ii) the preparation, issuance and delivery of the
certificates for the Shares to the Distributor, (iii) the fees and
disbursements of the Fund's counsel and accountants, (iv) the
qualification of the Shares under securities laws in accordance with the
provisions of Section 4(g) of this Agreement, including filing fees and
any fees or disbursements of counsel for the Distributor in connection
therewith and in connection with the preparation of the Blue Sky Survey,
(v) the printing and delivery to the Distributor of copies of the
Registration Statement and of each
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<PAGE>
amendment thereto, and of the Prospectus and any amendments or supplements
thereto, (vi) the printing and delivery to the Distributor of copies of
the Blue Sky Survey and (vii) the fees charged by rating agencies for the
rating of the Shares.
SECTION 7. Conditions of Distributor's Obligations. The obligations
---------------------------------------
of the Distributor hereunder are subject to the accuracy of the
representations and warranties of the Fund and the Adviser herein
contained, to the performance by the Fund and the Adviser of their
respective obligations hereunder, and to the following further conditions:
(a) The Registration Statement is effective and at each Settlement
Date, no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission.
(b) At the date hereof, the Distributor shall have received:
(i) The favorable opinion, dated as of Closing Time, of Brown &
Wood, counsel for the Fund and the Distributor, to the effect that:
(1) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Maryland.
(2) The Fund has corporate power and authority to own,
lease and operate its properties and conduct its business as described in the
Registration Statement and in the Prospectus.
(3) The Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, except where the failure to so qualify would not
have a material adverse effect on the condition, financial or otherwise,
business affairs or business prospects of the Fund.
(4) The outstanding Common Shares at the date hereof have
been duly authorized and validly issued and are fully paid and
nonassessable.
(5) The Shares have been duly authorized for issuance and
sale to the Distributor pursuant to this Agreement and, when issued and
delivered by the Fund pursuant to this Agreement against payment of the
applicable consideration, will be validly issued and fully paid and
nonassessable; the issuance of the
10
<PAGE>
Shares is not subject to preemptive or other similar rights; and
the authorized capital stock conforms in all material respects to the
description thereof in the Registration Statement.
(6) This Agreement has been duly authorized, executed and
delivered by the Fund, and complies with all applicable provisions of the
1940 Act.
(7) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop order
suspending the effectiveness of the Registration Statement has been issued
under the 1933 Act, and no proceedings for that purpose have been initiated,
are pending or are contemplated.
(8) The Registration Statement and the Prospectus, (other
than the financial statements included therein, as to which no opinion need
be rendered) as of their respective effective or issue dates complied
as to form in all material respects with the requirements of the 1933 Act,
the 1940 Act and the Rules and Regulations.
(9) To the best of their knowledge and information, there
are no legal or governmental proceedings pending or threatened against the
Fund which are required to be disclosed in the Registration Statement, other
than those disclosed therein.
(10) To the best of their knowledge and information, there
are no contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments of the Fund required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed as exhibits thereto, the
descriptions thereof are correct in all material respects, references thereto
are correct, and no default exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease
or other instrument so described, referred to or filed.
(11) No consent, approval, authorization or order of any
court or governmental authority or agency is required in connection with the
sale of the Shares to the Distributor, except such as has been obtained under
the 1933 Act, the 1940 Act or the Rules and Regulations or such as may be
required under state securities laws; and to the best of their knowledge and
information, the
11
<PAGE>
execution and delivery of this Agreement, the Advisory
Agreement, the Administration Agreement, the Custody Agreement, the Auction
Agreement and the Depository Agreement and the consummation of the
transactions contemplated herein and therein will not conflict with or
constitute a breach of, or a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Fund pursuant to, any contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which the Fund is a party or
by which it may be bound or to which any of the property or assets of the
Fund is subject, nor will such action result in any violation of the
provisions of the Charter or the By-Laws of the Fund, or any law,
administrative regulation or administrative or court decree.
(12) The Advisory Agreement, the Administration Agreement
and the Custody Agreement each has been duly authorized, executed and
delivered by the Fund, and each complies with all applicable provisions of
the 1940 Act.
(13) The Fund is registered with the Commission under the
1940 Act as a closed-end, non-diversified, management investment company, and
all required action has been taken by the Fund under the 1933 Act, the
1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares pursuant to this Agreement; the provisions
of the Charter and the By-Laws of the Fund comply as to form in
all material respects with the requirements of the 1940 Act; and, to the best
of their knowledge and information, no order of suspension or
revocation of such registration under the 1940 Act, pursuant to Section 8(e)
of the 1940 Act, has been issued or proceedings therefor initiated or
threatened by the Commission.
(14) The information in the Prospectus under the caption
"Taxes", to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by them and is correct in all material
respects.
(15) The Auction Agreement and the Depository Agreement
each has been duly authorized, executed and delivered by the Fund, and each
constitutes a valid and binding obligation of the Fund, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights and to general equitable principles.
12
<PAGE>
(ii) The favorable opinion, dated as of the date hereof, of
Philip L. Kirstein, Esq., General Counsel for the Adviser, in form and
substance satisfactory to counsel for the Distributor, to the effect that:
(1) The Adviser has been duly organized as a limited
partnership under the laws of the State of Delaware, with power and authority
to conduct its business as described in the Registration Statement and in the
Prospectus.
(2) The Adviser is duly registered as an investment
adviser under the Advisers Act and is not prohibited by the Advisers Act or
the 1940 Act, or the rules and regulations under such Acts, from acting
under the Advisory Agreement or the Administration Agreement for the Fund as
contemplated by the Prospectus.
(3) This Agreement has been duly authorized, executed and
delivered by the Adviser; the Advisory Agreement and the Administration
Agreement are in full force and effect and constitute valid and binding
obligations of the Adviser, enforceable in accordance with their terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization or
other laws relating to or affecting creditors' rights and to general
equitable principles; and, to the best of his knowledge and information,
neither the execution and delivery of this Agreement or the Advisory
Agreement or the Administration Agreement nor the performance by the Adviser
of its obligations hereunder or thereunder will conflict with, or result in a
breach of, any of the terms and provisions of, or constitute,
with or without the giving of notice or the lapse of time or both, a default
under, any agreement or instrument to which the Adviser is a party
or by which the Adviser is bound, or any law, order, rule or regulation
applicable to the Adviser of any jurisdiction, court, Federal or state
regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Adviser or
its properties or operations.
(4) To the best of his knowledge and information, the
description of the Adviser in the Registration Statement and in the
Prospectus does not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading.
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<PAGE>
(iii) In giving their opinion required by subsection (b)(i) of
this Section, Brown & Wood additionally shall state that nothing has come to
their attention that would lead them to believe that the Registration
Statement, at the time it became effective or at the date hereof, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, at the date hereof, includes an untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. In
giving their opinion, Brown & Wood may rely, as to all matters governed by
the laws of the State of Maryland, upon the opinion of Galland, Kharasch,
Morse & Garfinkle, P.C. Galland, Kharasch, Morse & Garfinkle, P.C. and Brown
& Wood may rely, as to matters of fact, upon certificates and written
statements of officers and employees of and accountants for the Fund and the
Adviser and of public officials.
(c) At the date hereof, (i) there shall not have been, since the
date as of which information is given in the Prospectus, any material
adverse change in the condition, financial or otherwise, of the Fund or in
its earnings, business affairs or business prospects, whether or not
arising in the ordinary course of business, from that set forth in the
Prospectus, (ii) the Adviser shall have the financial resources available
to it necessary for the performance of its services and obligations as
contemplated in the Registration Statement and in the Prospectus, (iii) no
proceedings shall be pending or, to the knowledge of the Fund or the
Adviser, threatened against the Fund or the Adviser before or by any
Federal, state or other commission, board or administrative agency wherein
an unfavorable decision, ruling or finding would materially and adversely
affect the business, property, financial condition or income of either the
Fund or the Adviser other than as set forth in the Prospectus, and (iv)
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P") shall have confirmed that the Shares have been rated
"aaa" and AAA, respectively, by such agencies; and the Distributor shall
have received, at the date hereof, a certificate of the President or the
Treasurer of the Fund and of the President or a Vice President of the
Adviser dated as of the date hereof, evidencing compliance with the
appropriate provisions of this subsection (c), together with true and
correct copies of letters from Moody's and S&P confirming their rating.
As used in this subsection (c), the term "Prospectus" means the Prospectus
in the form first provided to the Distributor for use in confirming sales
of the Shares.
14
<PAGE>
(d) At the date hereof, the Distributor shall have received
certificates, dated the date hereof, (i) of the President or the Treasurer
of the Fund to the effect that the representations and warranties of the
Fund contained in Section 2(a) are true and correct with the same force
and effect as though expressly made at and as of Closing Time, and (ii) of
the President or a Vice President of the Adviser to the effect that the
representations and warranties of the Adviser contained in Sections 2(a)
and (b) are true and correct with the same force and effect as though
expressly made at and as of the date of such certificate.
(e) On the date hereof, the Distributor shall have received from
Deloitte & Touche LLP a letter, dated as of the date hereof, in form and
substance satisfactory to the Distributor, to the effect that:
(i) they are independent accountants with respect to the Fund
within the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the statement of assets, liabilities and
capital examined by them and included in the Registration Statement
complies as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1940 Act and the Rules and
Regulations;
(iii) they have performed specified procedures, not constituting
an audit, including a reading of the latest available interim financial
statements of the Fund, a reading of the minute books of the Fund, inquiries
of officials of the Fund responsible for financial accounting matters and
such other inquiries and procedures as may be specified in such letter, and
on the basis of such inquiries and procedures nothing came to their attention
that caused them to believe that (A) the unaudited
financial statements as of __________, 1994 included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and of the 1933 Act
Regulations applicable to unaudited interim financial statements included in
registration statements or are not in conformity with generally
accepted accounting principles applied on a basis substantially consistent
with that of the audited financial statements included in the Registration
Statement, and (B) during the period from __________, 1994 to a specified
date not more than three days prior to the date of this Agreement, there was
any change in the capital stock of the Fund (other than by reason of the
issuance of Common Shares in connection with the Fund's dividend reinvestment
plan, as specified in such letter) or any increase in the long-term debt of
the Fund, as compared with amounts shown on the unaudited financial
statements included in the Registration Statement,
15
<PAGE>
except for changes which the Registration Statement discloses have
occurred or may occur; and
(iv) in addition to the procedures referred to in clause (iii)
above, they have performed other specified procedures, not constituting an
audit, with respect to certain amounts, percentages, numerical data,
financial information and financial statements appearing in the Registration
Statement, which previously have been specified by such accountants and which
shall be specified in such letter, and have compared
certain of such items with, and have found such items to be in agreement
with, the accounting and financial records of the Fund.
(f) On the date hereof and on each Settlement Date, counsel for the
Distributor shall have been furnished with such documents and opinions as
they reasonably may require for the purpose of enabling them to pass upon
the issuance and sale of the Shares as herein contemplated and to pass
upon related proceedings, or in order to evidence the accuracy of any of
the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Fund and
the Adviser in connection with the organization and registration of the
Fund under the 1940 Act and the issuance and sale of the Shares as herein
contemplated shall be satisfactory in form and substance to the
Distributor and counsel for the Distributor.
If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be
terminated by the Distributor by notice to the Fund at any time, and such
termination shall be without liability of any party to any other party,
except that the covenant regarding provision of an earnings statement set
forth in Section 4(g) hereof, the provisions covering payment of expenses
under Section 6 hereof, the indemnity and contribution agreement set forth
in Sections 9 and 10 hereof, the provisions concerning the
representations, warranties and agreements to survive delivery of Section
11 hereof, the provisions relating to parties set forth in Section 14 and
the provision relating to governing law set forth in Section 15 shall
remain in effect.
SECTION 8. Additional Covenants of the Fund.
--------------------------------
The Fund covenants and agrees with the Distributor that:
(a) Reaffirmation of Representations and Warranties. Each
-----------------------------------------------
acceptance by the Fund of an offer for the purchase of Shares and each
delivery of Shares, shall be deemed to be an affirmation that the
representations and warranties of the Fund contained in this Agreement and
in any certificate theretofore delivered to the Fund pursuant thereto are
true and correct at the time of such acceptance or sale, as the case may
be, and an undertaking
16
<PAGE>
that such representations and warranties will be true and correct at the
time of delivery to the Distributor of the Shares relating to such
acceptance or sale, as the case may be, as though made at and as of each
such time (and it is understood that such representations and warranties
shall relate to the Registration Statement and Prospectus as amended and
supplemented to each such time).
(b) Subsequent Delivery of Certificates. Each time that the
-----------------------------------
Registration Statement or the Prospectus shall be amended or supplemented
(other than by an amendment or supplement providing solely information as
to the applicable dividend rate on Shares during a dividend period), the
Fund shall furnish or cause to be furnished to the Distributor, forthwith
certificates dated the date of filing with the Commission of such
supplement or the date of effectiveness of such amendment, as the case may
be, in form satisfactory to the Distributor to the effect that the
statements contained in the certificates referred to in Sections 7(c) and
7(d) hereof which were last furnished to the Distributor are true and
correct at the time of such amendment or supplement, as the case may be,
as though made at and as of such time (except that such statements shall
be deemed to relate to the Registration Statement and the Prospectus as
amended and supplemented to such time) or, in lieu of such certificates,
certificates of the same tenor as the certificates referred to in Sections
7(c) and 7(d) hereof, modified as necessary to relate to the Registration
Statement and the Prospectus as amended and supplemented to the time of
delivery of such certificate.
(c) Subsequent Delivery of Legal Opinions. Each time that the
-------------------------------------
Registration Statement or the Prospectus shall be amended or supplemented
(other than by an amendment or supplement providing solely information as
to the applicable dividend rate on Shares during a dividend period), the
Fund shall furnish or cause to be furnished forthwith to the Distributor
the written opinions of Brown & Wood, counsel to the Fund, and Philip L.
Kirstein, Esq., General Counsel for the Adviser, dated the date of filing
with the Commission of such supplement or the date of effectiveness of
such amendment, as the case may be, in form and substance satisfactory to
the Distributor, of the same tenor as the opinions referred to in Sections
7(b)(1) and 7(b)(2) hereof, respectively, but modified, as necessary, to
relate to the Registration Statement and the Prospectus as amended and
supplemented to the time of delivery of such opinion or, in lieu of such
opinion, counsel last furnishing each such opinion to the Distributor
shall furnish the Distributor with a letter substantially to the effect
that the Distributor may rely on such last opinion to the same extent as
though it was dated the date of such letter authorizing reliance (except
that statements in each such last opinion shall be deemed to relate to the
Registration Statement and the Prospectus as amended and
17
<PAGE>
supplemented to the time of delivery of each such letter authorizing
reliance).
(d) Subsequent Delivery of Comfort Letters. Each time that the
--------------------------------------
Registration Statement or the Prospectus shall be amended or supplemented
to include additional financial information, the Fund shall cause Deloitte
& Touche LLP forthwith to furnish to the Distributor a letter, dated the
date of effectiveness of such amendment or supplement with the Commission,
as the case may be, in form satisfactory to the Distributor, of the same
tenor as the portions of the letter referred to in clauses (i) and (ii) of
Section 7(e) hereof but modified to relate to the Registration Statement
and Prospectus as amended and supplemented to the date of such letter, and
of the same general tenor as the portions of the letter referred to in
clauses (iii) and (iv) of said Section 7(e) with such changes as may be
necessary to reflect changes in the financial statements and other
information derived from the accounting records of the Fund.
SECTION 9. Indemnification. (a) The Fund and the Adviser jointly
---------------
and severally agree to indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor within the meaning of
Section 15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto) or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expenses whatsoever (including the fees
and disbursements of counsel chosen by the Distributor) reasonably
incurred in investigating, preparing or defending against any litigation or
investigation or
18
<PAGE>
proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the extent
that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any
- - -------- -------
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with written information furnished to
the Fund by the Distributor expressly for use in the Registration
Statement (or in any amendment thereto) or in the Prospectus (or in any
amendment or supplement thereto).
(b) The Distributor agrees to indemnify and hold harmless the Fund
and the Adviser, their respective directors, each of the Fund's officers
who signed the Registration Statement, and each person, if any, who
controls the Fund or the Adviser within the meaning of Section 15 of the
1933 Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in the Registration Statement
(or in any amendment or supplement thereto) or in the Prospectus (or in
any amendment or supplement thereto) in reliance upon and in conformity
with written information furnished to the Fund by the Distributor
expressly for use in the Registration Statement (or in any amendment
thereto) or in the Prospectus (or in any amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but
failure to so notify an indemnifying party shall not relieve it from any
liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in
the defense of any such action. In no event shall the indemnifying
parties be liable for the fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances.
SECTION 10. Contribution. In order to provide for just and
------------
equitable contribution in circumstances in which the indemnity agreement
provided for in Section 9 for any reason is held to be unenforceable by
the indemnified parties although applicable in accordance with its terms,
the Fund, the Adviser and the Distributor shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
19
<PAGE>
contemplated by said indemnity agreement as incurred by the Fund, the
Adviser and the Distributor, in such proportion as is appropriate to
reflect the relative benefits received by the Fund and the Adviser on the
one hand and the Distributor on the other from the offering of the Shares;
provided, however, that no person guilty of fraudulent misrepresentation
- - -------- -------
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 10, the
Distributor shall not be required to contribute any amount in excess of
the amount by which the total price at which the Shares sold by it to the
public were offered to the public exceeds the amount of any damages which
such Distributor otherwise has been required to pay in respect of such
losses, liabilities, claims, damages and expenses. For purposes of this
Section, each person, if any, who controls the Distributor within the
meaning of Section 15 of the 1933 Act shall have the same rights to
contribution as the Distributor, and each director of the Fund and of the
Adviser, respectively, each officer of the Fund who signed the
Registration Statement, and each person, if any, who controls the Fund or
the Adviser within the meaning of Section 15 of the 1933 Act, shall have
the same rights to contribution as the Fund and the Adviser, respectively.
SECTION 11. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in
- - --------
this Agreement or in certificates of officers of the Fund or of the
Adviser submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of
the Distributor or a controlling person, or by or on behalf of the Fund or
the Adviser, and shall survive each delivery of the Shares to the
Distributor.
SECTION 12. Termination.
-----------
(a) Termination of this Agreement. This Agreement (excluding any
-----------------------------
agreement by the Distributor to purchase Shares from the Fund the
termination of which is discussed in paragraph (b) of this Section 12) may
be terminated for any reason, at any time by either the Fund and the
Adviser on the one hand or the Distributor on the other, upon the giving
of 30 days' written notice of such termination to the other parties
hereto.
(b) Termination of Agreement to Purchase Shares. The Distributor
-------------------------------------------
may terminate any agreement to purchase Shares from the Fund, immediately
upon notice to the Fund, at any time prior Settlement Date relating
thereto if (i) there has been, since the date of such agreement or since
the date as of which information is given in the Prospectus, any material
adverse change in the condition, financial or otherwise, or in the
earnings, business
20
<PAGE>
affairs or business prospects of the Fund or the Adviser, whether or not
arising in the ordinary course of business, or (ii) there has occurred any
material adverse change in the financial markets in the United States or
elsewhere or any outbreak of hostilities or other calamity or crisis or
any escalation of existing hostilities the effect of which is such as to
make it, in the Distributor's judgment, impracticable to market the Shares
or enforce contracts for the sale of the Shares, or (iii) trading in any
securities of the Fund has been suspended by the Commission or a national
securities exchange, or trading generally on either the American Stock
Exchange or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices
for securities have been required, by either of said exchanges or by order
of the Commission or any other governmental authority, or if a banking
moratorium has been declared by Federal or New York authorities, or (iv)
the rating assigned by Moody's to the Shares of "aaa" or the rating
assigned by S&P to the Shares of AAA shall have been lowered since that
date or if either Moody's or S&P shall have publicly announced that it has
under surveillance or review, with possible negative implications, its
rating of the Shares, or (v) there shall have come to the attention of the
Distributor any facts that would cause them to believe that the
Prospectus, at the time it was required to be delivered to a purchaser of
Shares, included an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein,
in light of the circumstances existing at the time of such delivery, not
misleading. As used in this Section 12(b), the term "Prospectus" means
the Prospectus in the form first provided to the Distributor for use in
confirming sales of the Shares.
(c) In the event of any such termination, neither party will have
any liability to the other party hereto, except that (i) if at the time of
termination an offer to purchase any Shares has been accepted by the Fund
but the time of delivery to the Distributor of the Shares has not
occurred, the covenants set forth in Section 4 and 8 hereof shall remain
in effect until such Shares are delivered and resold, and (ii) the
covenant set forth in Section 4(g) hereof, the provisions of Section 6
hereof, the indemnity and contribution agreements set forth in Sections 9
and 10 hereof, and the provisions of Sections 11, 14 and 15 hereof shall
remain in effect.
SECTION 13. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunication. Notices
to the Distributor shall be directed to Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated at Merrill Lynch World
Headquarters, World Financial Center, North Tower, New York, New York
10281-1305, Attention: Richard N. Doyle, Director; notices to the Fund or
to
21
<PAGE>
the Adviser shall be directed to each of them at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, Attention: Arthur Zeikel, President.
SECTION 14. Parties. This Agreement shall inure to the benefit of
-------
and be binding upon the Distributor, the Fund, the Adviser and their
respective successors. Nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any person, firm or corporation,
other than the parties hereto and their respective successors and the
controlling persons and officers and directors referred to in Sections 9
and 10 and their heirs and legal representatives, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and
provisions hereof are intended to be for the sole and exclusive benefit of
the parties hereto and thereto and their respective successors, and said
controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Shares from the Distributor shall be deemed
to be a successor merely by reason of such purchase.
SECTION 15. Governing Law and Time. This Agreement shall be
----------------------
governed by and construed in accordance with the laws of the State of New
York applicable to agreements made and to be performed in said State.
Specified times of day refer to New York City time.
22
<PAGE>
If the foregoing is in accordance with your understanding of our
Agreement, please sign and return to us a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a single binding
agreement between the Distributor and the Fund and the Adviser in
accordance with its terms.
Very truly yours,
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
By:
--------------------------
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By:
--------------------------
Authorized Officer
Confirmed and Accepted,
as of the date
first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
----------------------------
Authorized Signatory
23
<PAGE>
B&W Draft
11/9/95
AUCTION AGENT AGREEMENT
between
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
and
IBJ SCHRODER BANK & TRUST COMPANY
Dated as of January __, 1996
Relating to
AUCTION MARKET PREFERRED STOCK(Registered Trademark)
("AMPS"(Registered Trademark))
Series A, B, C, D and E
of
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
(Registered Trademark) Registered trademark of Merrill Lynch & Co., Inc.
0
<PAGE>
THIS AUCTION AGENT AGREEMENT, dated as of January __, 1996, is between
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC., a Maryland corporation (the
"Company"), and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking
corporation.
The Company proposes to duly authorize and issue up to 8,000 shares of
Auction Market Preferred Stock(Registered Trademark), Series A ("Series A
AMPS"), up to 8,000 shares of Auction Market Preferred Stock(Registered
Trademark), Series B ("Series B AMPS"), up to 8,000 shares of Auction Market
Preferred Stock(Registered Trademark), Series C ("Series C AMPS"), up to
8,000 shares of Auction Market Preferred Stock(Registered Trademark), Series
D ("Series D AMPS") and up to 8,000 shares of Auction Market Preferred
Stock(Registered Trademark), Series E ("Series E AMPS") (all with a par value
of $.10 per share and a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared)), pursuant to the Company's Articles Supplementary (as defined
below). The Series A AMPS, Series B AMPS, Series C AMPS, Series D AMPS and
Series E AMPS are sometimes referred to together herein as "AMPS". A
separate Auction (as defined below) will be conducted for each series of
AMPS. The Company desires that IBJ Schroder Bank & Trust Company perform
certain duties as agent in connection with each Auction of shares of AMPS (in
such capacity, the "Auction Agent"), and as the transfer agent, registrar,
dividend disbursing agent and redemption agent with respect to the shares of
AMPS (in such capacity, the "Paying Agent"), upon the terms and conditions
of this Agreement, and the Company hereby appoints IBJ Schroder Bank & Trust
Company as said Auction Agent and Paying Agent in accordance with those terms
and conditions (hereinafter generally referred to as the "Auction Agent",
except in Sections 3 and 4 below).
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Company and the Auction Agent agree as
follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
-------------------------------------
1.1. Terms Defined by Reference to
Articles Supplementary.
-----------------------------
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary.
______________________
(Registered Trademark) Registered trademark of Merrill Lynch & Co., Inc.
1
<PAGE>
1.2. Terms Defined Herein.
--------------------
As used herein and in the Settlement Procedures (as defined below), the
following terms shall have the following meanings, unless the context
otherwise requires:
(a) "Affiliate" shall mean any Person, other than Merrill Lynch,
Pierce, Fenner & Smith Incorporated, made known to the Auction Agent to be
controlled by, in control of, or under common control with, the Company or
its successors.
(b) "Agent Member" of any Person shall mean such Person's agent
member of the Securities Depository that will act on behalf of a Bidder.
(c) "Articles Supplementary" shall mean the Articles Supplementary
of the Company, establishing the powers, preferences and rights of the AMPS,
filed on January __, 1996 with the Department of Assessments and Taxation of
the State of Maryland.
(d) "Auction" shall have the meaning specified in Section 2.1
hereof.
(e) "Auction Procedures" shall mean the Auction Procedures that
are set forth in Paragraph 10 of the Articles Supplementary.
(f) "Authorized Officer" shall mean each Senior Vice President,
Vice President, Assistant Vice President, Trust Officer, and Assistant
Secretary and Assistant Treasurer of the Auction Agent assigned to its
Corporate Trust and Agency Group and every other officer or employee of the
Auction Agent designated as an "Authorized Officer" for purposes hereof in
a communication to the Company.
(g) "Broker-Dealer Agreement" shall mean each agreement between
the Auction Agent and a Broker-Dealer substantially in the form attached
hereto as Exhibit A.
(h) "Company Officer" shall mean the Chairman and Chief Executive
Officer, the President, each Vice President (whether or not designated by a
number or word or words added before or after the title "Vice President"),
the
____________________
(Registered Trademark) Registered trademark of Merrill Lynch & Co., Inc.
2
<PAGE>
Secretary, the Treasurer, each Assistant Secretary and each Assistant
Treasurer of the Company and every other officer or employee of the Company
designated as a "Company Officer" for purposes hereof in a notice from the
Company to the Auction Agent.
(i) "Holder" shall be a holder of record of one or more shares of
AMPS, listed as such in the stock register maintained by the Paying Agent
pursuant to Section 4.6 hereof.
(j) "Settlement Procedures" shall mean the Settlement Procedures
attached as Exhibit A to the Broker-Dealer Agreement.
1.3. Rules of Construction.
---------------------
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of this
Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for convenience
of reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto," and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
II. THE AUCTION.
-----------
2.1. Purpose; Incorporation by Reference of Auction
Procedures and Settlement Procedures.
----------------------------------------------
(a) The Articles Supplementary provide that the Applicable Rate
on shares of each series of AMPS, as the case may be, for each Dividend
Period therefor after the Initial Dividend Period shall be the rate per annum
that a commercial bank, trust company or other financial institution
appointed by the Company advises results from implementation of the Auction
Procedures. The Board of Directors of the Company has adopted a resolution
appointing IBJ Schroder Bank & Trust Company as Auction Agent for purposes
of the Auction Procedures. The Auction Agent
3
<PAGE>
hereby accepts such appointment and agrees that, on each Auction Date,
it shall follow the procedures set forth in this Section 2 and the Auction
Procedures for the purpose of determining the Applicable Rate for the AMPS
for the next Dividend Period therefor. Each periodic operation of such
procedures is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and
in the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part hereof to the same extent as if
such provisions were set forth fully herein.
2.2. Preparation for Each Auction; Maintenance
of Registry of Beneficial Owners.
-----------------------------------------
(a) Pursuant to Section 2.5 hereof, the Company shall not
designate any Person to act as a Broker-Dealer without prior written approval
of the Auction Agent (which approval shall not be withheld unreasonably).
As of the date hereof, the Company shall provide the Auction Agent with a
list of the Broker-Dealers previously approved by the Auction Agent and shall
cause to be delivered to the Auction Agent for execution by the Auction Agent
a Broker-Dealer Agreement signed by each such Broker-Dealer. The Auction
Agent shall keep such list current and accurate and shall indicate thereon,
or on a separate list, the identity of each Existing Holder, if any, whose
most recent Order was submitted by a Broker-Dealer on such list and resulted
in such Existing Holder continuing to hold or purchasing shares of AMPS. Not
later than five Business Days prior to any Auction Date for which any change
in such list of Broker-Dealers is to be effective, the Company shall notify
the Auction Agent in writing of such change and, if any such change is the
addition of a Broker-Dealer to such list, the Company shall cause to be
delivered to the Auction Agent for execution by the Auction Agent a
Broker-Dealer Agreement signed by such Broker-Dealer. The Auction Agent
shall have entered into a Broker-Dealer Agreement with each Broker-Dealer
prior to the participation of any such Broker-Dealer in any Auction.
(b) In the event that the Auction Date for any Auction shall be
changed after the Auction Agent shall have given the notice referred to in
clause (vii) of Paragraph (a) of the Settlement Procedures, the Auction
Agent, by such means as the Auction Agent deems practicable, shall give
notice of such change to the Broker-Dealers not later than the earlier of
9:15 A.M. on the new Auction Date or 9:15 A.M. on the old Auction Date.
4
<PAGE>
(c) The provisions contained in paragraph 2 of the Articles
Supplementary concerning Special Dividend Periods and the notification of a
Special Dividend Period will be followed by the Company and, to the extent
applicable, the Auction Agent, and the provisions contained therein are
incorporated herein by reference in their entirety and shall be deemed to be
a part of this Agreement to the same extent as if such provisions were set
forth fully herein.
(d)(i) Except as otherwise provided in paragraph 2(f) of the
Articles Supplementary, whenever the Company intends to include any net
capital gains or other income subject to regular Federal income tax in any
dividend on shares of AMPS, the Company will notify the Auction Agent of the
amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established.
Whenever the Auction Agent receives such notice from the Company, in turn it
will notify each Broker-Dealer, who, on or prior to such Auction Date, in
accordance with its Broker-Dealer Agreement, will notify its Beneficial
Owners and Potential Beneficial Owners believed to be interested in
submitting an Order in the Auction to be held on such Auction Date. Whenever
the Company includes any additional amounts in a dividend as provided in
paragraph 2(f) of the Articles Supplementary, the Company will notify the
Auction Agent of such additional amounts to be so included in such dividend
at least five Business Days prior to the applicable Dividend Payment Date.
Whenever the Auction Agent receives such notice from the Company, in turn it
will notify the Securities Depository and each Broker-Dealer, who, on or
prior to the applicable Dividend Payment Date, in accordance with its Broker-
Dealer Agreement, will notify its Beneficial Owners.
(ii) If the Company makes a Retroactive Taxable Allocation, the
Company, within 90 days (and generally within 60 days) after the end of its
fiscal year for which a Retroactive Taxable Allocation is made, will provide
notice thereof to the Auction Agent and to each Holder (initially the
Securities Depository) during such fiscal year at such Holder's address as
the same appears or last appeared on the stock books of the Company. The
Company, within 30 days after such notice is given to the Auction Agent, will
pay to the Auction Agent (who then will distribute to such Holders), out of
funds legally available therefor, a cash amount equal to the aggregate
Additional Dividend with respect to all Retroactive Taxable Allocations made
to such Holders during the fiscal year in question.
(e)(i) On each Auction Date, the Auction Agent shall determine the
Reference Rate and the Maximum Applicable Rate. If the Reference Rate is not
quoted on an interest
5
<PAGE>
basis but is quoted on a discount basis, the Auction Agent shall convert
the quoted rate to an Interest Equivalent, as set forth in paragraph 1 of the
Articles Supplementary; or, if the rate obtained by the Auction Agent is not
quoted on an interest or discount basis, the Auction Agent shall convert the
quoted rate to an interest rate after consultation with the Company as to the
method of such conversion. Not later than 9:30 A.M. on each Auction Date,
the Auction Agent shall notify the Company and the Broker-Dealers of the
Reference Rate so determined and of the Maximum Applicable Rate.
(ii) If the Reference Rate is the applicable "AA" Composite
Commercial Paper Rate and such rate is to be based on rates supplied by
Commercial Paper Dealers and one or more of the Commercial Paper Dealers
shall not provide a quotation for the determination of the applicable "AA"
Composite Commercial Paper Rate, the Auction Agent immediately shall notify
the Company so that the Company can determine whether to select a Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers to provide the
quotation or quotations not being supplied by any Commercial Paper Dealer or
Commercial Paper Dealers. The Company promptly shall advise the Auction
Agent of any such selection. If the Company does not select any such
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers,
then the rates shall be supplied by the remaining Commercial Paper Dealer or
Commercial Paper Dealers.
(iii) If, after the date of this Agreement, there is any change
in the prevailing rating of AMPS by either of the rating agencies (or
substitute or successor rating agencies) referred to in the definition of the
Maximum Applicable Rate, thereby resulting in any change in the corresponding
applicable percentage for the AMPS, as set forth in said definition (the
"Percentage"), the Company shall notify the Auction Agent in writing of such
change in the Percentage prior to 9:00 A.M. on the Auction Date for AMPS next
succeeding such change. The Percentage for the AMPS on the date of this
Agreement is as specified in paragraph 10(a)(vii) of the Articles
Supplementary. The Auction Agent shall be entitled to rely on the last
Percentage of which it has received notice from the Company (or, in the
absence of such notice, the Percentage set forth in the preceding sentence)
in determining the Maximum Applicable Rate as set forth in Section 2.2(e)(i)
hereof.
(f)(i) The Auction Agent shall maintain a current registry of the
Beneficial Owners of the shares of each series of AMPS for purposes of each
Auction. The Company shall use its best efforts to provide or cause to be
6
<PAGE>
provided to the Auction Agent within ten Business Days following the
date of the Closing a list of the initial Beneficial Owners of each series
of AMPS, and the Broker-Dealer of each such Beneficial Owner through which
such Beneficial Owner purchased such shares. The Auction Agent may rely
upon, as evidence of the identities of the Beneficial Owners, such list, the
results of each Auction and notices from any Beneficial Owner, the Agent
Member of any Beneficial Owner or the Broker-Dealer of any Beneficial Owner
with respect to such Beneficial Owner's transfer of any shares of AMPS to
another Person.
(ii) In the event of any partial redemption of any series of
AMPS, upon notice by the Company to the Auction Agent of such partial
redemption, the Auction Agent promptly shall request the Securities
Depository to notify the Auction Agent of the identities of the Agent Members
(and the respective numbers of shares) from the accounts of which shares have
been called for redemption and the person or department at such Agent Member
to contact regarding such redemption, and at least two Business Days prior
to the Auction preceding the date of redemption with respect to shares of the
series being partially redeemed, the Auction Agent shall request each Agent
Member so identified to disclose to the Auction Agent (upon selection by such
Agent Member of the Beneficial Owners whose shares are to be redeemed) the
number of shares of such series of AMPS of each such Beneficial Owner, if
any, to be redeemed by the Company, provided that the Auction Agent has been
furnished with the name and telephone number of a person or department at
such Agent Member from which it is to request such information. In the
absence of receiving any such information with respect to a Beneficial Owner,
from such Beneficial Owner's Agent Member or otherwise, the Auction Agent may
continue to treat such Beneficial Owner as having beneficial ownership of the
number of shares of the series of AMPS shown in the Auction Agent's registry
of Beneficial Owners.
(iii) The Auction Agent shall register a transfer of the
beneficial ownership of shares of a series of AMPS from a Beneficial Owner
to another Beneficial Owner, or to another Person if permitted by the
Company, only if (A) such transfer is made pursuant to an Auction or (B) if
such transfer is made other than pursuant to an Auction, the Auction Agent
has been notified of such transfer in writing in a notice substantially in
the form of Exhibit C to the Broker-Dealer Agreements, by such Beneficial
Owner or by the Agent Member of such Beneficial Owner. The Auction Agent is
not required to accept any notice of transfer delivered for an Auction unless
it is received by the Auction Agent by 3:00 P.M. on the Business Day next
preceding the applicable
7
<PAGE>
Auction Date. The Auction Agent shall rescind a transfer made on the
registry of the Beneficial Owners of any shares of AMPS if the Auction Agent
has been notified in writing, in a notice substantially in the form of
Exhibit D to the Broker-Dealer Agreement, by the Agent Member or the
Broker-Dealer of any Person that (i) purchased any shares of AMPS and the
seller failed to deliver such shares or (ii) sold any shares of AMPS and
the purchaser failed to make payment to such Person upon delivery to the
purchaser of such shares.
(g) The Auction Agent may request that the BrokerDealers, as set
forth in Section 3.2(c) of the Broker-Dealer Agreements, provide the Auction
Agent with a list of their respective customers that such Broker-Dealers
believe are Beneficial Owners of shares of AMPS. The Auction Agent shall
keep confidential any such information and shall not disclose any such
information so provided to any Person other than the relevant Broker-Dealer
and the Company, provided that the Auction Agent reserves the right to
disclose any such information if it is advised by its counsel that its
failure to do so would be unlawful.
2.3. Auction Schedule.
----------------
The Auction Agent shall conduct Auctions in accordance with the schedule
set forth below. Such schedule may be changed by the Auction Agent with the
consent of the Company, which consent shall not be withheld unreasonably.
The Auction Agent shall give notice of any such change to each Broker-Dealer.
Such notice shall be received prior to the first Auction Date on which any
such change shall be effective.
Time Event
---- -----
By 9:30 A.M. Auction Agent advises the Company and the
Broker-Dealers of the Reference Rate and the Maximum Applicable Rate as set
forth in Section 2.2(e)(i) hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information
communicated to it by Broker- Dealers as provided in Paragraph 10(c)(i) of
the Articles Supplementary. Submission deadline is 1:00 P.M.
Not earlier than Auction Agent makes determinations
1:00 P.M. pursuant to Paragraph 10(d)(i) of the Articles
Supplementary.
8
<PAGE>
By approximately Auction Agent advises the Company
3:00 P.M. of the results of the Auction as provided in
Paragraph 10(d)(ii) of the Articles Supplementary.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part and shares of AMPS allocated as
provided in Paragraph 10(e) of the Articles Supplementary.
Auction Agent gives notice of
the Auction results as set
forth in Section 2.4 hereof.
2.4. Notice of Auction Results.
-------------------------
On each Auction Date, the Auction Agent shall notify Broker-Dealers of
the results of the Auction held on such date by telephone or through the
Auction Agent's Auction Processing System as set forth in Paragraph (a) of
the Settlement Procedures.
2.5. Broker-Dealers.
--------------
(a) Not later than 12:00 noon on each Auction Date, the Company
shall pay to the Auction Agent in New York Clearing House or similar next-day
funds an amount in cash equal to (i) in the case of any Auction Date
immediately preceding a 7-day Dividend Period or 28-day Dividend Period, the
product of (A) a fraction the numerator of which is the number of days in
such Dividend Period (calculated by counting the first day of such Dividend
Period but excluding the last day thereof) and the denominator of which is
360, times (B) 1/4 of 1%, times (C) $25,000 times (D) the sum of the
aggregate number of Outstanding shares of AMPS for which the Auction is
conducted and (ii) in the case of any Special Dividend Period, the amount
determined by mutual consent of the Company and the Broker-Dealers pursuant
to Section 3.5 of the Broker-Dealer Agreements. In lieu of making such
payment in New York Clearing House or similar next-day funds, the Company may
make such payment by noon on the Business Day immediately following the
Auction Date in the form of Federal Funds or similar same-day funds. The
Auction Agent shall apply such moneys as set forth in Section 3.5 of the
Broker-Dealer Agreements and shall thereafter remit to the Company any
remaining funds paid to the Auction Agent pursuant to this Section 2.5(a).
(b) The Company shall not designate any Person to act as a
Broker-Dealer, or permit a Beneficial Owner or a
9
<PAGE>
Potential Beneficial Owner to participate in Auctions through any Person
other than a Broker-Dealer, without the prior written approval of the Auction
Agent, which approval shall not be withheld unreasonably. The Company may
designate an Affiliate or Merrill Lynch, Pierce, Fenner & Smith Incorporated
to act as a Broker-Dealer.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement
as set forth therein if so directed by the Company.
(d) Subject to Section 2.5(b) hereof, the Auction Agent from time
to time shall enter into such Broker-Dealer Agreements as the Company shall
request.
(e) The Auction Agent shall maintain a list of Broker-Dealers.
2.6. Ownership of Shares of AMPS and Submission of Bids
by the Company and its Affiliates.
--------------------------------------------------
Neither the Company nor any Affiliate of the Company may submit any Sell
Order or Bid, directly or indirectly, in any Auction, except that an
Affiliate of the Company that is a Broker-Dealer may submit a Sell Order or
Bid on behalf of a Beneficial Owner or a Potential Beneficial Owner. The
Company shall notify the Auction Agent if the Company or, to the best of the
Company's knowledge, any Affiliate of the Company becomes a Beneficial Owner
of any shares of AMPS. Any shares of AMPS redeemed, purchased or otherwise
acquired (i) by the Company shall not be reissued, except in accordance with
the requirements of the Securities Act of 1933, as amended, or (ii) by its
Affiliates shall not be transferred (other than to the Company). The Auction
Agent shall have no duty or liability with respect to enforcement of this
Section 2.6.
2.7. Access to and Maintenance of Auction Records.
--------------------------------------------
The Auction Agent shall afford to the Company, its agents, independent
public accountants and counsel, access at reasonable times during normal
business hours to review and make extracts or copies (at the Company's sole
cost and expense) of all books, records, documents and other information
concerning the conduct and results of Auctions, provided that any such agent,
accountant or counsel shall furnish the Auction Agent with a letter from the
Company requesting that the Auction Agent afford such person access. The
Auction Agent shall maintain records relating to any Auction for a period of
two years after such Auction (unless requested by the Company to maintain
such records for such longer period not in excess of four years, then for
such longer period), and such records, in reasonable detail, shall accurately
and fairly reflect the actions taken by the Auction Agent hereunder.
10
<PAGE>
The Company agrees to keep confidential any information regarding the
customers of any Broker-Dealer received from the Auction Agent in connection
with this Agreement or any Auction, and shall not disclose such information
or permit the disclosure of such information without the prior written
consent of the applicable Broker-Dealer to anyone except such agent,
accountant or counsel engaged to audit or review the results of Auctions as
permitted by this Section 2.7, provided that the Company reserves the right
to disclose any such information if it is advised by its counsel that its
failure to do so would (i) be unlawful or (ii) expose it to liability, unless
the Broker-Dealer shall have offered indemnification satisfactory to the
Company. Any such agent, accountant or counsel, before having access to such
information, shall agree to keep such information confidential and not to
disclose such information or permit disclosure of such information without
the prior written consent of the applicable Broker-Dealer, provided that such
agent, accountant or counsel may reserve the right to disclose any such
information if it is advised by its counsel that its failure to do so would
(i) be unlawful or (ii) expose it to liability, unless the Broker-Dealer
shall have offered indemnification satisfactory to such agent, accountant or
counsel.
III. THE AUCTION AGENT AS PAYING AGENT.
---------------------------------
3.1. The Paying Agent.
----------------
The Board of Directors of the Company has adopted a resolution
appointing IBJ Schroder Bank & Trust Company as transfer agent, registrar,
dividend disbursing agent and redemption agent for the Company in connection
with any shares of AMPS (in such capacity, the "Paying Agent"). The Paying
Agent hereby accepts such appointment and agrees to act in accordance with
its standard procedures and the provisions of the Articles Supplementary
which are specified herein with respect to the shares of AMPS and as set
forth in this Section 3.
3.2. The Company's Notices to the Paying Agent.
-----------------------------------------
Whenever any shares of AMPS are to be redeemed, the Company promptly
shall deliver to the Paying Agent a Notice of Redemption, which will be
mailed by the Company to each Holder at least five Business Days prior to the
date such Notice of Redemption is required to be mailed pursuant to the
Articles Supplementary. The Paying Agent shall have no responsibility to
confirm or verify the accuracy of any such Notice.
11
<PAGE>
3.3. The Company to Provide Funds for Dividends,
Redemptions and Additional Dividends.
-------------------------------------------
(a) Not later than noon on the Business Day immediately preceding
each Dividend Payment Date, the Company shall deposit with the Paying Agent
an aggregate amount of New York Clearing House or similar next-day funds
equal to the declared dividends to be paid to Holders on such Dividend
Payment Date, and shall give the Paying Agent irrevocable instructions to
apply such funds to the payment of such dividends on such Dividend Payment
Date. In lieu of making such deposit in New York Clearing House or similar
next-day funds, the Company may make such deposit by noon on each Dividend
Payment Date in the form of Federal Funds or similar same-day funds.
(b) If the Company shall give a Notice of Redemption, then by noon
of the Business Day immediately preceding the date fixed for redemption, the
Company shall deposit in trust with the Paying Agent an aggregate amount of
New York Clearing House or similar next-day funds sufficient to redeem such
shares of AMPS called for redemption and shall give the Paying Agent
irrevocable instructions and authority to pay the redemption price to the
Holders of shares of AMPS called for redemption upon surrender of the
certificate or certificates therefor. In lieu of making such deposit in New
York Clearing House or similar next-day funds, the Company may make such
deposit by noon on the date fixed for redemption in the form of Federal Funds
or similar same-day funds.
(c) If the Company provides notice to the Auction Agent of a
Retroactive Taxable Allocation, the Company, within 30 days after such notice
is given and by noon of the Business Day immediately preceding the date fixed
for payment of an Additional Dividend, shall deposit in trust with the Paying
Agent an aggregate amount of New York Clearing House or similar next-day
funds equal to such Additional Dividend and shall give the Paying Agent
irrevocable instructions and authority to pay the Additional Dividend to
Holders (or former Holders) entitled thereto. In lieu of making such deposit
in New York Clearing House or similar next-day funds, the Company may make
such deposit by noon on the date fixed for payment of an Additional Dividend
in the form of Federal Funds or similar same-day funds.
12
<PAGE>
3.4. Disbursing Dividends, Redemption Price
and Additional Dividends.
--------------------------------------
After receipt of the New York Clearing House or similar next-day funds
(or Federal Funds or similar same-day funds) and instructions from the
Company described in Sections 3.3(a), (b) and (c) above, the Paying Agent
shall pay to the Holders (or former Holders) entitled thereto (i) on each
corresponding Dividend Payment Date, dividends on the shares of AMPS, (ii)
on any date fixed for redemption, the redemption price of any shares of AMPS
called for redemption and (iii) on the date fixed for payment of an
Additional Dividend, such Additional Dividend. The amount of dividends for
any Dividend Period to be paid by the Paying Agent to Holders will be
determined by the Company as set forth in Paragraph 2 of the Articles Supple-
mentary. The redemption price to be paid by the Paying Agent to the Holders
of any shares of AMPS called for redemption will be determined as set forth
in Paragraph 4 of the Articles Supplementary. The amount of Additional
Dividends to be paid by the Paying Agent in the event of a Retroactive
Taxable Allocation to Holders will be determined by the Company pursuant to
paragraph 2(e) of the Articles Supplementary. The Company shall notify the
Paying Agent in writing of a decision to redeem any shares of AMPS on or
prior to the date specified in Section 3.2 above, and such notice by the
Company to the Paying Agent shall contain the information required to be
stated in a Notice of Redemption required to be mailed by the Company to such
Holders. The Paying Agent shall have no duty to determine the redemption
price and may rely on the amount thereof set forth in a Notice of Redemption.
IV. THE PAYING AGENT AS TRANSFER AGENT AND REGISTRAR.
------------------------------------------------
4.1. Original Issue of Stock Certificates.
------------------------------------
On the Date of Original Issue for any share of AMPS, one or more
certificates for each series of AMPS shall be issued by the Company and
registered in the name of Cede & Co., as nominee of the Securities
Depository, and countersigned by the Paying Agent.
4.2. Registration of Transfer or Exchange of Shares.
----------------------------------------------
Except as provided in this Section 4.2, the shares of each series of
AMPS shall be registered solely in the name of the Securities Depository or
its nominee. If the Securities Depository shall give notice of its intention
to resign as such, and if the Company shall not have selected a substitute
Securities Depository acceptable to the Paying Agent prior to such
resignation, then upon such resignation, the shares of each series of AMPS,
at the Company's request, may be registered for transfer or exchange, and new
certificates thereupon shall be issued in the name of the designated
transferee or transferees,
13
<PAGE>
upon surrender of the old certificate in form deemed by the Paying Agent
properly endorsed for transfer with (a) all necessary endorsers' signatures
guaranteed in such manner and form as the Paying Agent may require by a
guarantor reasonably believed by the Paying Agent to be responsible, (b) such
assurances as the Paying Agent shall deem necessary or appropriate to
evidence the genuineness and effectiveness of each necessary endorsement and
(c) satisfactory evidence of compliance with all applicable laws relating to
the collection of taxes in connection with any registration of transfer or
exchange or funds necessary for the payment of such taxes. If the
certificate or certificates for shares of AMPS are not held by the Securities
Depository or its nominee, payments upon transfer of shares in an Auction
shall be made in same-day funds to the Auction Agent against delivery of
certificates therefor.
4.3. Removal of Legend.
-----------------
Any request for removal of a legend indicating a restriction on transfer
from a certificate evidencing shares of AMPS shall be accompanied by an
opinion of counsel stating that such legend may be removed and such shares
may be transferred free of the restriction described in such legend, said
opinion to be delivered under cover of a letter from a Company Officer
authorizing the Paying Agent to remove the legend on the basis of said
opinion.
4.4. Lost, Stolen or Destroyed Stock Certificates.
--------------------------------------------
The Paying Agent shall issue and register replacement certificates for
certificates represented to have been lost, stolen or destroyed, upon the
fulfillment of such requirements as shall be deemed appropriate by the
Company and by the Paying Agent, subject at all times to provisions of law,
the By-Laws of the Company governing such matters and resolutions adopted by
the Company with respect to lost, stolen or destroyed securities. The Paying
Agent may issue new certificates in exchange for and upon the cancellation
of mutilated certificates. Any request by the Company to the Paying Agent
to issue a replacement or new certificate pursuant to this Section 4.4 shall
be deemed to be a representation and warranty by the Company to the Paying
Agent that such issuance will comply with provisions of applicable law and
the By-Laws and resolutions of the Company.
4.5. Disposition of Canceled Certificates;
Record Retention.
-------------------------------------
The Paying Agent shall retain stock certificates which have been
canceled in transfer or in exchange and accompanying documentation in
accordance with applicable rules and regulations of the Securities and
Exchange Commission for two calendar years from the date of such
cancellation. The Paying Agent, upon
14
<PAGE>
written request by the Company, shall afford to the Company, its agents and
counsel access at reasonable times during normal business hours to review and
make extracts or copies (at the Company's sole cost and expense) of such
certificates and accompanying documentation. Upon request by the Company at
any time after the expiration of this two-year period, the Paying Agent shall
deliver to the Company the canceled certificates and accompanying
documentation. The Company, at its expense, shall retain such records for
a minimum additional period of four calendar years from the date of delivery
of the records to the Company and shall make such records available during
this period at any time, or from time to time, for reasonable periodic,
special, or other examinations by representatives of the Securities and
Exchange Commission. The Company also shall undertake to furnish to the
Securities and Exchange Commission, upon demand, either at their principal
office or at any regional office, complete, correct and current hard copies
of any and all such records. Thereafter, such records shall not be destroyed
by the Company without the approval of the Paying Agent, which approval shall
not be withheld unreasonably, but will be safely stored for possible future
reference.
4.6. Stock Register.
--------------
The Paying Agent shall maintain the stock register, which shall contain
a list of the Holders, the number of shares held by each Holder and the
address of each Holder. The Paying Agent shall record in the stock register
any change of address of a Holder upon notice by such Holder. In case of any
written request or demand for the inspection of the stock register or any
other books of the Company in the possession of the Paying Agent, the Paying
Agent will notify the Company and secure instructions as to permitting or
refusing such inspection. The Paying Agent reserves the right, however, to
exhibit the stock register or other records to any person in case it is
advised by its counsel that its failure to do so would (i) be unlawful or
(ii) expose it to liability, unless the Company shall have offered
indemnification satisfactory to the Paying Agent.
4.7. Return of Funds.
---------------
Any funds deposited with the Paying Agent by the Company for any reason
under this Agreement, including for the payment of dividends or the
redemption of shares of any series of AMPS, that remain with the Paying Agent
after 12 months shall be repaid to the Company upon written request by the
Company.
15
<PAGE>
V. REPRESENTATIONS AND WARRANTIES.
------------------------------
5.1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to the Auction Agent that:
(i) the Company is duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland, and has
full power to execute and deliver this Agreement and to authorize, create and
issue the shares of AMPS;
(ii) the Company is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified, management investment company;
(iii) this Agreement has been duly and validly authorized, executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject as to such enforceability to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equitable principles;
(iv) the forms of the certificates evidencing the shares of each
series of AMPS comply with all applicable laws of the State of Maryland;
(v) the shares of each series of AMPS have been duly and validly
authorized by the Company and, upon completion of the initial sale of the
shares of such series of AMPS and receipt of payment therefor, will be
validly issued, fully paid and nonassessable;
(vi) at the time of the offering of the shares of each series of
AMPS, the shares offered will be registered under the Securities Act of 1933,
as amended, and no further action by or before any governmental body or
authority of the United States or of any state thereof is required in
connection with the execution and delivery of this Agreement or will be
required in connection with the issuance of the shares of AMPS, except such
action as required by applicable state securities or insurance laws, all of
which action will have been taken;
(vii) the execution and delivery of this Agreement and the issuance
and delivery of the shares of each series of AMPS do not and will not
conflict with, violate, or result in a breach of, the terms, conditions or
provisions of, or
16
<PAGE>
constitute a default under, the Charter or the By-Laws of the Company,
any law or regulation applicable to the Company, any order or decree of any
court or public authority having jurisdiction over the Company, or any
mortgage, indenture, contract, agreement or undertaking to which the Company
is a party or by which it is bound; and
(viii) no taxes are payable upon or in respect of the execution of
this Agreement or will be payable upon or in respect of the issuance of the
shares of each series of AMPS.
5.2. Representations and Warranties of the Auction Agent.
---------------------------------------------------
The Auction Agent represents and warrants to the Company that the
Auction Agent is duly organized and is validly existing as a banking
corporation in good standing under the laws of the State of New York, and has
the corporate power to enter into and perform its obligations under this
Agreement.
VI. THE AUCTION AGENT.
-----------------
6.1. Duties and Responsibilities.
---------------------------
(a) The Auction Agent is acting solely as agent for the Company
hereunder and owes no fiduciary duties to any Person except as provided by
this Agreement.
(b) The Auction Agent undertakes to perform such duties and only
such duties as are set forth specifically in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the
Auction Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered or omitted
by it or for any error of judgment made by it in the performance of its
duties under this Agreement. The Auction Agent shall not be liable for any
error of judgment made in good faith unless the Auction Agent shall have been
negligent in ascertaining (or failing to ascertain) the pertinent facts.
6.2. Rights of the Auction Agent.
---------------------------
(a) The Auction Agent may rely upon, and shall be protected in
acting or refraining from acting upon, any communication authorized hereby
and any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document
reasonably believed by it to be genuine. The Auction Agent shall not be
liable for acting upon any telephone
17
<PAGE>
communication authorized hereby which the Auction Agent believes in good
faith to have been given by the Company or by a Broker-Dealer. The Auction
Agent may record telephone communications with the Company or with the
Broker-Dealers or with both.
(b) The Auction Agent may consult with counsel of its choice, and
the written advice of such counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder. The Auction Agent
shall be under no liability for interest on any money received by it
hereunder except as otherwise agreed in writing with the Company.
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or attorneys.
6.3. Auction Agent's Disclaimer.
--------------------------
The Auction Agent makes no representation as to the validity or the
adequacy of this Agreement, the Broker-Dealer Agreements or the AMPS.
6.4. Compensation, Expenses and Indemnification.
------------------------------------------
(a) The Company shall pay to the Auction Agent from time to time
reasonable compensation for all services rendered by it under this Agreement
and under the Broker-Dealer Agreements as shall be set forth in a separate
writing signed by the Company and the Auction Agent, subject to adjustments
if the AMPS no longer are held of record by the Securities Depository or its
nominee or if there shall be such other change as shall increase materially
the Auction Agent's obligations hereunder or under the Broker-Dealer
Agreements.
(b) The Company shall reimburse the Auction Agent upon its request
for all reasonable expenses, disbursements and advances incurred or made by
the Auction Agent in accordance with any provision of this Agreement and of
the Broker-Dealer Agreements (including the reasonable compensation, expenses
and disbursements of its agents and counsel), except any expense,
disbursement or advance attributable to its negligence or bad faith.
18
<PAGE>
(c) The Company shall indemnify the Auction Agent for, and hold
it harmless against, any loss, liability or expense incurred without
negligence or bad faith on its part arising out of or in connection with its
agency under this Agreement and under the Broker-Dealer Agreements, including
the costs and expenses of defending itself against any claim of liability in
connection with its exercise or performance of any of its duties hereunder
and thereunder, except such as may result from its negligence or bad faith.
VII. MISCELLANEOUS.
-------------
7.1. Term of Agreement.
-----------------
(a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Company may terminate this
Agreement at any time by so notifying the Auction Agent, provided that if any
AMPS remain outstanding the Company shall have entered into an agreement in
substantially the form of this Agreement with a successor auction agent. The
Auction Agent may terminate this Agreement upon prior notice to the Company
on the date specified in such notice, which date shall be no earlier than 60
days after delivery of such notice. If the Auction Agent resigns while any
shares of AMPS remain outstanding, the Company shall use its best efforts to
enter into an agreement with a successor auction agent containing
substantially the same terms and conditions as this Agreement.
(b) Except as otherwise provided in this Section 7.1(b), the
respective rights and duties of the Company and the Auction Agent under this
Agreement shall cease upon termination of this Agreement. The Company's
representations, warranties, covenants and obligations to the Auction Agent
under Sections 5 and 6.4 hereof shall survive the termination hereof. Upon
termination of this Agreement, the Auction Agent shall (i) resign as Auction
Agent under the Broker-Dealer Agreements, (ii) at the Company's request,
deliver promptly to the Company copies of all books and records maintained
by it in connection with its duties hereunder, and (iii) at the request of
the Company, transfer promptly to the Company or to any successor auction
agent any funds deposited by the Company with the Auction Agent (whether in
its capacity as Auction Agent or as Paying Agent) pursuant to this Agreement
which have not been distributed previously by the Auction Agent in accordance
with this Agreement.
19
<PAGE>
7.2. Communications.
--------------
Except for (i) communications authorized to be made by telephone
pursuant to this Agreement or the Auction Procedures and (ii) communications
in connection with Auctions (other than those expressly required to be in
writing), all notices, requests and other communications to any party
hereunder shall be in writing (including telecopy or similar writing) and
shall be given to such party at its address or telecopier number set forth
below:
If to the Company, Merrill Lynch Municipal Strategy
addressed to: Strategy Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Treasurer
Telephone No.: (609) 282-2000
Telecopier No.: (609) 282-3472
If to the Auction IBJ Schroder Bank & Trust Company
Agent, addressed to: One State Street
New York, New York 10004
Attention: Auction Window
Subcellar 1
Telephone No.: (212) 858-2135
Telecopier No.: (212) 797-1148
or such other address or telecopier number as such party hereafter may
specify for such purpose by notice to the other party. Each such notice,
request or communication shall be effective when delivered at the address
specified herein. Communications shall be given on behalf of the Company by
a Company Officer and on behalf of the Auction Agent by an Authorized
Officer.
7.3. Entire Agreement.
----------------
This Agreement contains the entire agreement between the parties
relating to the subject matter hereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or inferred, between the parties relating to the subject matter
hereof, except for agreements relating to the compensation of the Auction
Agent.
7.4. Benefits.
--------
Nothing herein, express or implied, shall give to any Person, other than
the Company, the Auction Agent and their respective successors and assigns,
any benefit of any legal or equitable right, remedy or claim hereunder.
20
<PAGE>
7.5. Amendment; Waiver.
-----------------
(a) This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except
by a written instrument signed by a duly authorized representative of the
party to be charged. The Company shall notify the Auction Agent of any
change in the Articles Supplementary prior to the effective date of any such
change. If any such change in the Articles Supplementary materially
increases the Auction Agent's obligations hereunder, the Company shall obtain
the written consent to the Auction Agent prior to the effective date of such
change.
(b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any
subsequent breach.
7.6. Successors and Assigns.
----------------------
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of
the Company and the Auction Agent. This Agreement may not be assigned by
either party hereto absent the prior written consent of the other party,
which consent shall not be withheld unreasonably.
7.7. Severability.
------------
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any
of the remaining clauses, provisions or sections hereof.
7.8. Execution in Counterparts.
-------------------------
This Agreement may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
7.9. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and to be
performed in said State.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as
of the date first above written.
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
By: _______________________________
Title:
IBJ SCHRODER BANK & TRUST COMPANY
By: _______________________________
Title:
22
<PAGE>
B&W DRAFT
11/9/95
BROKER-DEALER AGREEMENT
between
IBJ SCHRODER BANK & TRUST COMPANY
and
(NAME OF BROKER-DEALER)
Dated as of January __, 1996
Relating to
AUCTION MARKET PREFERRED STOCK(Registered Trademark)
("AMPS"(Registered Trademark))
Series A, B, C, D and E
of
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
(Registered Trademark) Registered trademark of Merrill Lynch & Co., Inc.
1
<PAGE>
BROKER-DEALER AGREEMENT dated as of January __, 1996, between IBJ
Schroder Bank & Trust Company a New York banking corporation (the "Auction
Agent") (not in its individual capacity, but solely as agent of Merrill Lynch
Municipal Strategy Fund, Inc., a Maryland corporation (the "Company"),
pursuant to authority granted to it in the Auction Agent Agreement dated as
of January __, 1996, between the Company and the Auction Agent (the "Auction
Agent Agreement")) and (NAME OF BROKER-DEALER) (together with its successors
and assigns, "BD").
The Company proposes to duly authorize and issue up to 8,000 shares of
Auction Market Preferred Stock(Registered Trademark), Series A ("Series A
AMPS"), up to 8,000 shares of Auction Market Preferred Stock(Registered
Trademark), Series B ("Series B AMPS"), up to 8,000 shares of Auction Market
Preferred Stock(Registered Trademark), Series C ("Series C AMPS"), up to
8,000 shares of Auction Market Preferred Stock(Registered Trademark), Series
D ("Series D AMPS") and up to 8,000 shares of Auction Market Preferred
Stock(Registered Trademark), Series E ("Series E AMPS"), all with a par value
of $.10 per share and a liquidation preference of $25,000 per share plus
accumulated but unpaid dividends (whether or not earned or declared), each
pursuant to the Company's Articles Supplementary (as defined below). The
Series A AMPS, Series B AMPS, Series C AMPS, Series D AMPS and Series E AMPS
are sometimes referred to together herein as "AMPS".
The Company's Articles Supplementary provide that the dividend rate on
each series of AMPS for each Dividend Period therefor after the Initial
Dividend Period shall be the Applicable Rate therefor, which in each case,
in general shall be the rate per annum that a commercial bank, trust company
or other financial institution appointed by the Company advises results from
implementation of the Auction Procedures (as defined below). The Board of
Directors of the Company has adopted a resolution appointing IBJ Schroder
Bank & Trust Company as Auction Agent for purposes of the Auction Procedures,
and pursuant to Section 2.5(d) of the Auction Agent Agreement, the Company
has requested and directed the Auction Agent to execute and deliver this
Agreement.
The Auction Procedures require the participation of one or more
Broker-Dealers.
- - ----------------
(Registered Trademark) Registered trademark of Merrill Lynch & Co., Inc.
1
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the Auction Agent and BD agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
-------------------------------------
1.1. Terms Defined by Reference to the Articles Supplementary.
------------------------------------------ -------------
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary of the Company.
1.2. Terms Defined Herein. As used herein and in the Settlement
--------------------
Procedures (as defined below), the following terms shall have the following
meanings, unless the context otherwise requires:
(a) "Articles Supplementary" shall mean the Articles
Supplementary, as amended, of the Company, establishing the powers,
preferences and rights of the AMPS filed on January __, 1996 with the
Department of Assessments and Taxation of the State of Maryland.
(b) "Auction" shall have the meaning specified in Section 3.1
hereof.
(c) "Auction Procedures" shall mean the Auction Procedures that
are set forth in Paragraph 10 of the Articles Supplementary.
(d) "Authorized Officer" shall mean each Senior Vice President,
Vice President, Assistant Vice President, Trust Officer, Assistant Secretary
and Assistant Treasurer of the Auction Agent assigned to its Corporate Trust
and Agency Group and every other officer or employee of the Auction Agent
designated as an "Authorized Officer" for purposes of this Agreement in a
communication to BD.
(e) "BD Officer" shall mean each officer or employee of BD
designated as a "BD Officer" for purposes of this Agreement in a
communication to the Auction Agent.
(f) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a
Broker-Dealer.
(g) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit A.
1.3. Rules of Construction. Unless the context or use indicates another
---------------------
or different meaning or intent, the following rules shall apply to the
construction of this Agreement:
2
<PAGE>
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for convenience
of reference and shall not constitute a part of this Agreement, nor shall
they affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto," and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
II. NOTIFICATION OF DIVIDEND PERIOD AND ADVANCE NOTICE OF ALLOCATION OF
-------------
TAXABLE INCOME.
- - ---------------------------------------
2.1. The provisions contained in paragraph 2 of the Articles
Supplementary concerning the notification of a Special Dividend Period will
be followed by the Auction Agent and BD, and the provisions contained therein
are incorporated herein by reference in their entirety and shall be deemed
to be a part of this Agreement to the same extent as if such provisions were
set forth fully herein.
2.2. Except as otherwise provided in paragraph 2(f) of the Articles
Supplementary, whenever the Company intends to include any net capital gains
or other income subject to regular Federal income tax in any dividend on
shares of any series of AMPS, the Company will notify the Auction Agent of
the amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established.
Whenever the Auction Agent receives such notice from the Company, in turn it
will notify BD, who, on or prior to such Auction Date, will notify its
Beneficial Owners and Potential Beneficial Owners believed to be interested
in submitting an Order in the Auction to be held on such Auction Date.
Whenever the Company intends to include any additional amounts in a dividend
as provided in paragraph 2(f) of the Articles Supplementary, the Company will
notify the Auction Agent of such additional amounts to be so included in such
dividend at least five Business Days prior to the applicable Dividend Payment
Date. Whenever the Auction Agent receives such notice from the Company, in
turn it will notify the Securities Depository and BD, who, on or prior to the
applicable Dividend Payment Date, will notify its Beneficial Owners.
3
<PAGE>
III. THE AUCTION.
-----------
3.1. Purpose; Incorporation by Reference of Auction Procedures
----------------------------------------------
and Settlement Procedures.
(a) On each Auction Date, the provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of determining the
Applicable Rate for each series of AMPS, for the next Dividend Period
therefor. Each periodic operation of such procedures is hereinafter referred
to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part of this Agreement to the same
extent as if such provisions were set forth fully herein.
(c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this
Agreement. BD understands that other Persons meeting the requirements
specified in the definition of "Broker-Dealer" contained in Paragraph 1 of
the Articles Supplementary may execute a Broker-Dealer Agreement and
participate as Broker-Dealers in Auctions.
(d) BD and other Broker-Dealers may participate in Auctions for
their own accounts. However, the Company, by notice to BD and all other
Broker Dealers, may prohibit all Broker-Dealers from submitting Bids in
Auctions for their own accounts, provided that Broker-Dealers may continue
to submit Hold Orders and Sell Orders.
3.2. Preparation for Each Auction.
----------------------------
(a) Not later than 9:30 A.M. on each Auction Date for the AMPS,
the Auction Agent shall advise BD by telephone of the Reference Rate and the
Maximum Applicable Rate in effect on such Auction Date.
(b) In the event that the Auction Date for any Auction shall be
changed after the Auction Agent has given the notice referred to in clause
(vii) of paragraph (a) of the Settlement Procedures, the Auction Agent, by
such means as the Auction Agent deems practicable, shall give notice of such
change to BD not later than the earlier of 9:15 A.M. on the new Auction Date
or 9:15 A.M. on the old Auction Date. Thereafter, BD promptly shall notify
customers of BD that BD believes are Beneficial Owners of shares of AMPS of
such change in the Auction Date.
4
<PAGE>
(c) The Auction Agent from time to time may request BD to provide
it with a list of the respective customers BD believes are Beneficial Owners
of shares of each series of AMPS. BD shall comply with any such request, and
the Auction Agent shall keep confidential any such information, including
information received as to the identity of Bidders in any Auction, and shall
not disclose any such information so provided to any Person other than the
Company; and such information shall not be used by the Auction Agent or its
officers, employees, agents or representatives for any purpose other than
such purposes as are described herein. The Auction Agent shall transmit any
list of customers BD believes are Beneficial Owners of shares of each series
of AMPS and information related thereto only to its officers, employees,
agents or representatives in the Corporate Trust and Agency Group who need
to know such information for the purposes of acting in accordance with this
Agreement, and the Auction Agent shall prevent the transmission of such
information to others and shall cause its officers, employees, agents and
representatives to abide by the foregoing confidentiality restrictions;
provided, however, that the Auction Agent shall have no responsibility or
liability for the actions of any of its officers, employees, agents or
representatives after they have left the employ of the Auction Agent.
3.3. Auction Schedule; Method of Submission of Orders.
------------------------------------------------
(a) The Company and the Auction Agent shall conduct Auctions for
each series of AMPS in accordance with the schedule set forth below. Such
schedule may be changed at any time by the Auction Agent with the consent of
the Company, which consent shall not be withheld unreasonably. The Auction
Agent shall give notice of any such change to BD. Such notice shall be
received prior to the first Auction Date on which any such change shall be
effective.
Time Event
---- -----
By 9:30 A.M. Auction Agent advises the Company and Broker-Dealers of
the Reference Rate and the Maximum Applicable Rate as set forth in Section
3.2(a) hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information
communicated to it by Broker- Dealers as provided in Paragraph 10(c)(i) of
the Articles Supplementary. Submission Deadline is 1:00 P.M.
5
<PAGE>
Not earlier than Auction Agent makes determinations
1:00 P.M. pursuant to Paragraph 10(d)(i) of
the Articles Supplementary.
By approximately Auction Agent advises the Company
3:00 P.M. of the results of the Auction as provided in Paragraph
10(d)(ii) of the Articles Supplementary.
Submitted Bids and Submitted Sell Orders are accepted and rejected in
whole or in part and shares of AMPS are allocated as provided in
Paragraph 10(e) of the Articles Supplementary.
Auction Agent gives notice of
the Auction results as set forth
in Section 3.4(a) hereof.
(b) BD agrees to maintain a list of Potential Beneficial Owners
and to contact the Potential Beneficial Owners on such list on or prior to
each Auction Date for the purposes set forth in Paragraph 10 of the Articles
Supplementary.
(c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit B. BD shall submit
separate Orders to the Auction Agent for each Potential Beneficial Owner or
Beneficial Owner on whose behalf BD is submitting an Order and shall not net
or aggregate the Orders of Potential Beneficial Owners or Beneficial Owners
on whose behalf BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit C, of transfers of
shares of any series of AMPS, made through BD by a Beneficial Owner to
another Person other than pursuant to an Auction, and (ii) a written notice,
substantially in the form attached hereto as Exhibit D, of the failure of
shares of any series of any series of AMPS to be transferred to or by any
Person that purchased or sold shares of any series of AMPS through BD
pursuant to an Auction. The Auction Agent is not required to accept any
notice delivered pursuant to the terms of the foregoing sentence with respect
to an Auction unless it is received by the Auction Agent by 3:00 P.M. on the
Business Day next preceding the applicable Auction Date.
6
<PAGE>
3.4. Notice of Auction Results.
-------------------------
(a) On each Auction Date, the Auction Agent shall notify BD by
telephone as set forth in paragraph (a) of the Settlement Procedures. On the
Business Day next succeeding such Auction Date, the Auction Agent shall
notify BD in writing of the disposition of all Orders submitted by BD in the
Auction held on such Auction Date.
(b) BD shall notify each Beneficial Owner, Potential Beneficial
Owner, Existing Holder or Potential Holder on whose behalf BD has submitted
an Order as set forth in paragraph (b) of the Settlement Procedures, and take
such other action as is required of BD pursuant to the Settlement Procedures.
If any Beneficial Owner or Existing Holder selling shares of AMPS in an
Auction fails to deliver such shares, the BD of any Person that was to have
purchased shares of such series of AMPS in such Auction may deliver to such
Person a number of whole shares of such series of AMPS that is less than the
number of shares that otherwise was to be purchased by such Person. In such
event, the number of shares of such series of AMPS to be so delivered shall
be determined by such BD. Delivery of such lesser number of shares shall
constitute good delivery. Upon the occurrence of any such failure to deliver
shares, such BD shall deliver to the Auction Agent the notice required by
Section 3.3(d)(ii) hereof. Notwithstanding the foregoing terms of this
Section 3.4(b), any delivery or non-delivery of shares of any series of AMPS
which represents any departure from the results of an Auction, as determined
by the Auction Agent, shall be of no effect unless and until the Auction
Agent shall have been notified of such delivery or non-delivery in accordance
with the terms of Section 3.3(d) hereof. The Auction Agent shall have no
duty or liability with respect to enforcement of this Section 3.4(b).
3.5. Service Charge to Be Paid to BD. On the Business Day next
-------------------------------
succeeding each Auction Date, the Auction Agent shall pay to BD from moneys
received from the Company an amount equal to:
(a) in the case of any Auction Date immediately preceding a 7-day Dividend
Period or 28-day Dividend Period, the product of (i) a fraction the numerator
of which is the number of days in such Dividend Period (calculated by
counting the first day of such Dividend Period but excluding the last day
thereof) and the denominator of which is 360, times (ii) 1/4 of 1%, times
(iii) $25,000 times (iv) the sum of (A) the aggregate number of AMPS placed
by BD in the applicable Auction that were (x) the subject of a Submitted Bid
of a Beneficial Owner submitted by BD and continued to be held as a result
of such submission and (y) the subject of a Submitted Bid of a Potential
Beneficial Owner submitted by BD and were purchased as a result of such
submission plus (B) the aggregate number of AMPS subject to valid Hold
7
<PAGE>
Orders (determined in accordance with Paragraph 10 of the Articles
Supplementary) submitted to the Auction Agent by BD plus (C) the number of
AMPS deemed to be subject to Hold Orders by Beneficial Owners pursuant to
Paragraph 10 of the Articles Supplementary that were acquired by such
Beneficial Owners through BD; and (b) in the case of any Auction Date
immediately preceding a Special Dividend Period, that amount as mutually
agreed upon by the Company and BD, based on the selling concession that would
be applicable to an underwriting of fixed or variable rate preferred shares
with a similar final maturity or variable rate dividend period, at the
commencement of such Special Dividend Period.
For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any
Beneficial Owner who acquired shares of any series of AMPS through BD
transfers those shares to another Person other than pursuant to an Auction,
then the Broker-Dealer for the shares so transferred shall continue to be BD,
provided, however, that if the transfer was effected by, or if the transferee
is, a Broker-Dealer other than BD, then such Broker-Dealer shall be the
Broker-Dealer for such shares.
IV. THE AUCTION AGENT.
-----------------
4.1. Duties and Responsibilities.
---------------------------
(a) The Auction Agent is acting solely as agent for the Company
hereunder and owes no fiduciary duties to any other Person by reason of this
Agreement.
(b) The Auction Agent undertakes to perform such duties and only
such duties as are set forth specifically in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the
Auction Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered or omitted
by it, or for any error of judgment made by it in the performance of its
duties under this Agreement. The Auction Agent shall not be liable for any
error of judgment made in good faith unless the Auction Agent shall have been
negligent in ascertaining (or failing to ascertain) the pertinent facts.
4.2. Rights of the Auction Agent.
---------------------------
(a) The Auction Agent may rely upon, and shall be protected in
acting or refraining from acting upon, any communication authorized by this
Agreement and any written instruction, notice, request, direction, consent,
report, certificate, share certificate or other instrument, paper or document
believed by it to be genuine. The Auction Agent shall
8
<PAGE>
not be liable for acting upon any telephone communication authorized by this
Agreement which the Auction Agent believes in good faith to have been given
by the Company or by BD. The Auction Agent may record telephone
communications with BD.
(b) The Auction Agent may consult with counsel of its own choice,
and the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or attorneys.
4.3. Auction Agent's Disclaimer. The Auction Agent makes no
--------------------------
representation as to the validity or adequacy of this Agreement or the AMPS.
V. MISCELLANEOUS.
-------------
5.1. Termination. Any party may terminate this Agreement at any time
-----------
upon five days' prior written notice to the other party; provided, however,
that if BD is Merrill Lynch, Pierce, Fenner & Smith Incorporated, neither BD
nor the Auction Agent may terminate this Agreement without first obtaining
prior written consent of the Company to such termination, which consent shall
not be withheld unreasonably.
5.2. Participant in Securities Depository; Payment of Dividends
------------------------------------------------
in Same-Day Funds.
(a) BD is, and shall remain for the term of this Agreement, a
member of, or a participant in, the Securities Depository (or an affiliate
of such a member or participant).
(b) BD represents that it (or if BD does not act as Agent Member,
one of its affiliates) shall make all dividend payments on the AMPS available
in same-day funds on each Dividend Payment Date to customers that use BD (or
its affiliate) as Agent Member.
5.3. Agent Member. At the date hereof, BD is a participant of the
------------
Securities Depository.
9
<PAGE>
5.4. Communications. Except for (i) communications authorized to be
--------------
made by telephone pursuant to this Agreement or the Auction Procedures and
(ii) communications in connection with the Auctions (other than those
expressly required to be in writing), all notices, requests and other
communications to any party hereunder shall be in writing (including telecopy
or similar writing) and shall be given to such party at its address or
telecopier number set forth below:
If to BD, (Name of Broker-Dealer)
addressed to: (Address of Broker-Dealer)
Attention:
Telecopier No.: ( ) -
Telephone No.: ( ) -
If to the Auction IBJ Schroder Bank & Trust Company
Agent, addressed to One State Street
New York, New York
Attention: Auction Window
Subcellar 1
Telecopier No.: (212) 797-1148
Telephone No.: (212) 858-2135
or such other address or telecopier number as such party hereafter may
specify for such purpose by notice to the other party. Each such notice,
request or communication shall be effective when delivered at the address
specified herein. Communications shall be given on behalf of BD by a BD
Officer and on behalf of the Auction Agent by an Authorized Officer. BD may
record telephone communications with the Auction Agent.
5.5. Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties relating to the subject matter hereof, and there are no
other representations, endorsements, promises, agreements or understandings,
oral, written or inferred, between the parties relating to the subject matter
hereof.
5.6. Benefits. Nothing in this Agreement, express or implied, shall
--------
give to any person, other than the Company, the Auction Agent and BD and
their respective successors and assigns, any benefit of any legal or
equitable right, remedy or claim under this Agreement.
5.7. Amendment; Waiver.
-----------------
(a) This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except
by a written instrument signed by a duly authorized representative of the
party to be charged.
10
<PAGE>
(b) Failure of either party to this Agreement to exercise any
right or remedy hereunder in the event of a breach of this Agreement by the
other party shall not constitute a waiver of any such right or remedy with
respect to any subsequent breach.
5.8. Successors and Assigns. This Agreement shall be binding upon,
----------------------
inure to the benefit of, and be enforceable by, the respective successors and
permitted assigns of each of BD and the Auction Agent. This Agreement may
not be assigned by either party hereto absent the prior written consent of
the other party;
provided, however, that this Agreement may be assigned by the Auction Agent
to a successor Auction Agent selected by the Company without the consent of
BD.
5.9. Severability. If any clause, provision or section of this
------------
Agreement shall be ruled invalid or unenforceable by any court of competent
jurisdiction, the invalidity or unenforceability of such clause, provision
or section shall not affect any remaining clause, provision or section
hereof.
5.10. Execution in Counterparts. This Agreement may be executed in
-------------------------
several counterparts, each of which shall be an original and all of which
shall constitute but one and the same instrument.
5.11. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York applicable to agreements
made and to be performed in said State.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as
of the date first above written.
IBJ SCHRODER BANK & TRUST COMPANY
By:
---------------------------
Title:
(NAME OF BROKER-DEALER)
By:
---------------------------
Title:
12
<PAGE>
EXHIBIT A
---------
SETTLEMENT PROCEDURES
---------------------
(From Prospectus)
13
<PAGE>
EXHIBIT B
---------
IBJ SCHRODER BANK & TRUST COMPANY
AUCTION BID FORM
---------------------------------
Submit To: IBJ Schroder Bank & Trust Co. Issue: Merrill Lynch Municipal
Securities Transfer Department Strategy Fund, Inc.
One State Street Series:
_______________________
New York, New York 10004 Auction Date:__________________
Attention: Auction Window Telephone: (212) 858-2272
Facsimile: (212) 797-1148
The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:
Name of Bidder:
------------------------
BENEFICIAL OWNER
Shares now held HOLD
--------------- -------------
BID at rate of
----------
- - --
SELL
--------
POTENTIAL BENEFICIAL OWNER
# of shares bid
----------
- - --
BID at rate of
----------
- - --
Notes:
(1) If submitting more than one Bid for one Bidder, use additional Auction
Bid Forms.
(2) If one or more Bids covering in the aggregate more than the number of
outstanding shares held by any Beneficial Owner are submitted, such bid shall
be considered valid in the order of priority set forth in the Auction
Procedures on the above issue.
(3) A Hold or Sell Order may be placed only by a Beneficial Owner covering
a number of shares not greater than the number of shares currently held.
(4) Potential Beneficial Owners may make only Bids, each of which must
specify a rate. If more than one Bid is submitted on behalf of any Potential
Beneficial Owner, each Bid submitted shall be a separate Bid with the rate
specified.
(5) Bids may contain no more than three figures to the right of the decimal
point (.001 of 1%). Fractions will not be accepted.
NAME OF BROKER-DEALER
------------------------
Authorized Signature
------------------------
14
<PAGE>
EXHIBIT C
---------
(Note: To be used only for transfers made
other than pursuant to an Auction)
TRANSFER FORM
-------------
Re: Merrill Lynch Municipal Strategy Fund, Inc.
Auction Market Preferred Stock(Registered Trademark),
Series (A)(B)(C)(D)(E) ("AMPS"(Registered Trademark))
We are (check one):
/ / the Beneficial Owner named below;
/ / the Broker-Dealer for such Beneficial Owner; or
/ / the Agent Member for such Beneficial Owner.
We hereby notify you that such Beneficial Owner has transferred
-----
shares of AMPS to .
--------------
--------------------------
(Name of Beneficial Owner)
--------------------------
(Name of Broker-Dealer)
-------------------------
(Name of Agent Member)
By:
-------------------------
Printed Name:
Title:
15
<PAGE>
EXHIBIT D
---------
(Note: To be used only for failures to deliver
AMPS sold pursuant to an Auction)
NOTICE OF A FAILURE TO DELIVER
------------------------------
Complete either I or II
- - -----------------------
I. We are a Broker-Dealer for (the "Purchaser"),
--------------------
which purchased shares of AMPS, Series (A)(B)(C)(D)(E), of Merrill
-----
Lynch Municipal Strategy Fund, Inc. in the Auction held on
from the seller of such shares.
- - ----------------------
II. We are a Broker-Dealer for (the "Seller"),
---------------------
which sold shares of AMPS, Series (A)(B)(C)(D)(E), of Merrill Lynch
----
Municipal Strategy Fund, Inc. in the Auction held on to the
--------------
Purchaser of such shares.
We hereby notify you that (check one):
the Seller failed to deliver such shares to the
-------
Purchaser
the Purchaser failed to make payment to the Seller upon
-------
delivery of such shares
Name:
-----------------------
(Name of Broker-Dealer)
By:
-----------------------
Printed Name:
Title:
16
<PAGE>
B&W DRAFT
11/9/95
LETTER OF REPRESENTATIONS
OF
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
AND
IBJ SCHRODER BANK & TRUST COMPANY
January __, 1996
The Depository Trust Company
55 Water Street
New York, New York 10041
Attention: General Counsel's Office
Re: Merrill Lynch Municipal Strategy Fund, Inc.
Issuance of Auction Market Preferred Stock(Registered Trademark)
----------------------------------------------------------------
("AMPS"(Registered Trademark))
- - ------------------------------
Ladies and Gentlemen:
The purpose of this letter is to set forth certain matters relating to
the proposed issuance and sale by Merrill Lynch Municipal Strategy Fund,
Inc., a Maryland corporation (the "Issuer"), of up to 8,000 shares of Auction
Market Preferred Stock, Series A ("Series A AMPS"), up to 8,000 shares of
Auction Market Preferred Stock(Registered Trademark), Series B ("Series B
AMPS"), up to 8,000 shares of Auction Market Preferred Stock(Registered
Trademark), Series C ("Series C AMPS"), up to 8,000 shares of Auction Market
Preferred Stock(Registered Trademark), Series D ("Series D AMPS") and up to
8,000 shares of Auction Market Preferred Stock(Registered Trademark), Series
E ("Series E AMPS"). The Series A AMPS, Series B AMPS, Series C AMPS, Series
D AMPS and Series E AMPS are sometimes referred to together herein as "AMPS".
A description of the Series A AMPS and the related offering are contained in
a prospectus dated January __, 1996 and a description of the other series of
AMPS will be contained in the prospectus relating to the offering of each
such series (such prospectuses being herein referred to as the "Prospectus").
IBJ Schroder Bank & Trust Company, in its capacity as Auction Agent (as
defined in the Prospectus) (the "Auction Agent"), will act as the transfer
agent, registrar, dividend disbursing agent and redemption agent with respect
to the shares of AMPS. The shares of AMPS will be distributed through The
Depository Trust Company
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("DTC") by Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Distributor").
To induce DTC to accept the shares of AMPS as eligible for deposit at
DTC, and to act in accordance with its rules (the "DTC Rules") with respect
to the shares of AMPS, the Issuer and the Auction Agent make the following
representations to DTC:
1. Prior to the issuance of the shares of AMPS, the Issuer shall cause
the Distributor to deposit with DTC one or more certificates representing the
AMPS, registered in the name of DTC's nominee, Cede & Co., which will
respectively represent the total number of shares of AMPS outstanding, and
said certificates shall remain in DTC's custody.
2. The Prospectus describes provisions for the solicitation of
consents from, and voting by, holders of the shares of AMPS under certain
circumstances. The Issuer shall establish a record date or record dates for
such purposes and shall give DTC notice of such record date or record dates
not less than 15 days in advance of such record date or record dates, to the
extent practicable.
3. In the event of a full or partial redemption of shares of AMPS
outstanding, the Issuer or the Auction Agent shall give DTC notice of such
event not less than 20 days prior to the redemption date.
4. In the event of a partial redemption of shares of AMPS outstanding,
the Issuer or the Auction Agent shall send DTC a notice specifying the number
of shares of AMPS to be redeemed and the date such notice is to be mailed to
shareholders of the Issuer or published by the Issuer (the "Publication
Date"). Such notice shall be sent to DTC by a secure means (e.g., legible
facsimile transmission, registered or certified mail, overnight express
delivery or hand delivery) in a timely manner designed to assure that such
notice is in DTC's possession no later than the close of business on the
Business Day (as defined in the Prospectus) before the Publication Date.
(The Issuer or the Auction Agent sending such notice shall have a method to
verify subsequently the use of such means and the timeliness of the notice.)
In the event of a partial redemption, the Publication Date shall not be less
than 20 days prior to the redemption date.
5. In the event of an invitation to tender the shares of AMPS, notice
by the Issuer or the Auction Agent to shareholders of the Issuer specifying
the terms of the
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tender and the Publication Date of such notice shall be sent to DTC
by a secure means in the manner set forth in the preceding paragraph.
Notices to DTC pursuant to this paragraph and notices of other corporate
actions (including mandatory tenders, exchanges and capital changes) shall
be sent by telecopy to DTC's Reorganization Department at (212) 709-1093 or
(212) 709-1094, and receipt of such notices shall be confirmed by
telephoning (212) 709-6884. Notices to DTC pursuant to the above shall be
sent by mail or by any other means to:
Manager, Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square, 23rd Floor
New York, NY 10004-2695
6. The Prospectus indicates that the dividend rate for the shares of
AMPS may vary from time to time. Absent other existing arrangements with
DTC, the Issuer or the Auction Agent shall give DTC notice of each such
change in the dividend rate on the same day the new rate is determined, by
telephone to the Supervisor of the Announcements Section of the Dividend
Department at (212) 709-1270, and such notice shall be followed by prompt
written confirmation, sent by a secure means as described in paragraph 4
above, to:
Manager, Announcements, Dividend Department
The Depository Trust Company
7 Hanover Square, 22nd Floor
New York, New York 10004
7. The Issuer and the Auction Agent acknowledge that as long as Cede
& Co. is the sole record owner of the shares of AMPS, Cede & Co. shall be
entitled to all voting rights applicable to the shares of AMPS and to receive
the full amount of all dividends, Additional Dividends (as defined in the
Prospectus), liquidation proceeds and redemption proceeds payable with
respect to the shares of AMPS. The Issuer and the Auction Agent acknowledge
that DTC shall treat any DTC Participant (defined in the DTC Rules to mean,
generally, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations for whom DTC, directly or
indirectly, holds securities) having shares of AMPS credited to its DTC
account as entitled to the full benefits of ownership of such shares.
Without limiting the generality of the preceding sentence, the Issuer and the
Auction Agent acknowledge that DTC shall treat any DTC Participant having
shares of AMPS credited to its
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DTC account as entitled to receive dividends, distributions and
voting rights, if any, in respect of such shares and, subject to Section 17
hereof, to receive a certificate evidencing such shares of AMPS if such
certificate is to be issued in accordance with the Issuer's Charter (as
defined in the Prospectus). (The treatment by DTC of the effects of its
crediting of shares of AMPS to the DTC accounts of DTC Participants described
in the preceding two sentences shall not affect the rights of the Issuer,
participants in Auctions (as defined in the Prospectus) relating to the
shares of AMPS, purchasers, sellers or holders of shares of AMPS against any
DTC Participant).
8. The Prospectus indicates that in the event the Issuer retroactively
allocates any net capital gains or other income subject to regular Federal
income tax to shares of AMPS without having given advance notice thereof to
the Auction Agent as described in the Prospectus solely by reason of the fact
that such allocation is made as a result of the redemption of all or a
portion of the shares of AMPS outstanding or the liquidation of the Issuer
(the amount of such allocation being referred to herein as a "Retroactive
Taxable Allocation"), the Issuer, within 90 days (and generally within 60
days) after the end of the Issuer's fiscal year for which a Retroactive
Taxable Allocation is made, will provide notice thereof to the Auction Agent
and to each holder of shares of AMPS (initially Cede & Co. as nominee of DTC)
during such fiscal year at such holder's address as the same appears or last
appeared on the stock books of the Issuer. The Issuer, within 30 days after
such notice is given to the Auction Agent, will pay to the Auction Agent (who
then will distribute to such holders of AMPS), out of funds legally available
therefor, an amount equal to the aggregate Additional Dividend with respect
to all Retroactive Taxable Allocations made to such holders during the fiscal
year in question.
9. The Issuer will notify DTC, at least 10 Business Days prior to the
payment date for any Additional Dividends, of (i) the record date for holders
of shares of AMPS entitled to receive Additional Dividends, (ii) the amount
of Additional Dividends payable on a per share basis to such holders and
(iii) the CUSIP number set forth on the share certificate representing such
shares of AMPS.
10. The Prospectus indicates that if the Issuer does not give advance
notice of the amount of net capital gains or other income subject to regular
Federal income tax to be included in a dividend on shares of AMPS in the
related Auction, the Issuer may include such taxable
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income in a dividend on shares of AMPS if it increases the dividend
by an additional amount calculated as if such income were a Retroactive
Taxable Allocation and the additional amount were an Additional Dividend.
The Issuer or the Auction Agent will notify DTC, at least five Business Days
prior to the applicable Dividend Payment Date, of the amount of such
additional amount to be included in the dividend on a per share basis.
11. The Prospectus indicates that in the event a Response (as defined
in the Prospectus) indicates that it is advisable that the Issuer give a
Notice of Special Dividend Period (as defined in the Prospectus) for the
AMPS, the Issuer, by no later than the second Business Day prior to the
relevant Auction Date (as defined in the Prospectus), may give a Notice of
Special Dividend Period to the Auction Agent, DTC and each Broker-Dealer (as
defined in the Prospectus), which notice will specify (i) the duration of the
Special Dividend Period, (ii) the Optional Redemption Price as specified in
the related Response and (iii) the Specific Redemption Provisions, if any,
as specified in the related Response. The Issuer is required to give
telephonic and written notice (a "Notice of Revocation") to the Auction
Agent, each Broker-Dealer, and DTC on or prior to the Business Day prior to
the relevant Auction Date under the circumstances specified in the
Prospectus.
12. All notices and payment advices sent to DTC shall contain the CUSIP
number set forth on the share certificate representing the AMPS.
13. Notices to DTC by facsimile transmission shall be sent to (212)
709-1093 or (212) 709-1094. The Issuer or the Auction Agent shall call (212)
709-6884 to confirm such receipt of notice. Except as provided in paragraph
5 hereof, notices to DTC by any other means shall be sent to:
Manager, Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square, 23rd Floor
New York, New York 10004
14. Dividend payments shall be received by Cede & Co., as nominee of
DTC, or its registered assigns, in same-day funds on each payment date or the
equivalent as agreed between the Issuer or the Auction Agent and DTC ("Fed-
Funds"). Such payment shall be made payable to the order of "Cede & Co."
Absent any other agreement
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between the Issuer or the Auction Agent and DTC, such payments
shall be addressed as follows:
Manager, Cash Receipts, Dividends
The Depository Trust Company
7 Hanover Square, 24th Floor
New York, New York 10004
15. Redemption payments shall be made in Fed-Funds in the manner set
forth in the SDFS Paying Agent Operating Procedures, a copy of which
previously has been provided to the Auction Agent.
16. DTC may direct the Issuer or the Auction Agent to use any other
telephone number for facsimile transmission, address, or department of DTC
as the number, address or department to which payments of dividends,
redemption proceeds or notices may be sent.
17. In the event of a redemption necessitating a reduction in the
number of shares of AMPS outstanding, DTC in its discretion may (a) request
the Issuer to execute and deliver a new share certificate or certificates
representing the remaining shares of AMPS outstanding or (b) make appropriate
notation on the certificates indicating the date and amounts of such
reductions. In the case of redemption of all of the shares, DTC will
surrender the certificate or certificates to the Auction Agent for
cancellation if required.
18. In the event the Issuer determines that Beneficial Owners of the
shares of AMPS of any series shall be able to obtain certificates
representing such shares of AMPS (as provided for in the Issuer's Charter),
the Issuer or the Auction Agent shall notify DTC of the availability of share
certificates representing such shares of AMPS, as the case may be, and shall
issue, transfer and exchange such certificates as required by DTC and others
in appropriate amounts.
19. DTC may determine to discontinue providing its services as
securities depository with respect to the shares of AMPS at any time by
giving reasonable notice to the Issuer and to the Auction Agent (at which
time DTC will confirm with the Auction Agent the aggregate amount of the
shares of AMPS then outstanding). Under such circumstances, the Issuer and
the Auction Agent will cooperate with DTC in taking appropriate action to
provide for a substitute or successor securities depository or to make
available one or more separate certificates evidencing the shares of AMPS to
any DTC Participant having such shares credited to its DTC account.
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20. The Issuer hereby authorizes DTC to provide to the Auction Agent
position listings of its DTC Participants with respect to the shares of AMPS
from time to time at the request of the Auction Agent and at DTC's customary
fee, and also authorizes DTC, in the event of a partial redemption of shares
of AMPS, to provide, and DTC hereby agrees to provide the Auction Agent, upon
request, with the names of those DTC Participants whose positions in such
shares of AMPS have been selected for redemption by DTC. DTC agrees to use
its best efforts to notify the Auction Agent of those DTC Participants whose
positions in the shares of AMPS have been selected for redemption by DTC.
The Issuer authorizes the Auction Agent to provide DTC with such signatures,
exemplars of signatures and authorizations to act as may be deemed necessary
by DTC to permit DTC to discharge its obligations to its DTC Participants and
appropriate regulatory authorities.
This authorization, unless revoked by the Issuer, shall continue
with respect to the shares of AMPS while any such shares are on deposit at
DTC, until and unless the Auction Agent no longer shall be acting in such
capacity. In such event, the Issuer shall provide DTC with similar evidence
of the authorization of any successor thereto so to act.
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21. Nothing herein shall be deemed to require the Auction Agent to
advance funds on behalf of the Issuer.
Very truly yours,
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
as Issuer
By: ____________________________
Title:
IBJ SCHRODER BANK & TRUST COMPANY
as Auction Agent
By: ____________________________
Title:
Received and Accepted:
THE DEPOSITORY TRUST COMPANY
By: _________________________
Title:
cc: Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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