As filed with the Securities and Exchange Commission on October 12, 1999
Securities Act File No. 333-_________
Investment Company Act File No. 811-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO.
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO.
-------------------
INCOME OPPORTUNITIES FUND 2006, INC.
(Exact Name of Registrant as Specified in Charter)
-------------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(609) 282-2800
(Registrant's Telephone Number, including Area Code)
Terry K. Glenn
Income Opportunities Fund 2006, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
Copies to:
Michael J. Hennewinkel, Esq. Frank P. Bruno, Esq.
Fund Asset Management, L.P. Brown & Wood LLP
P.O. Box 9011 One World Trade Center
Princeton, New Jersey 08543-9011 New York, New York 10048-0557
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Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
-------------------
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), other than
securities offered only in connection with dividend or interest reinvestment
plans, check the following box.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
________________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. __________________
If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box.
-------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- ------------------------------- ----------------- ------------------------- --------------------------- -----------------
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount Being Offering Price Per Unit Aggregate Offering Price Registration
Being Registered Registered (1) (1) Fee(2)
- ------------------------------- ----------------- ------------------------- --------------------------- -----------------
Common Stock ($.10 par value) 100,000 $10.00 $1,000,000 $278
- ------------------------------- ----------------- ------------------------- --------------------------- =================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 12, 1999
PROSPECTUS
_________ Shares
Income Opportunities Fund 2006, Inc.
Common Stock
-------------
Income Opportunities Fund 2006, Inc. (the "Fund") is a newly
organized, diversified, fixed term, closed-end management investment company.
The investment objective of the Fund is to provide monthly income and return
$10 per share (the initial public offering price per share) to shareholders on
or about December 31, 2006 (the Fund's termination date). The Fund seeks to
achieve its objective by investing primarily in a portfolio of investment
grade mortgage backed and asset backed debt securities. The Fund may engage in
various portfolio strategies to enhance income and to hedge its portfolio
against investment and interest rate risks, including the use of leverage,
options and futures. There can be no assurance that the investment objective
of the Fund will be realized and that the Fund will be able to return $10 per
share on its termination date.
Because the Fund is newly organized, its shares have no history of
public trading, and shares of closed-end investment companies frequently trade
at a discount from their net asset value. This risk may be greater for
investors expecting to sell their shares in a relatively short period after
completion of the public offering. The Fund plans to apply to list its shares
on the New York Stock Exchange or another national securities exchange under
the symbol " ." Trading of the Fund's common stock on the exchange is expected
to begin within two weeks of the date of this prospectus. Before it begins
trading, the underwriter does not intend to make a market in the Fund's
shares. Thus, investors may not be able to buy and sell shares of the Fund
during that time.
-------------
This prospectus contains information you should know before
investing, including information about risks. Please read it before you invest
and keep it for future reference.
-------------
Investing in the common stock involves certain risks, which are
described in the "Risk Factors and Special Considerations" section beginning
on page 5 of this prospectus.
Per Share Total
Public Offering Price..................... $10.00 $
Sales Load................................ None None
Proceeds, before expenses, to Fund........ $10.00 $
The Fund's investment adviser or an affiliate will pay the
underwriter a commission in the amount of % of the public offering price per
share in connection with the sale of the common stock.
The underwriter may also purchase up to an additional ___________ shares
at the public offering price within 45 days from the date of this prospectus
to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The shares of common stock will be ready for delivery in New York,
New York on or about December , 1999.
-------------
Merrill Lynch & Co.
-------------
The date of this prospectus is December , 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary.....................................................2
Risk Factors And Special Considerations................................5
Fee Table..............................................................8
The Fund...............................................................9
Use Of Proceeds........................................................9
Investment Objective and Policies......................................9
Other Investment Policies.............................................14
Investment Restrictions...............................................21
Directors And Officers................................................22
Investment Advisory and Management Arrangements.......................24
Portfolio Transactions................................................25
Dividends and Distributions...........................................26
Taxes.................................................................27
Automatic Dividend Reinvestment Plan..................................29
Mutual Fund Investment Option.........................................30
Net Asset Value.......................................................31
Description Of Capital Stock..........................................31
Custodian.............................................................33
Underwriting..........................................................33
Transfer Agent, Dividend Disbursing Agent and Registrar...............34
Legal Opinions........................................................35
Experts...............................................................35
Additional Information................................................35
Report Of Independent Auditors........................................36
Statement Of Assets, Liabilities and Capital..........................37
Appendix I...........................................................A-1
Appendix II.........................................................A-10
Information about the Fund can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information
on the operation of the public reference room. This information is also
available on the SEC's Internet site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee by writing the Public Reference
Section of the SEC, Washington, D.C. 20549-6009.
------------------------
You should rely only on the information contained in this prospectus.
We have not, and the underwriter has not, authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition,
results of operations and prospects may have changed since that date.
<PAGE>
Prospectus Summary
This summary is qualified in its entirety by reference to the
detailed information included in this Prospectus.
The Fund Income Opportunities Fund 2006, Inc. is a newly
organized, diversified, fixed term, closed-end
management investment company. The Fund will
distribute substantially all of its net assets on or
about December 31, 2006 and will then terminate.
The Offering The Fund is offering shares of common stock at an
initial offering price of $10 per share. The common
stock is being offered by Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as underwriter. The
underwriter may also purchase up to an additional
shares of common stock within 45 days of the date of
this prospectus to cover over-allotments.
Investment
Objective and
Policies
The investment objective of the Fund is to provide
monthly income and return $10 per share (the initial
public offering price per share) to investors on or
about December 31, 2006 (the termination date of the
Fund).
The Fund intends to invest in securities that, at the
time of investment, are rated at least investment
grade by one or more nationally recognized statistical
rating organizations or, if unrated, are considered by
the Fund's investment adviser to be of equivalent
credit quality. The Fund intends to invest primarily
in mortgage backed and asset backed securities,
including mortgage backed securities that are issued
or guaranteed by the U.S. government, its agencies or
instrumentalities. The Fund also may invest in
corporate or municipal debt securities and other types
of debt securities, including zero coupon securities.
Over time, the Fund may increasingly invest in
short-term securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or
investment grade short-term securities that are
expected to mature on or about the termination date of
the Fund. Such securities may represent over 50% of
the Fund's total assets in its later years.
The Fund will seek to return $10 per share to
investors on or about December 31, 2006, through the
following:
o preserving capital through active management of
its portfolio; and
o investing in fixed income securities that have a
final or expected maturity on or about the
termination date of the Fund.
The Fund's investment adviser will manage the Fund's
assets so as to cause the dollar-weighted average
maturity of the portfolio to shorten over time in
relation to the remaining term of the Fund. The Fund
does not plan to invest in securities that are
expected to mature more than two years beyond the
Fund's termination date.
The Fund's investment adviser believes that it will be
able to manage the Fund's assets without realizing
capital losses that are not offset by capital gains
over the life of the Fund.
There can be no assurance that the investment
objective of the Fund will be realized and that the
Fund will be able to return $10 per share on its
termination date.
Portfolio
Investments Mortgage backed securities are securities representing
an interest in pools of mortgages. These securities
are secured by and payable from the underlying
mortgages. Some mortgage backed securities are issued
or guaranteed by government agencies. However, they
are not guaranteed by the full faith and credit of the
U.S. government except in certain instances. The yield
and credit characteristics of mortgage backed
securities differ in a number of respects from
traditional debt securities.
Mortgage backed securities may be either pass-through
securities or collateralized mortgage obligations.
Pass-through securities represent a right to receive
principal repayments and interest payments collected
on a pool of mortgages, which are passed through to
security holders (less servicing costs).
Collateralized mortgage obligations are debt
securities collateralized by mortgages themselves or
pass-through securities. Collateralized mortgage
obligations also include multi-class pass-through
securities, where the different classes have claims on
different revenue streams with varying priority rights
to payment. As part of its overall strategy, the Fund
may invest in derivative instruments whose value is
generally linked to payments of interest or principal
on mortgage backed securities.
Asset backed securities are debt securities issued by
a trust or other legal entity established for the
purpose of issuing securities and holding certain
assets, such as credit card receivables, auto
leases, commercial loans and related assets, or debt
obligations, that are paid down over time and generate
sufficient cash to pay holders of the securities.
These securities have yield and credit characteristics
similar to mortgage backed securities.
Other types of investments. The Fund also may invest
in various other types of debt securities including
securities issued by the U.S. government, its agencies
or instrumentalities, corporate bonds and municipal
bonds, including zero coupon securities. Further, the
Fund expects to invest from time to time in various
instruments designed to enhance income and to hedge
its portfolio against investment and interest rate
risks. The Fund expects to enter into repurchase and
reverse repurchase agreements, and dollar rolls. The
Fund also may use interest rate swaps, caps or floors.
The Fund may purchase or sell futures and listed and
over-the-counter options contracts on securities and
indices, make short sales, lend securities, make
forward commitments and invest in restricted or
illiquid securities.
Leverage The Fund is authorized to borrow funds and use
leverage (including through reverse repurchase
agreements and dollar rolls) in amounts not exceeding
33 1/3% of its total assets (including the amount
borrowed), and under current market conditions,
intends to borrow or obtain equivalent leverage in the
maximum amount permitted.
Listing Currently, there is no public market for the Fund's
common stock. The Fund plans to apply to list its
shares of common stock on the New York Stock Exchange
or another national securities exchange. Trading of
the Fund's common stock is expected to begin within
two weeks of the date of this prospectus. Before it
begins trading, the underwriter does not intend to
make a market in the Fund's shares of common stock.
Thus, investors may not be able to buy and sell shares
of the Fund during that period.
Investment
Adviser Fund Asset Management, L.P. is the Fund's investment
adviser and provides investment advisory and
management services to the Fund. For its services, the
Fund pays the investment adviser a monthly fee at the
annual rate of 0.75% of the Fund's average weekly net
assets from the effective date of the investment
advisory agreement through December 31, 2001, 0.65% of
the Fund's average weekly net assets from January 1,
2002 through December 31, 2004, and 0.55% of the
Fund's average weekly net assets from January 1, 2005
through the Fund's termination date.
Dividends
and
Distributions The Fund intends to distribute dividends of all or a
portion of its net investment income to common
stockholders each month. At times, in order to
maintain a stable level of monthly dividends to common
stockholders, the Fund may pay out less than all of
its net investment income or pay out accumulated
undistributed income in addition to net investment
income. The Fund intends to distribute all or a
portion of any net long-term capital gains at least
once annually. The Fund's income and dividends are
expected to decline to some extent over the term of
the Fund as the dollar-weighted average maturity
(commonly referred to as "average life") of the Fund's
assets shorten. Various factors will affect the level
of the Fund's income, including the asset mix, the
scheduled reduction of the investment adviser's fees,
the amount of leverage used by the Fund and the Fund's
use of hedging transactions. The Fund expects to begin
paying dividends to common stockholders within
approximately 90 days from the date of this
prospectus.
Yield
Considerations
The yield on the Fund's common stock will vary from
period to period depending on factors including, but
not limited to, market conditions, the timing of the
Fund's investment in portfolio securities, the
securities comprising the Fund's portfolio, changes in
interest rates including changes in the relationship
between short-term rates and long-term rates, the rate
of prepayment on mortgage backed and asset backed
securities, the amount and timing of the Fund's use of
leverage, the Fund's net assets and its operating
expenses. Consequently, the Fund cannot guarantee any
particular yield on its shares and the yield for any
given period is not an indication or representation of
future yields on Fund shares. The Fund's ability to
achieve any particular yield level after it commences
operations depends on future interest rates and other
factors mentioned above and the initial yield and
later yields may be lower. Any statements as to the
estimated yield are as of the date made and no
guarantee can be given that the Fund will achieve or
maintain any particular yield level. As noted above,
the Fund's yield is expected to decline to some extent
over the term of the Fund.
Automatic Dividend
Reinvestment Plan Dividend and capital gains distributions generally are
used to purchase additional shares of the Fund's
common stock. However, an investor can choose to
receive distributions in cash. Since not all investors
can participate in the automatic dividend reinvestment
plan, you should call your broker or nominee to
confirm that you are eligible to participate in the
plan.
Mutual Fund
Investment
Option Investors who purchase shares in this offering through
the underwriter and later sell their shares have the
option, subject to certain conditions, to purchase
Class D shares of certain Merrill Lynch funds with the
proceeds from the sale.
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity and Market Price of Shares. The Fund is newly organized and
has no operating history or history of public trading. Before the Fund's
common stock is listed on the New York Stock Exchange or another national
securities exchange, an investment in the Fund may be illiquid.
Shares of closed-end funds that trade in a secondary market
frequently trade at a market price that is below their net asset value. This
is commonly referred to as "trading at a discount." Investors who sell their
shares within a relatively short period after completion of the public
offering are more likely to be exposed to this risk. Accordingly, the Fund is
designed primarily for long-term investors and should not be considered a
vehicle for trading purposes.
Interest Rate and Credit Risk. The Fund invests in debt securities
that are subject to interest rate risk and credit risk. Interest rate risk is
the risk that prices of debt securities generally increase when interest rates
decline and decrease when interest rates increase. Prices of longer term
securities generally change more in response to interest rate changes than
prices of shorter term securities. Zero coupon securities are more sensitive
to interest rate changes than securities that pay interest periodically.
Credit risk is the risk that the issuer will be unable to pay interest or
repay principal when due. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.
Mortgage Backed Securities. Mortgage backed securities represent the
right to receive a portion of principal repayments and/or interest payments
made on a pool of residential or commercial mortgage loans. When interest
rates fall, borrowers may refinance or otherwise repay principal on their
mortgages earlier than scheduled. When this happens, certain types of mortgage
backed securities may be paid off more quickly than originally anticipated,
and the Fund may have to invest the proceeds in new securities with lower
yields. This risk is known as "prepayment risk." When interest rates rise,
certain types of mortgage backed securities will be paid off more slowly than
originally anticipated and the value of these securities will fall. This risk
is known as "extension risk."
Because of prepayment risk and extension risk, mortgage backed
securities react differently to changes in interest rates than other fixed
income securities. Small movements in interest rates (both increases and
decreases) may quickly and significantly reduce the value of certain mortgage
backed securities.
Some mortgage backed securities are issued by U.S. government
agencies, such as the Government National Mortgage Association (Ginnie Mae),
the Federal Home Loan Mortgage Corporation (Freddie Mac) or Federal National
Mortgage Association (Fannie Mae). Principal and interest payments on mortgage
backed securities issued by the U.S. government agencies are guaranteed by
either the Federal government or the government agency. Such securities have
very little credit risk. Other mortgage backed securities are issued by
private corporations rather than U.S. government agencies. These securities
have credit risk as well as prepayment risk and extension risk.
Certain mortgage backed securities, frequently referred to as
"mortgage derivatives," may represent a right to receive interest only (IOs),
principal only (POs) or an amount that remains after other floating-rate
classes are paid (an inverse floater). These securities may be extremely
sensitive to changes in interest rates. If the Fund invests in certain
mortgage derivatives (including those issued by U.S. government agencies) and
interest rates move in a manner not anticipated by Fund management, it is
possible that the Fund could lose all or substantially all of its investments
in these securities.
Asset Backed Securities. Like traditional fixed income securities,
the value of asset backed securities typically increases when interest rates
fall and decreases when interest rates rise. A limited number of asset backed
securities also may be subject to prepayment risk. In a period of declining
interest rates, borrowers may pay what they owe on the underlying assets more
quickly than anticipated. Prepayment reduces the yield to maturity and the
average life of asset backed securities. In addition, when the Fund reinvests
the proceeds of a prepayment it may receive a lower interest rate than the
rate on the security that was prepaid. In a period of rising interest rates,
prepayment may occur at a slower rate than expected. As a result, the average
maturity of the Fund's portfolio will increase. The value of long-term
securities generally changes more widely in response to changes in interest
rates than shorter term securities.
Concentration in Mortgage Backed and Asset Backed Securities. Since
the Fund may concentrate in mortgage backed and asset backed securities, it is
more susceptible to factors adversely affecting mortgage backed and asset
backed securities than is an investment company that is not concentrated in
mortgage backed and asset backed securities.
Rating Categories. The Fund intends to invest in debt securities that
at the time of investment are rated investment grade by Standard & Poor's or
Moody's Investors Service, Inc. It also may invest in unrated debt securities
that Fund management believes are of comparable quality at the time of
investment. Obligations rated in the lowest investment grade category may have
certain speculative characteristics. Also, if the Fund invests in an
investment grade security and it is subsequently downgraded below investment
grade, the Fund may determine to continue to hold such security in its
portfolio.
Return of Initial Investment. The Fund will seek to return $10 per
share to investors on or about December 31, 2006 by preserving capital
through, among other things, active management of its portfolio and investing
in securities that have a final or expected maturity on or about the
termination date of the Fund. If the Fund realizes capital losses on
dispositions of securities that are not offset by capital gains on the
disposition of other securities over the life of the Fund, the Fund may be
unable to distribute to its shareholders an amount equal to $10 for each share
outstanding on or about December 31, 2006. The Fund may maintain investment
positions to their maturity dates in order to avoid capital losses and may
thereby forego the opportunity to invest assets at a higher yield. In
addition, while the Fund seeks to invest in securities maturing on or about
the Fund's termination date, it may invest in securities with a final or
expected maturity of up to two years after the Fund's termination date. The
Fund could incur a capital loss on the disposition of such securities upon the
Fund's termination date in certain interest rate environments.
Leverage. The use of leverage by the Fund creates an opportunity for
increased net income, but, at the same time, creates special risks. The Fund
will only borrow or use leverage when the Fund's investment adviser believes
that such activities will benefit the Fund. To the extent the income derived
from securities purchased with borrowed funds exceeds the cost of borrowing,
the Fund's net income will be greater than if borrowing had not been used.
Conversely, if the income from the securities purchased with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing had not been used, and therefore the amount
available for distribution to shareholders as dividends will be reduced. In
the later case, the Fund may nevertheless determine to maintain its leveraged
position in order to avoid capital losses on securities purchased with the
leverage. The Fund may also borrow up to an additional 5% of its total assets
for temporary purposes without regard to the foregoing limitation. The Fund
expects to engage in investment management techniques such as reverse
repurchase agreements and dollar rolls which provide leverage in much the same
manner as borrowings.
During times of rising interest rates, the Fund's portfolio
securities and the net asset value of its shares may decline in value. The
Fund expects to leverage its portfolio, which may accentuate the potential
decline. The Fund may also invest in portfolio securities that create
investment leverage, which may further accentuate any decline. Any investor
who purchases shares with borrowed funds may experience an even greater
decline.
Illiquid Securities. The Fund may invest in securities that lack an
established secondary trading market or are otherwise considered illiquid.
Liquidity of a security relates to the ability to easily dispose of the
security and the price to be obtained and does not generally relate to the
credit risk or likelihood of receipt of cash at maturity. Illiquid securities
may trade at a discount from comparable, more liquid investments. Illiquid
securities in which the Fund may invest include certain mortgage backed and
asset backed securities, stripped securities, interest rate swaps, certain
hedging instruments and restricted securities of corporate and other issuers.
Other Investment Management Techniques. The Fund may use various
other investment management techniques that also involve special
considerations including engaging in hedging transactions and short sales,
selling listed and over-the-counter covered call options, making forward
commitments, entering into repurchase agreements and lending its portfolio
securities. The Fund is not required to engage in hedging transactions and may
not do so.
Securities Lending. The Fund may lend securities to financial
institutions that provide U.S. government securities as collateral. Securities
lending involves the risk that the borrower may fail to return the securities
in a timely manner or at all. As a result, the Fund may lose money and there
may be a delay in recovering the loaned securities. the Fund could also lose
money if it does not recover the securities and the value of the collateral
falls. These events could trigger adverse tax consequences.
Anti-takeover Provisions. The Fund's Articles of Incorporation and
By-Laws include provisions that could limit or delay the ability of other
entities or persons to acquire control of the Fund, or to change the
composition of its Board of Directors without shareholder approval. Such
provisions could limit the ability of shareholders to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund.
<PAGE>
FEE TABLE
Shareholder Transaction Expenses
Maximum Sales Load (as a percentage of offering price)............. None
Dividend Reinvestment Plan Fees.................................... None
Annual Expenses (as a percentage of net assets attributable to common stock)
Investment Advisory Fees (a)...................................... 0.75%
Interest Payments on Borrowed Funds (b)........................... 2.65%
Other Expenses.................................................... 0.27%
-----
Total Annual Expenses (b)...................................... 3.67%
EXAMPLE 1 Year 3 Years 5 Years Life of
Fund
An investor would pay
the following expenses
on a $1,000 investment
(assuming leverage
of 33 1/3% of the Fund's
total assets) and a
5% annual return
throughout the periods: $37 $111(a) $187(a) $ 262(a)
- --------------
(a) The Investment Advisory Fees are reduced to 0.65% of the Fund's
average weekly net assets from January 1, 2002 through December 31,
2004, and 0.55% of the Fund's average weekly net assets from January
1, 2005 through the Fund's termination date. See "Investment Advisory
and Management Arrangements" - page 24.
(b) Assumes borrowings or other use of leverage of 33 1/3% of total
assets (including amount borrowed) at an interest rate of 5.30%. The
Fund intends to use leverage only if the Investment Adviser believes
that it would result in higher income to shareholders over time. See
"Other Investment Policies-Leverage." If the Fund does not use
leverage, there would be no Interest Payments on Borrowed Funds and
Total Annual Expenses would be 1.02%.
The Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year. The Example
set forth above assumes reinvestment of all dividends and distributions and
uses a 5% annual rate of return as mandated by Securities and Exchange
Commission regulations. The Example should not be considered a representation
of future expenses or annual rates of return, and actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
Example.
<PAGE>
The Fund
Income Opportunities Fund 2006, Inc. (the "Fund") is a newly
organized, diversified, fixed term, closed-end management investment company.
The Fund was incorporated under the laws of the State of Maryland on October
7, 1999, and has registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Fund's Articles of Incorporation
provide that the Fund will terminate on December 31, 2006, without shareholder
approval, at which time the Fund will distribute substantially all of its net
assets to shareholders. See "Description of Capital Stock." The Fund's
principal office is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and its telephone number is (609) 282-2800.
The Fund has been organized as a closed-end investment company.
Closed-end investment companies differ from open-end investment companies
(commonly referred to as "mutual funds") in that closed-end investment
companies do not generally make a continuous offering of shares or redeem
their securities at the option of the shareholder, whereas open-end companies
issue securities redeemable at net asset value at any time at the option of
the shareholder and typically engage in a continuous offering of their shares.
Accordingly, open-end investment companies are subject to continuous asset
in-flows and out-flows that can complicate portfolio management. Shares of
closed-end investment companies, however, frequently trade at a discount from
their net asset value. The risk may be greater for investors expecting to sell
their shares in a relatively short period after completion of the public
offering.
Use Of Proceeds
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment option
in full) after payment of offering expenses estimated to be approximately $ .
The net proceeds of the offering will be invested in accordance with
the Fund's investment objective and policies within approximately three months
after completion of the offering of the shares of common stock, depending on
market conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in U.S.
government securities or investment grade short-term securities. See
"Investment Objective and Policies."
Investment Objective and Policies
The investment objective of the Fund is to provide monthly income and
return $10 per share (the initial public offering price per share) to
stockholders on or about December 31, 2006 (the Fund's termination date).
There can be no assurance that the investment objective of the Fund will be
realized and that the Fund will be able to return $10 per share on its
termination date. The investment objective of the Fund is a fundamental policy
and may not be changed without shareholder approval.
The Fund seeks to achieve its investment objective by investing primarily
in mortgage backed and asset backed securities, including those issued or
guaranteed by the U.S. government, its agencies or instrumentalities, that are
rated at least investment grade by Standard & Poors ("S&P") or Moody's
Investors Service, Inc. ("Moody's") (BBB- or higher by S&P or Baa3 or higher
by Moody's) or, if unrated, are determined by Fund Asset Management, L.P,. the
Fund's investment adviser (the "Investment Adviser"), to be of equivalent
credit quality. As part of this strategy, the Fund may invest in derivative
instruments whose value is generally linked to payments of interest or
principal on mortgage backed securities. Over time, the Fund may increasingly
invest in short-term securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, or investment grade short-term securities
(rated in one of the top three ratings categories by S&P or Moody's) that are
expected to mature on or about the termination date of the Fund. Such
securities may represent over 50% of the Fund's total assets in its later
years. The Fund also may invest in corporate bonds, municipal bonds and other
types of debt securities, including zero coupon securities, rated at least
investment grade at the time of investment, or determined by the Investment
Adviser to be of comparable quality. The Fund will seek to return $10 per
share to investors on or about December 31, 2006, by preserving capital
through active management of its portfolio and investing in fixed income
securities which have a final or expected maturity on or about the Fund's
termination date. The Fund does not anticipate investing in securities that
are expected to mature more than two years beyond the Fund's termination date.
For temporary or defensive purposes, the Fund may invest up to 100%
of its assets in short-term securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or investment grade short-term
securities (see "--Other Portfolio Investments and Techniques"). At times, the
Fund expects to use leverage and to invest in various instruments designed to
enhance income and to hedge its portfolio against investment and interest rate
risks. Under current market conditions, the Fund intends to borrow or use
leverage in an amount approximately equal to 33 1/3% of its total assets
(including the amount borrowed), which is the maximum amount permitted.
As a result of the foregoing, the Fund will be considered to be
concentrated in mortgage backed and asset backed securities during most of the
term of the Fund.
The Investment Adviser will manage the Fund's assets so as to cause
the dollar-weighted average maturity of the assets to shorten over time as the
remaining term of the Fund decreases.
If the Fund realizes any capital losses on dispositions of securities
that are not offset by capital gains on the disposition of other securities,
the Fund may be unable to distribute to its shareholders at the end of the
Fund's term an amount equal to $10 for each share then outstanding.
Mortgage Backed and Asset Backed Securities
Mortgage backed securities are securities that directly or indirectly
represent an interest in, or are backed by and payable from, mortgage loans
secured by real property. Asset backed securities generally consist of
structures similar to mortgage backed securities, except that the underlying
asset pools are comprised of credit card, automobile loan or other types of
receivables, commercial loans and related assets, or of debt obligations
(receivables, commercial loans and such debt obligations and related assets
are together referred to herein as "financial assets"). Mortgage backed and
asset backed securities are issued in structured financings wherein the
sponsor securitizes the underlying mortgage loans or financial assets in order
to liquify the underlying assets or to achieve certain other financial goals.
The special considerations and risks inherent in investments in mortgage
backed and asset backed securities are discussed more fully below.
Some of the mortgage backed and asset backed securities in which the
Fund will invest will be issued by private issuers. Private issuers include
originators of or investors in mortgage loans and receivables such as savings
and loan associations, savings banks, commercial banks, investment banks,
finance companies and special purpose finance subsidiaries of any of the
above. Other mortgage backed securities in which the Fund may invest will be
guaranteed by the Government National Mortgage Association ("GNMA") or issued
by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). Other asset backed securities in which the
Fund will invest may be guaranteed by the Small Business Administration
("SBA") or issued in programs originated by the Resolution Trust Corporation
("RTC"). GNMA, FNMA, FHLMC and SBA are agencies or instrumentalities of the
United States. The proportion of the Fund's portfolio invested in mortgage
backed and asset backed securities issued by private issuers or issued or
guaranteed by the U.S. government, its agencies or instrumentalities will vary
over the life of the Fund.
Securities issued by private issuers must be rated investment grade
(at least BBB- by S&P or Baa3 by Moody's) or, if unrated, be of comparable
quality as determined by the Investment Adviser. The rating may be based, in
part, on certain types of credit enhancements issued in respect of those
securities. These credit enhancements may offer two types of protection to the
Fund: (i) liquidity protection, and (ii) protection against losses resulting
from ultimate default by an obligor and the underlying assets. Liquidity
protection refers to the advancing of scheduled payments of interest, and in
some circumstances principal, due on the underlying asset, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance polices or letters of credit
obtained by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Fund will not pay any additional fees for such credit enhancement, although
the existence of credit enhancement may increase the price of a security.
Credit enhancements can come from external providers such as banks or
financial insurance companies. Alternatively, they may come from the structure
of a transaction itself. Examples of credit enhancement arising out of the
structure of the transaction include "senior-subordinated securities"
(multiple class securities with one or more classes subordinate to other
classes as to the repayment of principal thereof and the payment of interest
thereon, with the result that defaults on the underlying assets are borne
first by the holders of the subordinated class), creation of "reserve funds"
(where cash or investments, sometimes funded from a portion of the payments on
the underlying assets, are held in reserve against future losses) and
"overcollateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit
enhancement provided for each issue generally is based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue. In addition, the Fund may
purchase subordinated securities which, as noted above, may serve as a form of
credit enhancement for senior securities purchased by other investors. In
purchasing securities for the Fund, the Investment Adviser will take into
account not only the creditworthiness of the issuer of the securities, but
also the creditworthiness of the provider of any external credit enhancement
of the securities.
The collateral backing mortgage backed securities is usually held by
an independent bailee, custodian or trustee on behalf of the holders of the
related mortgage backed securities or asset backed securities. In such
instances, the holder of the related mortgage backed securities or asset
backed securities (i.e., the Fund) will have either an ownership interest or
security interest in the underlying collateral and can exercise its rights
thereto through such bailee, custodian or trustee.
The Fund will invest in pass-through mortgage backed securities that
represent ownership interests in a pool of commercial mortgages or mortgages
on single-family or multi-family residences. Such securities represent
interests in pools of residential mortgage loans originated by U.S.
governmental or private lenders and guaranteed, to the extent provided in such
securities, by the U.S. government, one of its agencies or instrumentalities
or by private guarantors. Such securities, which are ownership interests in
the underlying mortgage loans, differ from conventional debt securities, which
provide for periodic payment of interest in fixed amounts (usually
semiannually) and principal repayments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal repayments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans,
net of any fees paid to the guarantor of such securities and the servicer of
the underlying mortgage loans.
The Fund also may invest in collateralized mortgage obligations
("CMOs") which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
pass-through mortgage backed securities guaranteed by GNMA, or issued by FNMA
or FHLMC. They may, however, also be collateralized by whole loans or by
pass-through mortgage backed securities of private issuers. The collateral for
CMOs is hereinafter referred to as "CMO Collateral." The term CMO as used
herein also includes multi-class pass-through securities, which are equity
interests in a trust composed of CMO Collateral. CMOs may be issued by
agencies or instrumentalities of the United States, including FNMA and FHLMC,
or by the types of private issuers described above.
The yield characteristics of mortgage backed and asset backed
securities differ from traditional corporate debt securities. Among the major
differences are that interest payments and principal repayments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if the Fund purchases such a security at a premium,
a prepayment rate that is faster than expected will reduce the security's
yield to maturity, while a prepayment rate that is slower than expected will
have the opposite effect of increasing the security's yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments
will reduce the securities' yield to maturity. The Fund may invest a portion
of its assets in derivative mortgage backed securities, such as stripped
mortgage backed securities, which are highly sensitive to changes in
prepayment rates and interest rates. The Investment Adviser will seek to
manage these risks (and potential benefits) by investing in a variety of such
securities and through hedging techniques.
Prepayments on a pool of mortgage loans are influenced by a variety
of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Accordingly, amounts available for reinvestment by the Fund are likely to be
greater during a period of declining interest rates and, as a result, likely
to be reinvested at lower interest rates than during a period of rising
interest rates. Although asset backed securities generally are less likely to
experience substantial prepayments than are mortgage backed securities,
certain of the factors that affect the rate of prepayments on mortgage backed
securities also affect the rate of prepayments on asset backed securities.
However, during any particular period, the predominant factors affecting
prepayment rates on mortgage backed and asset backed securities may be
different. Mortgage backed and asset backed securities may decrease in value
as a result of increases in interest rates and may benefit less than other
fixed income securities from declining interest rates because of the risk of
prepayment.
The Fund's yield will also be affected by the yields on instruments
in which the Fund is able to reinvest the proceeds of payments and
prepayments. Accelerated prepayments on securities purchased by the Fund at a
premium also impose a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is repaid in full.
The Fund may also invest in various derivative mortgage backed
securities, which are synthetic securities designed to be highly sensitive to
certain types of interest rate and principal prepayment scenarios. Derivative
instruments primarily consist of some form of stripped mortgage backed
securities ("SMBS") that commonly involve different classes of securities that
receive disproportionate amounts of the interest and principal distributions
on a pool of mortgage assets. SMBS are typically issued by the same types of
issuers as are mortgage backed securities generally. The structure of SMBS,
however, is different. SMBS arrangements commonly involve two classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common variety of SMBS is where
one class (the principal-only or PO class) receives some of the interest and
most of the principal from the underlying assets, while the other class (the
interest-only or IO class) receives most of the interest and the remainder of
the principal. In the most extreme case, the IO class receives all of the
interest, while the PO class receives all of the principal. The yield to
maturity on an IO class is extremely sensitive to the rate of principal
repayments (including prepayments) on the related underlying assets, and a
rate of principal repayments in excess of that considered in pricing the
securities will have a material adverse effect on an IO security's yield to
maturity. If the underlying mortgage assets experience greater than
anticipated repayments of principal, the Fund may fail to recoup fully its
initial investment in IOs. In addition, there are certain types of IOs that
represent the interest portion of a particular class as opposed to the
interest portion of the entire pool. The sensitivity of these types of IOs to
interest rate fluctuations may be increased because of the characteristics of
the principal portion to which they relate.
The Fund may invest in derivative mortgage backed floating rate
securities the interest rate of which is adjusted up or down inversely to
changes in a specified index ("inverse floaters"). Generally, income on
inverse floaters will decrease when short-term interest rates increase and
will increase when short-term interest rates decrease. Such securities have
the effect of providing a degree of investment leverage, since they may
increase or decrease in value in response to changes in market interest rates
at a rate that is a multiple of the rate at which fixed-rate, long-term
securities increase or decrease in response to such changes. As a result, the
market values of such securities generally will be more volatile than the
market values of fixed rate securities.
Under certain interest rate scenarios, the Fund may decide to retain
investments in IOs or inverse floaters yielding less than prevailing interest
rates in order to avoid capital losses on the sale of such investments.
Other Portfolio Investments and Techniques
The Fund may invest in interest bearing securities of varying
maturities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Fund also may invest in interest bearing corporate debt
securities and municipal debt securities rated at least investment grade at
the time of investment. Corporate and municipal debt securities providing for
payment of interest and repayment of principal are issued by corporate or
municipal entities with maturities ranging from one month to thirty years or
more. These securities typically have fixed or variable interest rates and a
fixed maturity, which may be subject to redemption provisions.
The Fund may also invest in zero coupon securities. Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payments prior to maturity and are issued and traded at a discount from their
face amounts. The discount varies depending on the time remaining until
maturity, prevailing interest rates, liquidity of the security and perceived
credit quality of the issuer. Zero coupon securities may be created by
separating the interest and principal components of U.S. government, agency or
instrumentality securities, municipal securities, or private corporate
securities. In addition, they may be issued directly by private corporate or
tax exempt issuers. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a
greater degree than do securities having similar maturities and credit quality
that do pay periodic interest.
The short-term securities in which the Fund may invest consist of
U.S. government, agency or instrumentality securities, domestic bank or
savings institution certificates of deposit and bankers' acceptances,
short-term debt securities such as commercial paper and other corporate debt,
and repurchase agreements. These investments must have a maturity not in
excess of one year from the date of purchase.
In addition, as discussed below, the Fund may use certain options,
futures contracts, interest rate swaps and related transactions for hedging
purposes and to enhance income. For purposes of enhancing liquidity and/or
preserving capital, on a temporary defensive basis, the Fund may invest
without limit in securities issued by the U.S. government, its agencies or
instrumentalities, repurchase agreements collateralized by such securities, or
certificates of deposit, time deposits or bankers' acceptances. The Fund also
may invest in other municipal securities, other debt obligations of corporate
issuers, such as commercial paper, and interest bearing savings accounts of
banks having assets greater than $1 billion and which are members of the
Federal Deposit Insurance Corporation (the "FDIC").
New types of mortgage backed and asset backed securities, zero coupon
securities, derivative securities and hedging instruments are developed and
marketed from time to time. Consistent with its investment objective, policies
and restrictions, the Fund expects to invest in such new types of securities
and instruments that the Investment Adviser believes may assist the Fund in
achieving its investment objective. More detailed information as to the types
of securities in which the Fund may invest is set forth in Appendix I.
Credit Quality of Portfolio Investments
The Fund's assets will be invested primarily in securities that are
rated at the time of investment in the four highest rating categories of S&P
or Moody's or, if unrated, are considered to be of comparable quality by the
Investment Adviser. The Fund will also invest in securities that are issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
Securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities are generally considered to be of the same or higher credit
quality as privately issued securities rated AAA.
The process of determining ratings for corporate debt securities
(which includes mortgage backed and asset backed securities) by S&P and
Moody's includes consideration of the likelihood of the receipt by security
holders of all distributions, the nature of the underlying securities, the
credit quality of any guarantor, the business sector of the issuer, business
and financial risks of the issuer, management evaluation, capital structure,
cash flows, regulatory considerations, other risks if any, the structural,
legal and tax aspects associated with such securities and other relevant
criteria. With respect to mortgage backed and asset backed securities, such
ratings do not represent an assessment of the likelihood that principal
prepayments will be made by mortgagors or the degree to which such prepayments
may differ from that originally anticipated, nor do they address the
possibility that investors may suffer a lower than anticipated yield or that
investors in such securities may fail to recoup fully their initial investment
due to prepayments. A description of the four highest rating categories of S&P
and Moody's for corporate debt securities is set forth in Appendix II.
The Fund has established the following standards with respect to
short-term securities in which the Fund invests. Commercial paper investments
at the time of purchase must be rated A-3 by S&P or Prime-3 by Moody's or, if
not rated, be issued by companies having such a rating with respect to
comparable short-term debt securities. A description of these rating
categories is set forth in Appendix II. Investments in short-term corporate
bonds and debentures (which would have maturities at the date of purchase of
one year or less) will be limited to securities of issuers which, at the time
of purchase, have a rating with respect to comparable short-term debt of A-3
by S&P or Prime-3 by Moody's. The Fund may not invest in any security issued
by a commercial bank or a savings institution unless the bank or institution
is organized and operating in the U.S., has total assets of at least one
billion dollars and is a member of the FDIC.
OTHER INVESTMENT POLICIES
Leverage and Borrowing
The Fund is authorized to borrow money from banks or otherwise in an
amount up to 33 1/3% of the Fund's total assets (including the amount
borrowed), less all liabilities and indebtedness other than the bank or other
borrowing, and under current market conditions, the Fund intends to borrow or
obtain equivalent leverage in an amount equal to approximately 33 1/3% of
the Fund's total assets. The Fund is also authorized to borrow an additional
5% of its total assets without regard to the foregoing limitation for
temporary purposes such as clearance of portfolio transactions and share
repurchases. The Fund will only borrow when the Investment Adviser believes
that such borrowings will benefit the Fund after taking into account
considerations such as interest income and possible gains or losses upon
liquidation. The Fund may at times borrow from an affiliate of the Investment
Adviser, provided that the terms of such borrowings are no less favorable than
those available from comparable sources of funds in the marketplace.
Borrowings from an affiliate of the Investment Adviser will result in the
payment of fees and interest on borrowed funds to the affiliate by the Fund.
Borrowings by the Fund create an opportunity for greater total return
but, at the same time, increase exposure to capital risk. For example,
leveraging may exaggerate changes in the net asset value of Fund shares and in
the yield on the Fund's portfolio. Although the principal of such borrowings
will be fixed, the Fund's assets may change in value during the time the
borrowings are outstanding. Borrowing will create interest expenses for the
Fund which can exceed the income from the assets retained. To the extent the
income derived from securities purchased with borrowed funds exceeds the
interest the Fund will have to pay, the Fund's net income will be greater than
if borrowing were not used. Conversely, if the income from the assets retained
with borrowed funds is not sufficient to cover the cost of borrowing, the net
income of the Fund will be less than if borrowing were not used, and therefore
the amount available for distribution to shareholders as dividends will be
reduced. The Fund may also borrow for emergency purposes, for the payment of
dividends, for share repurchases or for the clearance of transactions.
Because few or none of its assets will consist of margin securities,
the Fund does not expect to borrow on margin. The Fund also may leverage by
entering into reverse repurchase agreements with the same parties with whom it
may enter into repurchase agreements (as discussed below). Under a reverse
repurchase agreement, the Fund sells securities and agrees to repurchase them
at a mutually agreed date and price. At the time the Fund enters into a
reverse repurchase agreement, it may establish and maintain a segregated
account with its custodian containing cash, cash equivalents or liquid high
grade debt securities having a value not less than the repurchase price
(including accrued interest). If the Fund establishes and maintains such a
segregated account, a reverse repurchase agreement will not be considered a
borrowing by the Fund; however, if the Fund does not establish and maintain
such a segregated account, a reverse repurchase agreement will be considered a
borrowing for the purpose of the Fund's limitation on borrowing. Reverse
repurchase agreements involve the risk that the market value of the securities
acquired, or retained in lieu of sale, by the Fund in connection with the
reverse repurchase agreement may decline below the price of the securities the
Fund has sold but is obligated to repurchase. If such security being held by
the Fund as a result of the reverse repurchase agreement is an inverse
floating rate instrument (see the discussion of derivative mortgage backed
securities under "Investment Objective and Policies-Mortgage Backed and
Asset Backed Securities"), an increase in market interest rates (e.g., LIBOR)
could result in a negative interest rate spread on the leverage during the
term of the reverse repurchase agreement given the fact that the Fund may be
forced to hold such instrument to maturity rather than incur a capital loss on
the sale thereof which could impact the ability of the Fund to pay $10 per
share at its termination date. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's obligation to repurchase the securities, and the
Fund's use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
The Fund also may enter into "dollar rolls." A dollar roll is where
the Fund sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Fund forgoes principal and interest paid on such securities. The
Fund is compensated by the difference between the current sales price and the
lower forward price for the future purchase (often referred to as the "drop")
as well as by the interest earned on the cash proceeds of the initial sale. A
"covered roll" is a specific type of dollar roll for which there is a
segregated account with cash, cash equivalents or liquid high grade debt
securities. Covered rolls will not be considered to be borrowings for purposes
of the Fund's limitation on borrowing to the extent that they are
appropriately collateralized by high grade liquid assets of the Fund. Dollar
rolls which are not so collateralized will be considered borrowings for the
purpose of the Fund's limitation on borrowing.
The Fund expects that some of its borrowings may be made on a secured
basis. In such situations, either the Fund's custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
(i) the lender to act as a subcustodian if the lender is a bank or otherwise
qualifies as a custodian of investment company assets or (ii) a suitable
subcustodian.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset coverage and
portfolio composition requirements and those restricting the Fund's payment of
dividends and distributions on the common stock in certain circumstances. The
Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more rating agencies that may issue ratings for any debt
securities issued by the Fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed
on the Fund by the Investment Company Act. It is not anticipated that these
covenants or guidelines will impede the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies.
Under the Investment Company Act, the Fund is not permitted to incur
indebtedness unless immediately after such incurrence the Fund has an asset
coverage of at least 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3>% of the Fund's
total assets). Additionally, under the Investment Company Act the Fund may not
declare any dividend or other distribution upon its common stock or purchase
its common stock, unless the aggregate indebtedness of the Fund has, at the
time of the declaration of any such dividend or distribution or at the time of
any such purchase, an asset coverage of at least 300% after deducting the
amount of such dividend, distribution, or purchase price, as the case may be.
The Fund's failure to pay dividends and distributions on its common
stock could adversely affect the Fund's qualification as a regulated
investment company under Federal tax law. The Fund intends, however, to take
all measures necessary to continue to make dividend and distribution payments
on its common stock. See " Taxes."
The Fund's willingness to borrow money for investment purposes, and
the amount it will borrow, will depend on many factors, the most important of
which are investment outlook, market conditions and interest rates. Successful
use of a leveraging strategy depends on the Investment Adviser's ability to
predict correctly interest rates and market movements, and there is no
assurance that a leveraging strategy will be successful during any period in
which it is employed.
Assuming the use of leverage by borrowings or otherwise in the amount
of approximately 33 1/3% of the Fund's total assets (including the amount
obtained from leverage), and an estimated annual interest rate of 5.30%
payable on such leverage based on market rates as of the date of this
prospectus, the annual return that the Fund's portfolio must experience (net
of expenses) in order to cover such interest payments would be 1.77%. The
Fund's actual cost of leverage will be based on market rates at the time the
Fund undertakes a leveraging strategy, and such actual cost of leverage may be
higher or lower than that assumed in the previous example.
The following table is designed to illustrate the effect on the
return to a holder of the Fund's common stock of the leverage obtained by
borrowings in the amount of approximately 33 1/3% of the Fund's total
assets, assuming hypothetical annual returns of the Fund's portfolio of minus
10% to plus 10%. As the table shows, leverage generally increases the return
to shareholders when portfolio return is positive and greater than the cost of
leverage and decreases the return when the portfolio return is negative or
less than the cost of leverage. The figures appearing in the table are
hypothetical and actual returns may be greater or less than those appearing in
the table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of expenses)............ (10)% (5)% 0% 5% 10%
Corresponding Common Stock Return..................... (18)% (10)% (3)% 5% 12%
</TABLE>
Until the Fund borrows, the Fund's common stock will not be
leveraged, and the risks and special considerations related to leverage
described in this prospectus will not apply.
Portfolio Strategies Involving Interest Rate Transactions, Options and Futures
The Fund may engage in various portfolio strategies to seek to
increase its return through the use of options on portfolio securities and to
hedge its portfolio against movements in interest rates. The Fund has
authority to engage in interest rate transactions in order to hedge against
interest rate movements, purchase call and put options on securities, write
(i.e., sell) covered call and put options on its portfolio securities, and
engage in hedging transactions in financial futures and related options on
such futures. Each of these portfolio strategies is described below.
Although certain risks are involved in interest rate, options and
futures transactions, the Investment Adviser believes that, because the Fund
will (i) write only covered options on portfolio securities and (ii) engage in
other transactions primarily for hedging purposes, these portfolio strategies
will not subject the Fund to the risks frequently associated with the
speculative use of such transactions. There can be no assurance that the
Fund's hedging transactions will be effective. Furthermore, the Fund will only
engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in interest rates occur. The
Fund has no obligation to enter into hedging transactions and may not do so.
Reference is made to Appendix I for further information concerning these
strategies.
Interest Rate Transactions. In order to hedge the value of the Fund's
portfolio against interest rate fluctuations or to enhance the Fund's income,
the Fund may enter into various transactions, such as interest rate swaps and
the purchase or sale of interest rate caps and floors. The Fund expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions primarily as a hedge and not
as a speculative investment. However, the Fund may also invest in interest
rate swaps to enhance income or to increase the Fund's yield during periods of
steep interest rate yield curves (i.e., wide differences between short term
and long term interest rates).
The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Fund holds a
mortgage backed security with an interest rate that is reset only once each
year, it may swap the right to receive interest at this fixed rate for the
right to receive interest at a rate that is reset every week. This would
enable the Fund to offset a decline in the value of the mortgage backed
security due to rising interest rates but would also limit its ability to
benefit from falling interest rates. Conversely, if the Fund holds a mortgage
backed security with an interest rate that is reset every week and it would
like to lock in what it believes to be a high interest rate for one year, it
may swap the right to receive interest at this variable weekly rate for the
right to receive interest at a rate that is fixed for one year. Such a swap
would protect the Fund from a reduction in yield due to falling interest rates
and may permit the Fund to enhance its income through the positive
differential between one week and one year interest rates, but would preclude
it from taking full advantage of rising interest rates.
Typically, the parties with which the Fund will enter into interest
rate transactions will be broker-dealers and other financial institutions. The
Fund will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in one of the two highest rating categories of at least
one nationally recognized statistical rating organization at the time of
entering into such transaction or whose creditworthiness is believed by the
Investment Adviser to be equivalent to such rating. If there is a default by
the other party to such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with other similar instruments traded in the
interbank market. Caps and floors, however, are less liquid than swaps.
Certain Federal income tax requirements may limit the Fund's ability to engage
in certain interest rate transactions. Gains from transactions in interest
rate swaps distributed to shareholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to shareholders.
Call Options on Portfolio Securities. The Fund may purchase call
options on any of the types of securities in which it may invest. A purchased
call option gives the Fund the right to buy, and obligates the seller to sell,
the underlying security at the exercise price at any time during the option
period. The Fund may purchase call options on securities held in its portfolio
on which it has written call options or which it intends to purchase. The Fund
also is authorized to write (i.e., sell) covered call options on the
securities in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered call option is
an option where the Fund, in return for a premium, gives another party a right
to buy specified securities owned by the Fund at a specified future date and
price set at the time of the contract. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options also serve as a partial hedge against the price of the
underlying security declining. The Fund also may purchase and sell call
options on indices. Index options are similar to options on securities except
that, rather than taking or making delivery of securities underlying the
option at a specified price upon exercise, an index option gives the holder
the right to receive cash upon exercise of the option if the level of the
index upon which the option is based is greater than the exercise price of the
option.
Put Options on Portfolio Securities. The Fund is authorized to
purchase put options to hedge against a decline in the value of its
securities. By buying a put option, the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
option expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the put option plus the related transaction costs. A closing
sale transaction cancels out the Fund's position as the purchaser of an option
by means of an offsetting sale of an identical option prior to the expiration
of the option it has purchased. The Fund also has authority to write (i.e.,
sell) put options on the types of securities which may be held by the Fund,
provided that such put options are covered, meaning that such options are
secured by segregated, high grade liquid debt securities. The Fund will
receive a premium for writing a put option, which increases the Fund's return.
The Fund will not sell puts if, as a result, more than 50% of the Fund's
assets would be required to cover its potential obligations under its hedging
and other investment transactions. The Fund may purchase and sell put options
on indices. Index options are similar to options on securities except that,
rather than taking or making delivery of securities underlying the option at a
specified price upon exercise, an index option gives the holder the right to
receive cash upon exercise of the option if the level of the index upon which
the option is based is less than the exercise price of the option.
Financial Futures and Options Thereon. The Fund is authorized to
engage in transactions in financial futures contracts ("futures contracts")
and related options on such futures contracts as a hedge against adverse
changes in the market value of its portfolio securities and interest rates. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a security for a set price on a future date or, in the case of an
index futures contract, to make and accept a cash settlement based upon the
difference in value of the index between the time the contract was entered
into and the time of its settlement. A majority of transactions in futures
contracts, however, do not result in the actual delivery of the underlying
instrument or cash settlement, but are settled through liquidation, i.e., by
entering into an offsetting transaction. Futures contracts have been designed
by boards of trade which have been designated "contract markets" by the
Commodities Futures Trading Commission ("CFTC"). Transactions by the Fund in
futures contracts and financial futures are subject to limitations as
described below under "Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of an increase in
the general level of interest rates. Generally, as interest rates rise, the
market values of securities which may be held by the Fund will fall, thus
reducing the net asset value of the Fund. However, as interest rates rise, the
value of the Fund's short position in the futures contract will also tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of the Fund's investments which are being hedged. While the Fund will
incur commission expenses in selling and closing out futures positions, these
commissions are generally less than the transaction expenses which the Fund
would have incurred had the Fund sold portfolio securities in order to reduce
its exposure to increases in interest rates. The Fund also may purchase
financial futures contracts in anticipation of a decline in interest rates
when it is not fully invested in a particular market in which it intends to
make investments to gain market exposure that may in part or entirely offset
an increase in the cost of securities it intends to purchase. It is
anticipated that, in a substantial majority of these transactions, the Fund
will purchase securities upon termination of the futures contract.
The Fund also has authority to purchase and write call and put
options on futures contracts in connection with its hedging activities.
Generally, these strategies are used under the same market and market sector
conditions (i.e., conditions relating to specific types of investments) in
which the Fund enters into futures transactions. The Fund may purchase put
options or write call options on futures contracts rather than selling the
underlying futures contract in anticipation of a decrease in the market value
of securities or an increase in interest rates. Similarly, the Fund may
purchase call options, or write put options on futures contracts, as a
substitute for the purchase of such futures to hedge against the increased
cost resulting from an increase in the market value or a decline in interest
rates of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on exchanges
and options in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance, of the
parties' obligation is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Restrictions on the Use of Futures Transactions. Under regulations of
the CFTC, the futures trading activity described herein will not result in the
Fund being deemed a "commodity pool," as defined under such regulations,
provided that the Fund adheres to certain restrictions. In particular, the
Fund may purchase and sell futures contracts and options thereon (i) for bona
fide hedging purposes, and (ii) for non-hedging purposes, if the aggregate
initial margin and premiums required to establish positions in such contracts
and options does not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized losses
on any such contracts and options. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated, plus the amount of variation margin held in the account
of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options only
with member banks of the Federal Reserve System and primary dealers in U.S.
government securities or with affiliates of such banks or broker-dealers which
have capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million.
Risk Factors in Interest Rate Transactions and Options and Futures
Transactions. The use of interest rate transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. Interest rate
transactions involve the risk of an imperfect correlation between the index
used in the hedging transaction and that pertaining to the securities which
are the subject of such transaction. If the Investment Adviser is incorrect in
its forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not used. In addition,
interest rate transactions that may be entered into by the Fund do not involve
the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited
to the net amount of interest payments that the Fund is contractually
obligated to make. If the security underlying an interest rate swap is prepaid
and the Fund continues to be obligated to make payments to the other party to
the swap, the Fund would have to make such payments from another source. If
the other party to an interest rate swap defaults, the Fund's risk of loss
consists of the net amount of interest payments that the Fund contractually is
entitled to receive. In the case of a purchase by the Fund of an interest rate
cap or floor, the amount of loss is limited to the fee paid. Since interest
rate transactions arc individually negotiated, the Investment Adviser expects
to achieve an acceptable degree of correlation between the Fund's rights to
receive interest on securities and its rights and obligations to receive and
pay interest pursuant to interest rate swaps.
Utilization of options and futures transactions to hedge the
portfolio involves the risk of imperfect correlation in movements in the price
of options and futures and movements in the prices of the securities which are
the subject of the hedge. If the price of the options or futures moves more or
less than the price of the subject of the hedge, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. This risk particularly applies to the Fund's use of
futures and options thereon since it will generally use such instruments as a
so-called "cross-hedge," which means that the security that is the subject of
the futures contract is different from the security being hedged by the
contract.
Prior to exercise or expiration, an exchange-traded option position
can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund intends to enter into options and futures
transactions, on an exchange or in the over-the-counter market, only if there
appears to be a liquid secondary market for such options or futures. However,
there can be no assurance that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions also could have
an adverse impact on the Fund's ability to effectively hedge its portfolio.
There is also the risk of loss by the Fund of margin deposits or collateral in
the event of bankruptcy of a broker with whom the Fund has an open position in
an option, a futures contract or an option related to a futures contract.
Short Sales
The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund expects to make
short sales both as a form of hedging to offset potential declines in long
positions in similar securities and in order to maintain portfolio
flexibility.
When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and
is often obligated to pay over any payments received on such borrowed
securities.
The Fund's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
government securities or other high grade liquid securities similar to those
borrowed. The Fund also will be required to deposit similar collateral with
its custodian to the extent, if any, necessary so that the value of both
collateral deposits in the aggregate is at all times equal to at least 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Fund on such security, the Fund
may not receive any payments (including interest) on its collateral deposited
with such broker-dealer.
If the price of the security sold short increases between the time of
the short sale and the time the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Fund's gain is limited to the price at
which it sold the security short, its potential loss is theoretically
unlimited.
The Fund will not make a short sale if, after giving effect to such
sale, the market value of all securities sold short exceeds 25% of the value
of its total assets or the Fund's aggregate short sales of a particular class
of securities exceeds 25% of the outstanding securities of that class. The
Fund also may make short sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the sale, the Fund
owns or has the immediate and unconditional right to acquire at no additional
cost the identical security.
Restricted and Illiquid Securities
The Fund expects to invest in securities the disposition of which is
subject to legal or contractual restrictions or the markets for which are
illiquid. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale.
The Fund may invest in illiquid securities which, under current
guidelines of the staff of the Securities and Exchange Commission (the
"Commission"), include stripped mortgage backed, privately stripped U.S.
government, agency or instrumentality securities and municipal securities,
interest rate swaps, certain hedging instruments and certain restricted
securities of corporate and other issuers. Although the staff of the
Commission currently categorizes these securities as illiquid, many of them
trade in established secondary markets.
Repurchase Agreements
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. government securities. Under
such agreements, the bank or primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results
in a fixed rate of return insulated from market fluctuations during such
period. In the case of repurchase agreements, the prices at which the trades
are conducted do not reflect accrued interest on the underlying obligations.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the
purchaser. In the case of a repurchase agreement, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur
costs or possible losses in connection with the disposition of the collateral.
In the event of a default under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform.
Lending of Portfolio Securities
The Fund may from time to time lend securities from its portfolio,
with a value not exceeding 33 1/3% of its total assets, to banks, brokers
and other financial institutions and receive collateral in cash or securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. The purpose of such loans
is to permit the borrower to use such securities for delivery to purchasers
when such borrower has sold short. If cash collateral is received by the Fund,
it is invested in short-term securities, and a portion of the yield received
in respect of such investment is retained by the Fund. Alternatively, if
securities are delivered to the Fund as collateral, the Fund and the borrower
negotiate a rate for the loan premium to be received by the Fund for lending
its portfolio securities. In either event, the total yield on the Fund's
portfolio is increased by loans of its portfolio securities. The Fund will
have the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's, administrative and custodial fees
in connection with such loans.
When-Issued and Forward Commitment Securities
The Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to hedge
against anticipated changes in interest rates and prices. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but the Fund
will enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. If the
Fund disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss. At the time the Fund enters into a
transaction on a when-issued or forward commitment basis, it will segregate
with the custodian cash or liquid securities with a value not less than the
value of the when-issued or forward commitment securities. The value of these
assets will be monitored daily to ensure that their marked to market value
will at all times exceed the corresponding obligations of the Fund. There is
always a risk that the securities may not be delivered, and the Fund may incur
a loss. Settlements in the ordinary course, which may take substantially more
than five business days for mortgage-related securities, are not treated by
the Fund as when-issued or forward commitment transactions and accordingly are
not subject to the foregoing restrictions.
Investment Restrictions
The following are fundamental investment restrictions of the Fund and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding shares of common stock (which for this purpose and under
the Investment Company Act means the lesser of (i) 67% or more of the shares
of common stock represented at a meeting at which more than 50% of the
outstanding shares of common stock are represented or (ii) more than 50% of
the outstanding shares of common stock). The Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Make investments for the purpose of exercising control or
management of any company.
3. Purchase or sell real estate; commodities or commodity contracts
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
4. Issue senior securities or borrow money except as permitted by
Section 18 of the Investment Company Act.
5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
6. Make loans to other persons, except that the acquisition of
corporate debt securities and investment in U.S. Government, or agency or
instrumentality obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or
any similar instruments shall not be deemed to be the making of a loan,
and except further that the Fund may lend portfolio securities provided
that the lending of portfolio securities be made only in accordance with
applicable law and the guidelines set forth in this prospectus.
7. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single
industry other than mortgage backed and asset backed securities;
provided, however, that the Fund may not be concentrated in mortgage
backed and asset backed securities during the period, commencing not
earlier than the final two years of the term of the Fund, when the Fund
is liquidating such mortgage backed and asset backed securities in
anticipation of the termination of the Fund.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors, provide that the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable
law currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i)
3% of the total outstanding voting stock of such company is owned by the
Fund, (ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than
10% of the total outstanding stock of any one closed-end investment
company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund
except as may be necessary in connection with borrowings mentioned in
investment restriction (4) above or except as may be necessary in
connection with transactions in financial futures contracts and options
thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures
contracts and options thereon is not considered the purchase of a
security on margin).
d. Make short sales of securities except in conformity with
applicable laws, rules and regulations and unless, giving effect to such
sale, the market value of all securities sold short does not exceed 25%
of the value of the Fund's total assets and the Fund's aggregate short
sales of a particular class of securities does not exceed 25% of the then
outstanding securities of that class.
e. Invest in put, call, straddle or spread options, except that the
Fund may write, purchase and sell options and futures on portfolio
securities and related indices or otherwise in connection with bona fide
hedging activities.
If a percentage restriction on investment policies or the investment
or use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentages resulting from changing values will not
be considered a violation. If the Fund's Board of Directors calls a special
meeting of shareholders to consider voting upon an amendment to the Fund's
Articles of Incorporation to extend the life of the Fund beyond December 31,
2006, such shareholders will also be provided the opportunity to vote upon the
Fund's policy with respect to concentration in mortgage backed and asset
backed securities. See "Description of Capital Stock."
The Investment Adviser and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch &
Co., Inc. ("ML&Co."). Because of the affiliation of Merrill Lynch with the
Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the Investment Company Act and
the rules and regulations thereunder. Included among such restricted
transactions will be purchases from or sales to Merrill Lynch of securities in
transactions in which it acts as principal. See "Portfolio Transactions."
Directors And Officers
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Director and executive officer is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
TERRY K. GLENN (59)-- President and Director (1)(2)-Executive Vice
President of the Investment Adviser and Merrill Lynch Asset Management, L.P.
("MLAM") (which terms as used herein include their corporate predecessors)
since 1983; President of Princeton Funds Distributors, Inc. ("PFD") since 1986
and Director thereof since 1991; Executive Vice President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; President of
Princeton Administrators, L.P. since 1988.
ARTHUR ZEIKEL (67)--Director(1)(2)--300 Woodland Avenue, Westfield,
New Jersey 07090. Chairman of the Investment Adviser and MLAM from 1997 to
1999 and President thereof from 1977 to 1997; Chairman of Princeton Services
from 1997 to 1999, Director thereof from 1993 to 1999 and President thereof
from 1993 to 1999 and President thereof from 1993 to 1997; Executive Vice
President of ML & Co. from 1990 to 1999.
[To Be Completed By Amendment]
JOSEPH T. MONAGLE, JR. (51)--Senior Vice President(1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1990; Department Head of
Global Fixed Income Division of the Investment Adviser and MLAM since 1997:
Senior Vice President of Princeton Services since 1993.
JEFFREY B. HEWSON (48)--Vice President and Portfolio Manager
(1)(2)-Director (Global Fixed Income) of MLAM since 1998; Vice President of
MLAM from 1989 to 1998 and Portfolio Manager of MLAM since 1985.
GREGORY MARK MAUNZ (46)--Vice President and Portfolio Manager
(1)(2)-First Vice President of MLAM since 1997; Vice President of MLAM from
1985 to 1997; Portfolio Manager of MLAM since 1984.
DONALD C. BURKE (39)--Vice President and Treasurer(1)(2)--Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; First Vice
President of MLAM from 1997 to 1999; Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM since 1990; Vice President of PFD since 1999.
WILLIAM E. ZITELLI (31)--Secretary (1)(2)--Attorney associated with
MLAM since 1998; Attorney associated with Pepper Hamilton LLP from 1997 to
1998; Attorney associated with Reboul, MacMurray, Hewitt, Maynard and Kristol
from 1994 to 1997.
- -------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one
or more other investment companies for which the Investment Adviser
or MLAM acts as investment adviser.
Compensation Of Directors
The Fund pays each non-interested Director an annual fee of $______
per year plus $___ per meeting attended. The Fund also compensates members of
its audit committee, which consists of all of the non-interested Directors at
a rate of $____ per year, plus $___ per audit committee meeting attended. The
Fund reimburses each non-interested Director for his out-of-pocket expenses
relating to attendance at meetings.
The following table sets forth compensation to be paid by the Fund to
the non-affiliated Directors projected through the end of the Fund's first
full fiscal year and, for the calendar year ended December 31, 1998, the
aggregate compensation paid by all investment companies advised by the
Investment Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the
non-affiliated Directors.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total Compensation
Pension or from Fund and
Aggregate Retirement Benefits FAM/MLAM
Compensation Accrued as Part of Advised Funds Paid
Name of Director from Fund Fund Expense to Directors
[To Be Completed By Amendment.]
</TABLE>
- ------------
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows:
Investment Advisory and Management Arrangements
The Investment Adviser, which is owned and controlled by ML&Co., a
financial services holding company and the parent of Merrill Lynch, provides
the Fund with investment advisory and management services. The Asset
Management Group of ML & Co. (which includes the Investment Adviser) acts as
the investment adviser to more than 100 registered investment companies and
offers investment advisory services to individuals and institutional accounts.
As of August 1999, the Asset Management Group had a total of approximately $
billion in investment company and other portfolio assets under management.
This amount includes assets managed for certain affiliates of the Investment
Adviser. The Investment Adviser is a limited partnership, the partners of
which are ML&Co. and Princeton Services. The principal business address of the
Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the
supervision of the Fund's Board of Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to review by the Board of
Directors.
The Investment Adviser provides the portfolio management for the
Fund. Such portfolio management considers analyses from various sources
(including brokerage firms with which the Fund does business), makes the
necessary investment decisions, and places orders for transactions
accordingly. The Investment Adviser is responsible for the performance of
certain administrative and management services for the Fund. Jeffery B. Hewson
and Gregory Mark Maunz are the portfolio managers of the Fund and are
primarily responsible for the Fund's day-to-day management.
For the services provided by the Investment Adviser under the
Investment Advisory Agreement, the Fund will pay a monthly fee at the annual
rate of 0.75% of the Fund's average weekly net assets from the effective date
of the Investment Advisory Agreement through December 31, 2001, 0.65% of the
Fund's average weekly net assets from January 1, 2002 through December 31,
2004, and 0.55% of the Fund's average weekly net assets from January 1, 2005
through termination of the Fund ("average weekly net assets" means the average
weekly value of the total assets of the Fund minus the sum of accrued
liabilities of the Fund). For purposes of this calculation, average weekly net
assets is determined at the end of each month on the basis of the average net
assets of the Fund for each week during the month. The assets for each weekly
period are determined by averaging the net assets at the last business day of
a week with the net assets at the last business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, if any, stock certificates and shareholder
reports, charges of the custodian and the transfer and dividend disbursing
agent and registrar, Commission fees, fees and expenses of non-interested
Directors, accounting and pricing costs, insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, mailing and
other expenses properly payable by the Fund. Accounting services are provided
to the Fund by the Investment Adviser, and the Fund reimburses the Investment
Adviser for its costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of its
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Fund's Board of Directors or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an
advisory client when other clients are selling the same security. If purchases
or sales of securities by the Investment Adviser for the Fund or other funds
for which it acts as investment adviser or for other advisory clients arise
for consideration at or about the same time, transactions in such securities
will be made, insofar as feasible, for the respective funds and clients in a
manner deemed equitable to all. Transactions effected by the Investment
Adviser (or its affiliates) on behalf of more than one of its clients during
the same period may increase the demand for securities being purchased or the
supply of securities being sold, causing an adverse effect on price.
Code of Ethics
The Fund's Board of Directors has adopted a Code of Ethics pursuant
to Rule 17j-1 under the Investment Company Act that incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on Fund investment personnel.
The Codes require that all employees of the Investment Adviser
preclear any personal securities investment (with limited exceptions, such as
U.S. government securities). The preclearance requirement and associated
procedures are designed to identify any substantive prohibition or limitation
applicable to the proposed investment. The substantive restrictions applicable
to all employees of the Investment Adviser include a ban on acquiring any
securities in a "hot" initial public offering and a prohibition from profiting
on short-term trading securities. In addition, no employee may purchase or
sell any security that at the time is being purchased or sold (as the case may
be), or to the knowledge of the employee is being considered for purchase or
sale, by any fund advised by the Investment adviser. Furthermore, the Codes
provide for trading "blackout periods" that prohibit trading by investment
personnel of the Fund within periods of trading by the Fund in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
Portfolio Transactions
Subject to policies established by the Fund's Board of Directors, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provide investment research to
the Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Research information provided to the Investment
Adviser by securities firms is supplemental. It does not replace or reduce the
level of services performed by the Investment Adviser and the expenses of the
Investment Adviser will not be reduced because it receives supplemental
research information. Supplemental investment research obtained from such
securities firms might be used by the Investment Adviser in servicing all of
its accounts and such research might not be used by the Investment Adviser in
connection with the Fund.
The Fund invests in securities traded in the over-the-counter
markets, and the Fund intends to deal directly with dealers who make markets
in the securities involved, except in those circumstances where better prices
and execution are available elsewhere. Under the Investment Company Act,
except as permitted by an exemptive order, persons affiliated with the Fund
are prohibited from dealing with the Fund as principal in the purchase and
sale of securities. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principal for their own account,
the Fund does not deal with Merrill Lynch and its affiliates in connection
with such transactions. Affiliated persons of the Fund may serve as its
brokers in certain over-the-counter transactions conducted on an agency basis.
Portfolio Turnover
The Fund may dispose of securities without regard to the time they
have been held when such action, for defensive or other reasons, appears
advisable to the Investment Adviser. While it is not possible to predict
turnover rates with any certainty, presently it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, will be less than
___%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less
are excluded.) A higher portfolio turnover rate results in greater transaction
costs, which are borne directly by the Fund, and also has certain tax
consequences for shareholders.
Dividends and Distributions
The Fund intends to distribute dividends of all or a portion of its
net investment income monthly. The Fund may at times pay out less than the
entire amount of net investment income earned in any particular period and may
at times pay out such accumulated undistributed income in addition to net
investment income earned in other periods in order to permit the Fund to
maintain a more stable level of distributions. As a result, the distribution
paid by the Fund for any particular period may be more or less than the amount
of net investment income earned by the Fund during such period. The Fund
expects that all or a portion of net capital gains (i.e., the excess of net
long-term capital gain over net short-term capital loss), if any, will be
distributed at least once annually.
The Fund's income and distributions are expected to decline to some
extent over the term of the Fund as the dollar weighted average maturity of
the Fund's portfolio securities shortens. Various factors will affect the
level of the Fund's income, including the asset mix, the scheduled reduction
in the Investment Adviser's fees, the amount of leverage used by the Fund and
the Fund's use of hedging. Shareholders may elect to have all dividends and
distributions reinvested in shares of the Fund purchased in the open market
through the Fund's Automatic Dividend Reinvestment Plan. Shareholders who do
not elect to participate in such Plan will receive their dividends and
distributions in cash. See "Automatic Dividend Reinvestment Plan."
The Fund expects that it will commence paying dividends within 90
days of the date of this prospectus. The Fund expects that a final liquidating
distribution to shareholders of the net assets of the Fund will be made on or
about the termination of the Fund.
The yield on the Fund's common stock will vary from period to period
depending on factors including, but not limited to, market conditions, the
timing of the Fund's investment in portfolio securities, the securities
comprising the Fund's portfolio, changes in interest rates including changes
in the relationship between short-term rates and long-term rates, the rate of
prepayment on mortgage backed and asset backed securities, the amount and
timing of the Fund's use of leverage, the Fund's net assets and its operating
expenses. Consequently, the Fund cannot guarantee any particular yield on its
shares and the yield for any given period is not an indication or
representation of future yields on Fund shares. The Fund's ability to achieve
any particular yield level after it commences operations depends on future
interest rates and other factors mentioned above and the initial yield and
later yields may be lower. Any statements as to the estimated yield are as of
the date made and no guarantee can be given that the Fund will achieve or
maintain any particular yield level. As noted above, the Fund's yield is
expected to decline to some extent over the term of the Fund.
The Fund will seek to return $10 per share to investors on or about
December 31, 2006 by preserving capital through, among other things, active
management of its portfolio and investing in securities that have a final or
expected maturity on or about the termination date of the Fund. If the Fund
realizes capital losses on dispositions of securities that are not offset by
capital gains on the disposition of other securities over the life of the
Fund, the Fund may be unable to distribute to its shareholders an amount equal
to $10 for each share outstanding on or about December 31, 2006.
Taxes
The Fund intends to elect and qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, in any taxable year
in which its deduction for dividends paid during the taxable year (without
regard to capital gain dividends) equals or exceeds the sum of 90% of its
taxable net income and 90% of its tax exempt net income, the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of its income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and distribute 98% of
its capital gains, determined, in general, on an October 31 year end, plus
certain undistributed amounts from previous years. While the Fund intends to
distribute any income and capital gains in the manner necessary to minimize
imposition the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In such event, the Fund will be
liable for the tax only on the amount by which it does not meet the foregoing
distribution requirements.
Dividends paid by the Fund from its ordinary income or from an excess
of net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions from the excess of net
long-term capital gains over net short-term capital losses (including certain
transactions in futures and options) ("capital gain dividends") are taxable as
long-term capital gains, regardless of the length of time the shareholder has
owned Fund shares. Any loss upon the sale or exchange of Fund shares held for
six months or less will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. Distributions in
excess of the Fund's earnings and profits first reduce the adjusted tax basis
of a holder's common stock and, after such adjusted tax basis is reduced to
zero, constitute capital gains to such holder (assuming such common stock is
held as a capital asset.) Certain categories of capital gains are taxable at
different rates. Generally not later than 60 days after the close of its
taxable year, the Fund will provide shareholders with a written notice
designating the mounts of any capital gain dividends as well as any amounts of
capital gain dividends in the different categories of capital gain referred to
above.
Dividends are taxable to shareholders even though they are reinvested
in additional shares of the Fund. Distributions by the Fund will not be
eligible for the dividends received deduction allowed to corporations under
the Code. If the Fund pays a dividend in January which was declared in the
previous October, November or December to shareholders of record on a
specified date in one of such months, then such dividend or distribution will
be treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Although the Fund may invest in municipal securities, the interest on which is
exempt from Federal income tax, it is not anticipated that dividends paid by
the Fund will be exempt from Federal income tax for shareholders.
Shareholders receiving distributions in the form of additional shares
purchased by the Plan Agent pursuant to the Automatic Dividend Reinvestment
Plan will be treated for Federal income tax purposes as receiving the amount
of cash received by the Plan Agent on their behalf and will have a basis in
such shares equal to the price paid by the Plan Agent for the shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens will be subject to a 30% U.S. withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Non-resident shareholders are urged to consult
their own tax advisers concerning the applicability of the U.S. withholding
tax.
The Federal income tax rules governing the taxation of interest rate
swaps are not entirely clear and may require the Fund to treat payments
received under such arrangements as ordinary income and to amortize such
payments under certain circumstances. Additionally, the Fund will limit its
activity with respect to interest rate swaps in order to meet RIC income
source qualification requirements.
Under certain provisions of the Code, some shareholders may be
subject to a 31% withholding tax on ordinary income dividends, capital gains
distributions and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom a certified
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
The Fund will make investments that produce taxable income that is
not matched by a corresponding receipt of cash or an offsetting loss
deduction. Such investments would include zero coupon securities and other
obligations which have original issue discount or that accrue discount and
obligations which are subordinated in the mortgaged-backed or asset backed
securities structure. Such taxable income is treated as income earned by the
Fund and is subject to the distribution requirements of the Code. Because such
income may not be matched by a corresponding receipt of cash by the Fund or an
offsetting deduction, the Fund may be required to borrow money or dispose of
other securities in order to make required distributions to shareholders. The
Fund intends to make sufficient and timely distributions to shareholders so as
to qualify for treatment as a RIC at all times.
Under current law, a holder of common stock whose shares are
repurchased by the Fund and who sells all of its shares and who, after such
repurchase, is not considered to own any shares under attribution rules
contained in the Code will realize a taxable gain or loss depending upon such
shareholder's basis in the shares. Such gain or loss will be treated as
capital gain or loss if the shares are held as capital assets and will be
long-term if the shares have been held for more than one year. Different tax
consequences may apply to selling and non-selling holders of common stock in
connection with repurchase. For example, if a holder of common stock sells
less than all shares owned by or attributed to such shareholder, and if the
distribution to such shareholder does not otherwise qualify as a sale or
exchange, the proceeds received will be treated as a taxable dividend, or, if
the Fund has insufficient earnings and profits, a return of capital or capital
gains, depending on the shareholder's basis in the repurchased shares. Also,
there is a remote risk that non-selling holders of common stock may be
considered to have received a deemed distribution that may not be a taxable
dividend in whole or in part. Holders of common stock may wish to consult
their tax advisers prior to selling stock that will be repurchased by the
Fund.
The liquidating distribution a shareholder receives from the Fund at
maturity will be treated as made in exchange for Fund shares, and any capital
gain or loss will be long-term, provided the shares have been held for more
than one year as a capital asset. If a liquidating distribution exceeds a
shareholder's basis in Fund shares, the excess will be treated as a gain from
the sale of shares. If a shareholder receives a liquidating distribution that
is less than such basis, the shareholder will recognize a loss to that extent.
Any gain or loss recognized by the shareholder will be capital if the shares
have been held as a capital asset and will be long-term if the shares have
been held for more than one year.
Tax Treatment of Options, Futures and Interest Rate Transactions
The Fund may engage in interest rate transactions, write (i.e., sell)
covered call and covered put options on its portfolio securities, purchase
call and put options on securities, and engage in transactions in financial
futures and related options on such futures. In general, unless an exception
applies, such options and financial futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or financial futures contract
will be treated as sold for its fair market value on the last day of the
taxable year, and any gain or loss attributable to Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. Application of these
rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark to market rules outlined
above, however, will not apply to certain transactions entered into by the
Fund solely to reduce the risk of changes in price or interest rates with
respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect
the taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by
RICs which are derived from interest on U.S. government obligations. State law
varies as to whether dividend income attributable to U.S. government
obligations is exempt from state income tax. In general, state law does not
consider income derived from mortgage backed securities to be income
attributable to U.S. government obligations.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, state, local or foreign taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Fund.
Automatic Dividend Reinvestment Plan
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the
"Plan"), unless a shareholder is ineligible or otherwise elects, all dividend
and capital gains distributions will be automatically reinvested by ,
as agent for shareholders in administering the Plan (the "Plan
Agent"), in additional shares of the Fund. Shareholders whose shares are held
in the name of a broker or nominee should contact such broker or nominee to
confirm that they are eligible to participate in the Fund's dividend
reinvestment plan. Shareholders who are ineligible or elect not to participate
in the Plan will receive all dividends and distributions in cash paid by check
mailed directly to the shareholder of record (or, if the shares are held in
street or other nominee name, then to such nominee) by ,
as dividend paying agent. Such participants may elect not to
participate in the Plan and to receive all distributions of dividends and
capital gains in cash by sending written instructions to ,
as dividend paying agent, at the address set forth below. Such
participants may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently declared
dividend or distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares. After the Fund
declares dividends, the Plan Agent will, as agent for the participants,
receive the cash payment and use it to buy shares in the open market, on the
Stock Exchange or elsewhere, for the participants' accounts.
Each participant in the Plan will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends. Prior to the time the shares
commence trading on the Stock Exchange, participants in the
Plan will receive any dividends in cash. The Fund will not issue any new shares
in connection with the Plan.
The Plan Agent will have until the last business day before the next
date on which the shares trade on an "ex-dividend" basis or in no event more
than 30 days after the dividend payment date (the "last purchase date") to
invest the dividend amount in shares acquired in open-market purchases. It is
contemplated that the Fund will pay monthly income dividends. Therefore, the
period during which open-market purchases can be made will begin five business
days prior to the payment date on the dividend through the date before the
next "ex-dividend" date which typically will be approximately ten days.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant, and each shareholder's proxy will include
those shares purchased or received pursuant to the Plan. The Plan Agent will
forward all proxy solicitation materials to participants and vote proxies for
shares held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
who are to participate in the Plan.
The automatic reinvestment of dividends and distributions will not
relieve participants of any Federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. See "Taxes."
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
All correspondence concerning the Plan should be directed to the Plan
Agent at .
Mutual Fund Investment Option
Purchasers of the Fund's common stock in this offering will have an
investment option consisting of the right to reinvest the net proceeds from a
sale of such shares (the "Original Shares") in Class D initial sales charge
shares of certain Merrill Lynch-sponsored open-end mutual funds ("Eligible
Class D Shares") at their net asset value, without the imposition of the
initial sales charge, if the conditions set forth below are satisfied. First,
the sale of the Original Shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class D
Shares. Second, the Original Shares must have been either acquired in this
offering or be shares representing reinvested dividends from shares acquired
in this offering. Third, the Original Shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option. Class D
shares of certain of the mutual funds may be subject to an account maintenance
fee at an annual rate of up to 0.25% of the average daily net asset value of
such mutual fund. The Eligible Class D Shares may be redeemed at any time at
the next determined net asset value, subject in certain cases to a redemption
fee. Prior to the time the shares commence trading on the New York Stock
Exchange, the distributor for the mutual funds will advise Merrill Lynch
financial consultants as to those mutual funds which offer the investment
option described above.
Net Asset Value
Net asset value per share of common stock is determined after the
close of business on the New York Stock Exchange (generally, the New York
Stock Exchange closes at 4:00 p.m., New York time), on the last business day
in each week. For purposes of determining the net asset value of a share, the
value of the securities held by the Fund plus any cash or other assets
(including interest accrued but not yet received) minus all liabilities
(including accrued expenses) is divided by the total number of shares
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The Fund values corporate debt securities, mortgage backed
securities, municipal securities, asset backed securities and other debt
securities on the basis of one or more pricing services which determine prices
for normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders. In
certain circumstances, such other portfolio securities are valued at the last
sale price on the exchange that is the primary market for such securities, or
the last quoted bid price for those securities for which the over-the-counter
market is the primary market or for listed securities in which there were no
sales during the day. When the Fund writes an option, the amount of the
premium received is recorded in the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last bid price. The value
of swaps, including interest rate swaps, caps and floors, will be determined
by obtaining dealer quotations. Other investments, including futures contracts
and related options, are stated at market value. Debt securities having a
remaining maturity of 60 days or less are valued at amortized cost unless this
method no longer produces fair valuations. Repurchase agreements are valued at
cost plus accrued interest. Positions in options are generally valued at the
last sale price on the market where any such option is principally traded.
Securities for which there exist no price quotations or valuations are valued
at fair value as determined in good faith by or on behalf of the Fund's Board
of Directors.
The Fund determines and makes available for publication the net asset
value of its shares weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal and
the Monday and Saturday editions of The New York Times.
Description Of CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock,
par value $.10 per share, all of which are classified as common stock.
Although it has no current intention to do so, the Board of Directors is
authorized to classify or reclassify any unissued shares of capital stock by
setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption. The Fund's Articles of Incorporation permit the
Board of Directors to increase the number of authorized shares of capital
stock without the vote of shareholders. The shares, when issued, will be fully
paid and nonassessable. Shareholders are entitled to one vote for each share
held for the election of Directors and other matters submitted to
shareholders. There are no preemptive rights. The rights of the shares with
respect to dividends and distributions are described under "Dividends and
Distributions." Each share is entitled to participate equally in the net
distributable assets of the Fund upon liquidation or termination.
The Fund's Articles of Incorporation provide that the Fund will
terminate on December 31, 2006, without shareholder approval. In connection
with such termination, the Fund will liquidate all of its assets and
distribute to shareholders the net proceeds therefrom after making appropriate
provision for any liabilities of the Fund. Prior to such termination, however,
the Fund's Board of Directors will consider whether it is in the best
interests of shareholders to terminate and liquidate the Fund without
shareholder approval notwithstanding the Articles of Incorporation provision.
In considering the matter, the Board of Directors will take into account,
among other factors, the adverse effect which capital losses realized upon
disposition of securities in connection with liquidation (if any such losses
are anticipated) would have on the Fund and its shareholders. In the event
that the Board of Directors determines that under the circumstances,
termination and liquidation of the Fund on December 31, 2006, without a
shareholder vote, would not be in the best interests of shareholders, the
Board of Directors will call a special meeting of shareholders to consider an
appropriate amendment to the Fund's Articles of Incorporation. The Fund's
Articles of Incorporation would require the affirmative vote of the holders of
at least 66 2/3% of outstanding shares to approve such an amendment. The
foregoing provisions of the Fund's Articles of Incorporation are governed by
the laws of the State of Maryland and not the Investment Company Act. If the
Fund's Board of Directors calls a special meeting of shareholders to consider
voting upon an amendment to the Fund's Articles of Incorporation to extend the
life of the Fund beyond December 31, 2006, such shareholders will also be
provided the opportunity to vote upon the Fund's fundamental policy as set
forth in the first paragraph under "Investment Objective and Policies" and on
its policy with respect to concentration in mortgage backed and asset backed
securities.
The Fund has no present intention of offering any additional shares.
Other offerings of its shares, if made, will require approval by the Fund's
Board of Directors. Any additional offering of shares of common stock will be
subject to the requirements of the Investment Company Act that shares may not
be issued at a price below the then current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an offering
to existing shareholders or with the consent of a majority of the Fund's
outstanding voting securities.
The Fund will send unaudited reports at least semi-annually and
audited annual financial statements to all of its shareholders of record.
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of common stock at $10.00 per share of the Fund for
$100,000. As of the date of this prospectus, the Investment Adviser owned 100%
of the outstanding shares of common stock of the Fund. The Investment Adviser
may be deemed to control the Fund until such time as it owns less than 25% of
the outstanding shares of the Fund.
Certain Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation include provisions that could
have the effect of limiting the ability of other entities or persons to
acquire control of the Fund or to change the composition of its Board of
Directors and could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund. A
Director elected by holders of capital stock may be removed from office with
or without cause by vote of the holders of at least 66 2/3% of the Fund's
shares of capital stock entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable vote
of the holders of at least 66 2/3% of the Fund's shares of capital stock to
approve, adopt or authorize the following:
o a merger or consolidation or statutory share exchange of the Fund
with other corporations,
o 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
o a liquidation or dissolution of the Fund except pursuant to the
Articles of Incorporation on December 31, 2006
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with
the by-laws, in which case the affirmative vote of a majority of the Fund's
shares of capital stock is required.
In addition, conversion of the Fund to an open-end investment company
would require an amendment to the Fund's Articles of Incorporation. The
amendment would have to be declared advisable by the Board of Directors prior
to its submission to shareholders. Such an amendment would require the
favorable vote of the holders of at least 66 2/3% of the Fund's outstanding
shares entitled to be voted on the matter (or a majority of such shares if the
amendment was previously approved, adopted or authorized by two-thirds of the
total number of Directors fixed in accordance with the by-laws). Such a vote
also would satisfy a separate requirement in the Investment Company Act that
the change be approved by the shareholders. Shareholders of an open-end
investment company may require the company to redeem their shares of common
stock at any time (except in certain circumstances as authorized by or under
the Investment Company Act) at their net asset value, less such redemption
charge, if any, as might be in effect at the time of a redemption. All
redemptions would usually be made in cash. If the Fund is converted to an
open-end investment company, it could be required to liquidate portfolio
securities to meet requests for redemption, and the shares would no longer be
listed on a stock exchange.
Conversion to an open-end investment company also would require
changes in the Fund's fundamental policy as set forth in the first paragraph
under "Investment Objective and Policies" and also would require changes in
certain of the Fund's other investment policies and restrictions, such as
those relating to the borrowing of money and the purchase of illiquid
securities.
The Board of Directors has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the Investment Company Act, are in the best interests of
shareholders generally. Reference should be made to the Articles of
Incorporation and By-Laws on file with the Commission for the full text of
these provisions.
The Fund's By-Laws generally require that advance notice be given to
the Fund in the event a shareholder desires to nominate a person for election
to the Board of Directors or to transact any other business at an annual
meeting of shareholders. With respect to an annual meeting following the first
annual meeting of shareholders, notice of any such nomination or business must
be delivered to or received at the principal executive offices of the Fund not
less than 60 calendar days nor more than 90 calendar days prior to the
anniversary date of the prior year's annual meeting (subject to certain
exceptions). In the case of the first annual meeting of shareholders, the
notice must be given no later than the tenth calendar day following public
disclosure as specified in the By-Laws of the date of the meeting. Any notice
by a shareholder must be accompanied by certain information as provided in the
By-Laws.
The notice provisions are intended to afford shareholders a fair
opportunity to present matters for consideration at shareholder meetings while
assuring that shareholders and Directors will have a reasonable opportunity to
consider the matters proposed and to allow for full information to be
distributed to all shareholders about all sides of the particular issue. These
provisions could have the effect of limiting or delaying to some extent the
ability of shareholders to take certain actions at a meeting of shareholders.
Custodian
The Fund's securities and cash are held under a custodial agreement
with .
Underwriting
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Underwriter") has agreed, subject to the terms and conditions of a Purchase
Agreement with the Fund and the Investment Adviser, to purchase shares of
common stock from the Fund. The Underwriter is committed to purchase all of
such shares if any are purchased.
The Underwriter has advised the Fund that it proposes initially to
offer the shares to the public at the public offering price set forth on the
cover page of this prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of common stock in this
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of common stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $ per share on sales
by such dealers. After the initial public offering, the public offering price
and other selling terms may be changed. Investors must pay for shares of
common stock purchased in the offering on or before December , 1999.
The Fund has granted Merrill Lynch an option, exercisable for 45 days
after the date hereof, to purchase up to additional shares to cover
over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the
price of the shares of common stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
shares of common stock.
If the Underwriter creates a short position in the shares of common
stock in connection with the offering, i.e., if it sells more shares of common
stock than are set forth on the cover page of this prospectus, the Underwriter
may reduce its short position by purchasing shares of common stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter may also impose a penalty bid on certain selling
group members. This means that if the Underwriter purchases shares of common
stock in the open market to reduce the Underwriter's short position or to
stabilize the price of the shares of common stock, it may reclaim the amount
of the selling concession from the selling group members who sold those shares
of common stock as part of the offering.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases. The imposition of a
penalty bid might also have an effect on the price of a security to the extent
that it were to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representations or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the shares of common
stock. In addition, neither the Fund nor the Underwriter makes any
representation that the Underwriter will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for the
shares of the Fund. The Fund plans to apply to list the Fund's shares of
common stock on the New York Stock Exchange or another national securities
exchange. However, during an initial period which is not expected to exceed
two weeks from the date of this prospectus, the Fund's shares will not be
listed on any securities exchange. Additionally, before it begins trading, the
Underwriter does not intend to make a market in the Fund's common stock,
although a limited market may develop. Thus, it is anticipated that investors
may not be able to buy and sell shares of the Fund during such period. In
order to meet the requirements for listing, the Underwriter has undertaken to
sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act
as a broker in connection with the execution of the Fund's portfolio
transactions. The Fund has obtained an exemptive order permitting it to engage
in certain principal transactions with the Underwriter involving high quality,
short-term, tax-exempt securities subject to certain conditions. See
"Investment Restrictions" and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the
Fund.
The Fund and the Investment Adviser have agreed to indemnify Merrill
Lynch against certain liabilities including liabilities under the Securities
Act of 1933.
Transfer Agent, Dividend Disbursing Agent and Registrar
The transfer agent, dividend disbursing agent and registrar for the
shares of the Fund will be .
Legal Opinions
Certain legal matters in connection with the common stock offered
hereby will be passed upon for the Fund and Merrill Lynch by Brown & Wood LLP,
New York, New York.
Experts
, the independent auditors, have audited the statement of
assets, liabilities and capital of the Fund as of December , 1999, which is
included in this prospectus and Registration Statement as set forth in the
report which appears in this prospectus and Registration Statement. The
statement of assets, liabilities and capital is included in reliance on their
report, given on their authority as experts in accounting and auditing. The
selection of independent auditors is subject to ratification by shareholders
of the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the Investment Company Act
and in accordance therewith is required to file reports, proxy statements and
other information with the Commission. Any such reports, proxy statements and
other information can be inspected and copied at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: Regional Office, at Seven World Trade Center, Suite 1300, New
York, New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund is contained in the
Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the
Commission in Washington, D.C. This prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the
Fund and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of al or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
Year 2000 Issues
Many computer systems were designed using only two digits to
designate years. These systems may not be able to distinguish the Year 2000
from the Year 1900 (commonly known as the "Year 2000 Problem"). The Fund could
be adversely affected if the computer systems used by the Investment Adviser
or other Fund service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser expects to have addressed this problem
before then, and does not anticipate that the service it provides will be
adversely affected. The Fund's other service providers have told the
Investment Adviser that they also expect to resolve the Year 2000 Problem, and
the Investment Adviser will continue to monitor the situation as Year 2000
approaches. However, if the problem has not been fully addressed, the Fund
could be negatively affected. The Year 2000 Problem could also have a negative
impact on the issuers of securities in which the Fund invests, and this could
hurt the Fund's investment returns.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
Income Opportunities Fund 2006, Inc.
We have audited the accompanying statement of assets, liabilities and capital
of Income Opportunities Fund 2006, Inc. as of December , 1999. This statement
of assets, liabilities and capital is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets, liabilities and capital based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets, liabilities and capital
referred to above presents fairly, in all material respects, the financial
position of Income Opportunities Fund 2006, Inc. at December , 1999 in
conformity with generally accepted accounting principles.
December , 1999
<PAGE>
INCOME OPPORTUNITIES FUND 2006, INC.
Statement Of Assets, Liabilities and Capital
December , 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash ........................................................................................ $100,000
Offering costs (Note 1) ..................................................................... ________
Total Assets .............................................................................. ________
LIABILITIES
Liabilities and accrued expenses (Note 1)....................................................
NET ASSETS........................................................................................ $100,000
CAPITAL
Common stock, par value $.10 per share; 200,000,000 shares authorized; 10,000 shares issued
and outstanding (Note 1).................................................................... $ 1,000
Paid-in Capital in excess of par............................................................. 99,000
Total Capital-Equivalent to $10.00 net asset value per share of common stock (Note 1)........ $100,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Statement of Assets, Liabilities and Capital
Note 1. Organization
The Fund was incorporated under the laws of the State of Maryland on
October __, 1999, as a closed-end, diversified management investment company
and has had no operations other than the sale to Fund Asset Management, L.P.
(the "Investment Adviser") of an aggregate of 10,000 shares of Common Stock
for $100,000 on ________ __, 1999. The General Partner of the Investment
Adviser is an indirectly wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The Investment Adviser, on behalf of the Fund, will incur
organization costs estimated at $ . Direct costs relating to the public
offering of the Fund's shares will be charged to capital at the time of
issuance of shares.
Note 2. Management Arrangements
The Fund has engaged the Investment Adviser to provide investment
advisory and management services to the Fund. The Investment Adviser will
receive a quarterly fee in arrears at the annual rate of 0.75% of the Fund's
average weekly net assets from the effective date of the Investment Advisory
Agreement through December 31, 2001, 0.65% of the Fund's average weekly net
assets from January 1, 2002 through December 31, 2004, and 0.55% of the Fund's
average weekly net assets from January 1, 2005 through termination of the
Fund.
Note 3. Federal Income Taxes
The Fund intends to qualify as a "regulated investment company" and
as such (and by complying with the applicable provisions of the Internal
Revenue Code of 1986, as amended) will not be subject to Federal income tax on
taxable income (including realized capital gains) that is distributed to
shareholders.
<PAGE>
Appendix I
The following describes in greater detail certain of the types of
securities in which the Fund intends to invest.
MORTGAGE BACKED SECURITIES
Guaranteed Mortgage Pass-Through Securities
The guaranteed mortgage pass-through securities in which the Fund
will invest will include those issued or guaranteed by GNMA, FNMA and FHLMC.
GNMA mortgage backed securities are guaranteed by GNMA and consist of
pass-through interests in pools of mortgage loans guaranteed or insured by
agencies or instrumentalities of the U.S. FNMA and FHLMC mortgage backed
securities are issued by FNMA and FHLMC, respectively, and most often
represent pass-through interests in pools of conventional mortgage loans or
participations therein. GNMA, FNMA and FHLMC "pass-through" mortgage backed
securities are so named because they represent undivided interests in the
underlying mortgage pools, and a pro rata share of both regular interest and
principal payments (net of fees assessed by GNMA, FNMA and FHLMC and any
applicable loan servicing fees), as well as prepayments on the underlying
mortgage pool, are passed through monthly to the registered holder of the
mortgage backed securities (i.e., the Fund). As described more fully below,
FNMA and FHLMC also may issue types of mortgage backed securities other than
pass-through mortgage backed securities.
Timely payment of principal and interest on GNMA mortgage backed
securities is guaranteed by GNMA, a wholly-owned corporate instrumentality of
the U.S. within the Department of Housing and Urban Development, which
guarantee is backed by the full faith and credit of the U.S. FNMA, a federally
chartered and privately owned corporation, organized and existing under the
Federal National Mortgage Association Charter Act, guarantees timely payment
of principal and interest on FNMA mortgage backed securities. FHLMC, a
corporate instrumentality of the U.S., guarantees (i) the timely payment of
interest on all FHLMC mortgage backed securities, (ii) the ultimate collection
of principal with respect to some FHLMC mortgage backed securities, and (iii)
the timely payment of principal with respect to other FHLMC mortgage backed
securities. Neither the obligations of FNMA nor those of FHLMC are backed by
the full faith and credit of the U.S. Nevertheless, because of the
relationship of each such entity to the U.S., it is widely believed that
mortgage backed securities issued by such entities are high quality securities
with minimal credit risk.
Government National Mortgage Association. GNMA is a wholly-owned
corporate instrumentality of the U.S. within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the "Housing
Act"), authorizes GNMA to guarantee the timely payment of the principal of and
interest on securities that are based on and backed by a specified pool of
mortgage loans. To qualify such securities for a GNMA guarantee, the
underlying mortgages must be insured by the Federal Housing Administration
under the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or
be guaranteed by the Veterans' Administration under the Servicemen's
Readjustment Act of 1944, as amended ("VA Loans"), or be pools of other
eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that
may be required to be paid under any guarantee. In order to meet its
obligations under such guarantee, GNMA is authorized to borrow from the U.S.
Treasury with no limitations as to amount.
GNMA pass-through mortgage backed securities may represent a pro rata
interest in one or more pools of the following types of mortgage loans: (i)
fixed rate level payment mortgage loans; (ii) fixed rate graduated payment
mortgage loans; (iii) fixed rate growing equity mortgage loans; (iv) fixed
rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans
on multifamily residential properties under construction; (vi) mortgage loans
on completed multifamily projects; (vii) fixed rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage loans; and (ix)
mortgage backed serial notes.
Federal National Mortgage Association. FNMA is a federally chartered
and privately owned corporation established under the Federal National
Mortgage Association Charter Act. FNMA was originally established in 1938 as a
U.S. government agency to add greater liquidity to the mortgage market. FNMA
was transformed into a private sector corporation by legislation enacted in
1968. FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby providing them with funds for
additional lending. FNMA acquires funds to purchase such loans from investors
that may not ordinarily invest in mortgage loans directly, thereby expanding
the total amount of funds available for housing.
Each FNMA pass-through mortgage backed security represents a pro rata
interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (i.e., mortgage loans that are not insured or guaranteed by any
governmental agency). The loans contained in those pools consist of: (i) fixed
rate level payment mortgage loans; (ii) fixed rate growing equity mortgage
loans; (iii) fixed rate graduated payment mortgage loans; (iv) variable rate
mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate
mortgage loans secured by multifamily projects.
Federal Home Loan Mortgage Corporation. FHLMC is a corporate
instrumentality of the U.S. established by the Emergency Home Finance Act of
1970, as amended (the "FHLMC Act"). FHLMC was organized primarily for the
purpose of increasing the availability of mortgage credit to finance needed
housing. The operations of FHLMC currently consist of the purchase of first
lien, conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage backed securities.
The mortgage loans underlying the FHLMC mortgage backed securities
typically consist of fixed rate or adjustable rate mortgage loans with
original terms to maturity of between ten and thirty years, substantially all
of which are secured by first liens on one- to four-family residential
properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. Mortgage loans underlying
FHLMC mortgage backed securities may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations in another FHLMC mortgage backed security.
Private Mortgage Pass-Through Securities
Private mortgage pass-through securities ("Private pass-throughs")
are structured similarly to the GNMA, FNMA and FHLMC mortgage pass-through
securities described above and are issued by originators of and investors in
mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. Private pass-throughs are usually backed by a pool of conventional
fixed rate or adjustable rate mortgage loans. Since Private pass-throughs
typically are not guaranteed by an entity having the credit status of GNMA,
FNMA or FHLMC, such securities generally are structured with one or more types
of credit enhancements. See "Types of Credit Enhancements" below.
Collateralized Mortgage Obligations
Collateralized mortgage obligations ("CMOs") are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by pass-through mortgage backed securities
guaranteed by GNMA, or issued by FNMA or FHLMC. They may, however, also be
collateralized by whole loans or Private pass-throughs. The collateral for
CMOs is hereinafter referred to as "CMO Collateral." The term CMO as used
herein also includes multi-class pass-through securities, which are equity
interests in a trust composed of CMO Collateral. CMOs may be issued by
agencies or instrumentalities of the U.S. government, including FNMA and
FHLMC, or by the types of private issuers described above. The issuer of a
series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit (a "REMIC") under the Federal income tax laws.
The funds for payment on the CMOs are derived from payments of
principal and interest on the underlying CMO Collateral and, to the extent
provided in a particular transaction, reinvestment income therefrom. Most CMOs
are structured with multiple classes. Each class is issued at a fixed or
floating coupon rate and has a specified maturity or final distribution date.
Principal prepayments on the CMO Collateral may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the CMO
Collateral may be allocated among the several classes of a CMO in many ways.
In one structure, payments of principal, including any principal prepayments,
on the CMO Collateral are applied to the classes of the CMO in the order of
their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full.
The Fund may invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date so long as
payments on the underlying pool of mortgage loans remain within a certain
range. PAC Bonds are always parallel pay CMOs with the required principal
payment on such securities having the highest priority after interest has been
paid to all classes.
ASSET BACKED SECURITIES
The securitization techniques used to develop mortgage backed securities
are applied to a broad range of assets. Through the use of trusts and special
purpose corporations, various types of assets, including automobile and credit
card receivables, commercial loans and related assets, and debt obligations,
are securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a pay-through structure similar
to the CMO structure. Asset backed securities are typically bought or sold
from or to the same entities that act as primary dealers in U.S. government
securities. The Fund may invest in these and other types of asset backed
securities that may be developed in the future. Although under current market
conditions the Fund will not purchase asset backed securities initially, if
cost and yield considerations become favorable in the future, the Fund will
consider purchasing such securities, and such securities may represent more
than 5% of the Fund's assets in the later years of the Fund.
In general, the collateral supporting asset backed securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. As with mortgage backed securities, asset backed
securities are often backed by a pool of assets representing the obligations
of a number of different parties. Investments in asset backed securities that
cannot be disposed promptly within seven days and in the usual course of
business without taking a reduced price will be considered illiquid and
limited to an amount which, together with other illiquid investments, does not
exceed 10% of the value of the Fund's total assets.
Asset backed securities present certain risks that are not presented
by mortgage backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured, and debtors are entitled to the
protection of various state and Federal consumer protection laws. Some of
those laws give a right of set off, which may reduce the balance due. Most
issuers of asset backed securities backed by automobile receivables permit the
servicers of such receivables to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related asset backed securities. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of asset backed
securities backed by automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Commercial loans and related assets may be secured or unsecured and
are subject to credit, liquidity and interest rate risks. In addition, various
laws enacted for the protection of creditors may apply to obligors under the
commercial loans or related assets. Such laws may adversely affect asset
backed securities secured by commercial loans and related assets in the event
of the bankruptcy or insolvency of obligors of such assets.
Certain of the asset backed securities purchased by the Fund may be
backed by the guarantee of the SBA or issued in programs originated by the
RTC. The SBA is an independent agency of the U.S. established by the Small
Business Act of 1953. The SBA was organized primarily to assist independently
owned and operated businesses that are not dominant in their respective
markets. The SBA provides financial assistance, management counseling and
training for small businesses, as well as acting generally as an advocate of
small businesses. The RTC is an agency of the U.S. government created in 1989
to merge or close certain insolvent savings and loan associations.
The SBA guarantees the payment of principal and interest on portions
of loans made by private lenders to certain small businesses. The loans are
generally commercial loans such as working capital loans and equipment loans.
The SBA is authorized to issue from time to time, through its fiscal and
transfer agent, SBA-guaranteed participation certificates evidencing
fractional undivided interests in pools of these SBA guaranteed portions of
loans made by private lenders. The SBA's guarantee of such certificates, and
its guarantee of a portion of the underlying loan, are backed by the full
faith and credit of the U.S.
TYPES OF CREDIT ENHANCEMENTS
Mortgage backed securities and asset backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failures by obligors on underlying
assets to make payments, such securities may contain elements of credit
enhancements. These credit enhancements may offer two types of protection: (i)
liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses resulting from ultimate
default ensures ultimate payment of the obligations on at least a portion of
the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through
a combination of such approaches. The Fund will not pay any additional fees
for such credit support, although the existence of credit support may increase
the price of a security.
Credit enhancements can come from external providers such as banks or
financial insurance companies. Alternatively, they may come from the structure
of a transaction itself. Examples of credit support arising out of the
structure of the transaction include "senior-subordinated securities"
(multiple class securities with one or more classes subordinate to other
classes as to the payment of principal thereof and interest thereon, with the
result that defaults on the underlying assets are borne first by the holders
of the subordinated class), creation of "reserve funds" (where cash or
investments, sometimes funded from a portion of the payments on the underlying
assets, are held in reserve against future losses) and "overcollateralization"
(where the scheduled payments on, or the principal amount of, the underlying
assets exceeds that required to make payment of the securities and pay any
servicing or other fees). The degree of credit support provided for each issue
is generally based on historical information respecting the level of credit
risk associated with the underlying assets. Delinquencies or losses in excess
of those anticipated could adversely affect the return on an investment in
such issue. In addition, the Fund may purchase subordinated securities which,
as noted above, may serve as a form of credit support for senior securities
purchased by other investors. In purchasing securities for the Fund, the
Investment Adviser will take into account not only the creditworthiness of the
issuer of the securities, but also the creditworthiness of the provider of any
external credit enhancement of the securities.
CORPORATE DEBT SECURITIES
Corporations issue debt securities of various types, including bonds
and debentures (which are long term), notes (which may be short-term or
long-term), certificates of deposit (unsecured borrowings by banks), bankers'
acceptances (indirectly secured borrowings to facilitate commercial
transactions) and commercial paper (short-term unsecured notes). These
securities typically provide for periodic payments of interest, which may be
adjustable or fixed rate with payment of principal upon maturity and are
generally not secured by assets of the issuer or otherwise guaranteed.
Adjustable rate corporate debt securities may have interest rate caps and
floors as well as other features similar to those of mortgage backed
securities, but such corporate debt securities are not subject to prepayment
risk other than through contractual redemption provisions which generally
impose a penalty on the issuer for prepayment. Fixed rate debt securities also
may be subject to redemption provisions. The Fund expects to purchase
corporate debt securities rated at the time of investment no lower than BBB-
by S&P or Baa3 by Moody's that have final maturities approximately equal to
the termination date of the Fund. The rating of a corporate debt security may
change over time, as S&P and Moody's monitor and evaluate the ratings assigned
to corporate debt securities on an ongoing basis. As a result, corporate debt
securities held by the Fund could receive a higher rating (which would tend to
increase their value) or a lower rating (which would tend to decrease their
value) during the time that they are owned by the Fund. If a security owned by
the Fund is downgraded below either BBB- by S&P or Baa3 by Moody's, the
Investment Adviser will monitor such security and determine whether to sell it
based on the factors it considers relevant such as the remaining term of the
Fund, size of the investment, whether a loss or gain will result, relative
risk to the Fund, depth of the trading market or any other relevant factors.
The Fund also may invest in zero coupon securities of corporate
issuers, which are debt obligations that do not entitle the holder to any
periodic payments prior to maturity and therefore are issued and traded at a
discount from their face amounts. The market prices of zero coupon securities
are more volatile than the market prices of securities of comparable quality
and similar maturity that pay interest periodically and may respond to a
greater degree to fluctuations in interest rates than do such non-zero coupon
securities.
MUNICIPAL SECURITIES
Municipal securities include debt obligations issued to obtain funds
for various public purposes, including construction and equipping of a wide
range of public facilities, refunding of outstanding obligations and obtaining
funds for general operating expenses and loans to other public or private
institutions for the construction of facilities. In addition, certain types of
private activity bonds ("PABs") are issued by or on behalf of public
authorities to finance various privately operated facilities including
airports, public ports, mass commuting facilities, multifamily housing
projects, as well as facilities for water supply, gas, electricity, sewage or
solid waste disposal.
The two principal classifications of the debt obligations of
municipal issuers are "general obligation" and "revenue" bonds which latter
category includes PABs and, for bonds issued on or before August 15, 1986,
industrial development bonds or "IDBs." General obligation bonds are typically
secured by the issuer's pledge of faith, credit and taxing power for the
payment of principal and interest. Revenue or special obligation bonds
typically are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as from the users of
the facility being financed. PABs are in most cases revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the issuer of
such bonds. The repayment of principal and the payment of interest on revenue
bonds depends solely on the ability of the user of the facility financed by
the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such payment. Municipal
bonds may also include "moral obligation" bonds, which are normally issued by
special purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of such bonds becomes a moral
commitment but not a legal obligation of the state of municipality in
question. There are variations in the security and credit quality of municipal
obligations, both within a particular classification and between
classifications, depending on numerous factors. The yields and market values
of municipal obligations are dependent on a variety of factors, including
general economic and monetary conditions, money market factors, conditions of
the municipal obligation market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The income from
municipal securities is generally exempt from Federal taxation which generally
causes such securities to have lower yields than taxable securities of
comparable quality and maturity.
The Fund also may invest in zero coupon securities of municipal
issuers, which are debt obligations that do not entitle the holder to any
periodic payments prior to maturity and therefore are issued and traded at a
discount from their face amounts. The market prices of zero coupon municipal
securities are more volatile than the market prices of municipal securities of
comparable quality and similar maturity that pay interest periodically and may
respond to a greater degree to fluctuations in interest rates than do such
non-zero coupon municipal securities. Because accrued income on zero coupon
securities of municipal issuers is generally not taxable to holders, zero
coupon securities of municipal issuers have lower yields than other zero
coupon securities.
The Fund currently does not expect that it will invest more than 5%
of its total assets in municipal securities, including zero coupon municipal
securities, at any time during the term of the Fund.
OTHER INVESTMENT POLICIES
Reference is made to the discussion under the caption "Other
Investment Policies - Portfolio Strategies Involving Interest Rate
Transactions, Options and Futures" above for additional information with
respect to such portfolio strategies.
Interest Rate Transactions
In order to hedge the value of the Fund's portfolio against interest
rate fluctuations or to enhance the Fund's income the Fund may enter into
various interest rate transactions, such as interest rate swaps and the
purchase or sale of interest rate caps and floors. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions primarily as a hedge and not
as a speculative investment. However, the Fund may also invest in interest
rate swaps to enhance income or increase the Fund's yield, for example, during
periods of steep interest rate yield curves (i.e., wide differences between
short term and long term interest rates).
In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Fund holds a
debt instrument with an interest rate that is reset only once each year, it
may swap the right to receive interest at this fixed rate for the right to
receive interest at a rate that is reset every week. This would enable the
Fund to offset a decline in the value of the debt instrument due to rising
interest rates but would also limit its ability to benefit from falling
interest rates. Conversely, if the Fund holds a debt instrument with an
interest rate that is reset every week and it would like to lock in what it
believes to be a high interest rate for one year, it may swap the right to
receive interest at this variable weekly rate for the right to receive
interest at a rate that is fixed for one year. Such a swap would protect the
Fund from a reduction in yield due to falling interest rates and may permit
the Fund to enhance its income through the positive differential between one
week and one year interest rates, but would preclude it from taking full
advantage of rising interest rates.
The Fund usually will enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis, and
an amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account
by the Fund's custodian. If the interest rate swap transaction is entered into
on other than a net basis, the full amount of the Fund's obligations will be
accrued on a daily basis, and the full amount of the Fund's obligations will
be maintained in a segregated account by the Fund's custodian.
The Fund may also engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (the reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the difference
of the index and the predetermined rate on a notional principal amount from
the party selling such interest rate floor. The Fund will not enter into caps
or floors if, on a net basis, the aggregate notional principal amount with
respect to such agreements exceeds the net assets of the Fund.
Typically, the parties with which the Fund will enter into interest
rate transactions will be broker-dealers and other financial institutions. The
Fund will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated investment grade quality by at least one nationally
recognized statistical rating organization at the time of entering into such
transaction or whose creditworthiness is believed by the Investment Adviser to
be equivalent to such rating. If there is a default by the other party to such
a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid in
comparison with other similar instruments traded in the interbank market. Caps
and floors, however, are more recent innovations and are less liquid than
swaps. Certain Federal income tax requirements may limit the Fund's ability to
engage in certain interest rate transactions. Gains from transactions in
interest rate swaps distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to
shareholders. See "Taxes."
Options on Portfolio Securities
Call Option on Portfolio Securities. The Fund may purchase call
options on any of the types of securities in which it may invest. A purchased
call option gives the Fund the right to buy, and obligates the seller to sell,
the underlying security at the exercise price at any time during the option
period. The Fund also is authorized to write (i.e., sell) covered call options
on the securities in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered call option is
an option where the Fund, in return for a premium, gives another party a right
to buy specified securities owned by the Fund at a specified future date and
price set at the time of the contract. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options also serve as a partial hedge underlying security
declining. The Fund may also purchase and sell call options on indices. Index
options are similar to options on securities except that, rather than taking
or making delivery of securities underlying the option at a specified price
upon exercise, an index option gives the holder the right to receive cash upon
exercise of the option if the level of the index upon which the option is
based is greater than the exercise price of the option.
Put Options on Portfolio Securities. The Fund is authorized to
purchase put options to hedge against a decline in the value of its
securities. By buying a put option, the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
option expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the put option plus the related transaction costs. A closing
sale transaction cancels out the Fund's position as the purchaser of an option
by means of an offsetting sale of an identical option prior to the expiration
of the option it has purchased. The Fund also has authority to write (i.e.,
sell) put options on the types of securities which may be held by the Fund,
provided that such put options are covered, meaning that such options are
secured by segregated, liquid instruments. The Fund will receive a premium for
writing a put option, which increases the Fund's return. The Fund will not
sell puts if, as a result, more than 50% of the Fund's assets would be
required to cover its potential obligations under its hedging and other
investment transactions. The Fund may purchase and sell put options on
indices. Index options are similar to options on securities except that,
rather than taking or making delivery of securities underlying the option at a
specified price upon exercise, an index option gives the holder the right to
receive cash upon exercise of the option if the level of the index upon which
the option is based is less than the exercise price of the option.
Financial Futures and Options Thereon
The Fund is authorized to engage in transactions in financial futures
contracts ("futures contracts") and related options on such futures contracts
either as a hedge against adverse changes in the market value of its portfolio
securities and interest rates or to enhance the Fund's income. A futures
contract is an agreement between two parties which obligates the purchaser of
the futures contract to buy and the seller of a futures contract to sell a
security for a set price on a future date or, in the case of an index futures
contract to make and accept a cash settlement based upon the difference in
value of the index between the time the contract was entered into and the time
of its settlement. A majority of transactions in futures contracts, however,
do not result in the actual delivery of the underlying instrument or cash
settlement, but are settled through liquidation, i.e., by entering into an
offsetting transaction. Futures contracts have been designed by boards of
trade which have been designated "contract markets" by the Commodities Futures
Trading Commission ("CFTC"). Transactions by the Fund in futures contracts and
financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions."
The Fund may sell financial futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market values of securities which may be held by the Fund will fall,
thus reducing the net asset value of the Fund. However, as interest rates
rise, the value of the Fund's short position in the futures contract will also
tend to increase, thus offsetting all or a portion of the depreciation in the
market value of the Fund's investments which are being hedged. While the Fund
will incur commission expenses in selling and closing out futures positions,
these commissions are generally less than the transaction expenses which the
Fund would have incurred had the Fund sold portfolio securities in order to
reduce its exposure to increases in interest rates. The Fund also may purchase
financial futures contracts in anticipation of a decline in interest rates
when it is not fully invested in a particular market in which it intends to
make investments to gain market exposure that may in part or entirely offset
an increase in the cost of securities it intends to purchase. It is
anticipated that, in a substantial majority of these transactions, the Fund
will purchase securities upon termination of the futures contract.
The Fund also has authority to purchase and write call and put
options on futures contracts. Generally, these strategies are used under the
same market and market sector conditions (i.e., conditions relating to
specific types of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call options on
futures contracts rather than selling the underlying futures contract in
anticipation of a decrease in the market value of securities or an increase in
interest rates. Similarly, the Fund may purchase call options, or write put
options on futures contracts, as a substitute for the purchase of such futures
to hedge against the increased cost resulting from an increase in the market
value or a decline in interest rates of securities which the Fund intends to
purchase.
The Fund may engage in options and futures transactions on exchanges
and options in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligation is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Restrictions on the Use of Futures Transactions. Under regulations of
the CFTC, the futures trading activity described herein will not result in the
Fund being deemed a "commodity pool," as defined under such regulations,
provided that the Fund adheres to certain restrictions. In particular, the
Fund may purchase and sell futures contracts and options thereon (i) for bona
fide hedging purposes, and (ii) for non-hedging purposes, if the aggregate
initial margin and premiums required to establish positions in such contracts
and options does not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized losses
on any such contracts and options. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash or liquid instruments will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated, plus the amount of variation margin held in the account
of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in transactions in
OTC options only with banks or dealers which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million. OTC options and assets used to cover OTC options written by
the Fund are considered by the staff of the Commission to be illiquid. The
illiquidity of such options or assets may prevent a successful sale of such
options or assets, result in a delay of sale, or reduce the amount of proceeds
that might otherwise be realized.
Risk Factors in Interest Rate Transactions and Options and Futures Transactions
The use of interest rate transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. Interest rate
transactions involve the risk of an imperfect correlation between the index
used in the hedging transaction and that pertaining to the securities which
are the subject of such transaction. If the Investment Adviser is incorrect in
its forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not used. In addition,
interest rate transactions that may be entered into by the Fund do not involve
the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited
to the net amount of interest payments that the Fund is contractually
obligated to make. If the security underlying an interest rate swap is prepaid
and the Fund continues to be obligated to make payments to the other party to
the swap, the Fund would have to make such payments from another source. If
the other party to an interest rate swap defaults, the Fund's risk of loss
consists of the net amount of interest payments that the Fund contractually is
entitled to receive. In the case of a purchase by the Fund of an interest rate
cap or floor, the amount of loss is limited to the fee paid. Since interest
rate transactions are individually negotiated, the Investment Adviser expects
to achieve an acceptable degree of correlation between the Fund's rights to
receive interest on securities and its rights and obligations to receive and
pay interest pursuant to interest rate swaps.
Utilization of options and futures transactions to hedge the
portfolio involves the risk of imperfect correlation in movements in the price
of options and futures and movements in the prices of the securities which are
the subject of the hedge. If the price of the options or futures moves more or
less than the price of the subject of the hedge, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. This risk particularly applies to the Fund's use of
futures and options thereon since it will generally use such instruments as a
so-called "cross-hedge," which means that the security that is the subject of
the futures contract is different from the security being hedged by the
contract.
Prior to exercise or expiration, an exchange-traded option position
can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund intends to enter into options and futures
transactions, on an exchange or in the over-the-counter market, only if them
appears to be a liquid secondary market for such options or futures. However,
there can be no assurance that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions also could have
an adverse impact on the Fund's ability to effectively hedge its portfolio.
There is also the risk of loss by the Fund of margin deposits or collateral in
the event of bankruptcy of a broker with whom the Fund has an open position in
an option, a futures contract or an option related to a futures contract.
<PAGE>
APPENDIX II
ISSUE CREDIT RATINGS OF CORPORATE DEBT SECURITIES
(Including Mortgage-Backed and Asset-Backed Securities)
Description of Standard & Poor's, a Division of The McGraw-Hill Companies,
Inc.
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation. It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation. The issue
credit rating is not a recommendation to purchase, sell or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.
Issue credit ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Long-term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations: (1) likelihood of payment - capacity and willingness of the
obligor to meet its financial commitment on an obligation in accordance with
the terms of the obligation; (2) nature of and provisions of the obligation;
and (3) protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA An obligation rated AAA has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the highest rated issues
only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories. The
obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the
obligation.
Short-term Issue Credit Ratings
A-1 A short-term obligation rated A-1 is rated in the highest
category by Standard & Poor's. The obligor's capacity to
meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
<PAGE>
A-3 A short-term obligation rated A-3 exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
Description of Moody's Investors Service, Inc.'s ("Moody's") Ratings
Long-term Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor
poorly secured. Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Baa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
Short-term ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
o Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
<PAGE>
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt
obligations. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively
high financial leverage. Adequate alternate liquidity is
maintained.
<PAGE>
[This page is intentionally left blank.]
<PAGE>
=============================================================================
Through and including March , 2000 (the 90th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Shares
Income Opportunities Fund 2006, Inc.
Common Stock
_______________
PROSPECTUS
_______________
Merrill Lynch & Co.
December , 1999
CODE -
=============================================================================
<PAGE>
PART C
OTHER INFORMATION
Financial Statements and Exhibits.
Financial Statements
Report of Independent Auditors
Statement of Assets, Liabilities and Capital as of , 1999
Notes to Statement of Assets, Liabilities and Capital as of , 1999
Exhibits:
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description
------ -----------
(a) -- Articles of Incorporation of the Fund
(b) -- By-Laws of the Fund
(c) -- Not applicable
(d)(1) -- Portions of the Articles of Incorporation and By-Laws of the Fund
defining the rights of holders of shares of common stock of the Fund(a)
(d)(2) -- Form of specimen certificate for shares of common stock of the Fund*
(e) -- Form of Dividend Reinvestment Plan*
(f) -- Not applicable
(g) -- Form of Investment Advisory Agreement between the Fund and Fund
Asset Management, L.P. (the "Investment Adviser")*
(h)(1) -- Form of Purchase Agreement between the Fund and Merrill Lynch,
Pierce, Fenner & Smith Incorporated*
(h)(2) -- Merrill Lynch Standard Dealer Agreement*
(i) -- Not applicable
(j) -- Form of Custodian Contract between the Fund
and *
(k) -- Form of Registrar, Transfer Agency and Service Agreement between the
Fund and *
(1) -- Opinion and Consent of Brown & Wood LLP*
(m) -- Not applicable
(n) -- Consent of , independent auditors for the Fund*
(o) -- Not applicable
(p) -- Certificate of Fund Asset Management, L.P.*
(q) -- Not applicable
(r) -- Not applicable
- ---------------
</TABLE>
(a) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and
6), Article VII, Article VIII, Article X, Article XI, Article XII and
Article XIII of the Registrant's Articles of Incorporation, filed as
Exhibit (a) to this Registration Statement; and to Article II,
Article III (sections 1, 2, 3, 5 and 17), Article VI, Article VII,
Article XII, Article XIII and Article XIV of the Registrant's
By-Laws, filed as Exhibit (b) to this Registration Statement.
* To be provided by amendment.
<PAGE>
Marketing Arrangements.
See Exhibits (h)(1) and (2).
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............................... $ *
New York Stock Exchange listing fee............. *
Printing (other than stock certificates)........ *
Engraving and printing stock certificates....... *
Legal fees and expenses......................... *
NASD fees....................................... *
Miscellaneous................................... *
___________
Total...................................... $ *
___________
- -----------
*To be provided by amendment.
Persons Controlled by or Under Common Control with Registrant.
The information in the prospectus under the captions "Investment
Advisory and Management Arrangements" and "Description of Capital Stock" and
in Note I to the Statement of Assets, Liabilities and Capital is incorporated
herein by reference.
Number of Holders of Securities.
There will be one record holder of the Common Stock, par value $0.10
per share, as of the effective date of this Registration Statement.
Indemnification.
Section 2-418 of the General Corporation Law of the State of
Maryland, Article VI of the Registrant's Articles of Incorporation, filed as
Exhibit (a)(1) to this Registration Statement, Article VI of the Registrant's
By-Laws, filed as Exhibit (b) to this Registration Statement, and the
Investment Advisory Agreement, a form of which is filed as Exhibit (g)(1) to
this Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the " 1933 Act") may be provided to
directors, officers and controlling persons of the Fund, pursuant to the
foregoing provisions or otherwise, the Fund has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Fund of expenses incurred or paid
by a director, officer or controlling person of the Fund in connection with
any successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
Reference also is made to Section Six of the Purchase Agreement, a
form of which is filed as Exhibit (h)(1) hereto, for provisions relating to
the indemnification of the underwriter.
Business and Other Connections of the Investment Adviser.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate
of MLAM, acts as investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., Financial
Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch
California Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., and The
Municipal Fund Accumulation Program, Inc., and for the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield
Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc.,
Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
California Insured Fund V, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Florida Insured Fund IV, MuniHoldings Florida Insured Fund V,
MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II, Inc.,
MuniHoldings Insured Fund III, Inc., MuniHoldings Insured Fund IV, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings Michigan Insured Fund
II, Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc.,
MuniHoldings New Jersey Insured Fund IV, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniHoldings New York Insured Fund III, Inc., MuniHoldings New
York Insured Fund IV, Inc., MuniHoldings Pennsylvania Insured Fund,
MuniInsured Fund, Inc., MuniVest Florida Fund, MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., and Worldwide
DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis
and Wiley, a division of MLAM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund II, Inc. MLAM also acts as sub-adviser to Merrill Lynch
World Strategy Portfolio and Merrill Lynch Basic Equity Portfolio, two
investment portfolios of EQ Advisors Trust.
The address of each of these registered investment companies is P.O.
Box 9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2665. The address of the Investment Adviser, MLAM, Princeton Services,
Inc. ("Princeton Services") and Princeton Administrators, L.P. is also P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street,
New York, New York 10281-1201.
Set forth below is a list of each executive officer and partner of
the Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Glenn is President and Mr. Burke is Treasurer of all or substantially all
of the investment companies described in the first two paragraphs of this Item
30 and also hold the same positions with all or substantially all of the
investment companies advised by MLAM as they do with those advised by the
Investment Adviser. Messrs. Giordano, Kirstein and Monagle are officers of one
or more of such companies.
<TABLE>
<CAPTION>
Positions with Other Substantial Business, Profession,
Name Investment Adviser Vocation or Employment
<S> <C> <C>
ML & Co.................... Limited Partner Financial Services Holding Company; Limited Partner of FAM
Princeton Services......... General Partner General Partner of MLAM
Jeffrey M. Peek............ President President of MLAM; President and Director of Princeton
Services;
Executive Vice President of ML & Co.; Managing Director and
Co-Head of the Investment Banking Division of Merrill Lynch
in 1997;
Senior Vice President and Director of the Global Securities
and
Economics Division of Merrill Lynch from 1995 to 1997.
Terry K. Glenn............. Executive Vice Executive Vice President of MLAM; Executive Vice President
President and
Director of Princeton
Services; President
and Director of PFD;
Director of Financial
Data Services, Inc.;
President of Princeton
Administrators, L.P.
Gregory A. Bundy........... Chief Operating Chief Operating Officer and Managing Director of MLAM;
Officer and Managing Chief Operating Officer and Managing Director of Princeton
Director Services;
G-CEO of Merrill Lynch Australia from 1997 to 1999
Donald C. Burke............ Senior Vice President, Senior Vice President, Treasurer and Director of Taxation
Treasurer and of MLAM;
Director of Taxation Senior Vice President and Treasurer of Princeton Services;
Vice President of PFD;
First Vice President
of MLAM from 1997 to
1999; Vice President
of MLAM from 1990 to
1997
Michael G. Clark........... Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services; Director and Treasurer of PFD; First
Vice President of MLAM from 1997 to 1999; Vice President of
MLAM from 1996-1997
Robert C. Doll............. Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services; Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice President thereof
from 1991 to 1999
Linda L. Federici.......... Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services
Vincent R. Giordano........ Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services
Michael J. Hennewinkel..... Senior Vice President, Senior Vice President, General Counsel and Secretary of
General Counsel and MLAM;
Secretary Senior Vice President of Princeton Services
Philip L. Kirstein......... Senior Vice President Senior Vice President of MLAM; Senior Vice President,
General Counsel, Director and Secretary of Princeton
Services
Debra W. Landsman-Yaros.... Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services; Vice President of PFD
Stephen M. M. Miller....... Senior Vice President Executive Vice President of Princeton Administrators, L.P.,
Senior Vice President of Princeton Services
Joseph T. Monagle, Jr...... Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services
Brian A. Murdock........... Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services
Gregory D. Upah............ Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services
</TABLE>
Location of Account and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
Management Services.
Not applicable.
Undertakings.
1. Registrant undertakes to suspend the offering of the shares of
common stock covered hereby until it amends its prospectus contained
herein if (1) subsequent to the effective date of this Registration
Statement, its net asset value per share of common stock declines
more than 10% from its net asset value per share of common stock as
of the effective date of this Registration Statement, or (2) its net
asset value per share of common stock increases to an amount greater
than its net proceeds as stated in the prospectus contained herein.
2. Registrant undertakes that
a) For purposes of determining any liability under the 1933 Act
the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A
and contained in the form of prospectus filed by the registrant
pursuant to Rule 497(h) under the 1933 Act shall be deemed to be
part of this Registration Statement as of the time it was
declared effective.
b) For the purpose of determining any liability under the 1933
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
<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 12th day of October, 1999.
INCOME OPPORTUNITIES FUND 2006, INC.
(Registrant)
By /s/ WILLIAM E. ZITELLI, JR.
_____________________________
(William E. Zitelli, Jr., President)
Each person whose signature appears below hereby authorizes William
E. Zitelli, Jodi Pinedo or Allan Oster, or any of them, as attorney-in-fact,
to sign on his behalf, individually and in each capacity stated below, any
amendment to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
---------- ----- ----
/S/ WILLIAM E. ZITELLI, JR. President (Principal Executive October 12, 1999
- -------------------------------------- Officer) and Director
(William E. Zitelli, Jr.)
/S/ JODI PINEDO Treasurer (Principal Financial and October 12, 1999
- -------------------------------------- Accounting Officer) and Director
(Jodi Pinedo)
/S/ ALLAN OSTER Secretary and Director October 12, 1999
- --------------------------------------
(Allan Oster)
</TABLE>
<PAGE>
Exhibit List
Exhibit
Number Description
(a) -- Articles of Incorporation of the Fund
(b) -- By-Laws of the Fund
Exhibit (a)
ARTICLES OF INCORPORATION
OF
INCOME OPPORTUNITIES FUND 2006, INC.
THE UNDERSIGNED, PATRICIA GELFOND, whose post-office address is c/o
Brown & Wood LLP, One World Trade Center, 56th Floor, New York, New York
10048-0557, being at least eighteen (18) years of age, does hereby act as
incorporator, under and by virtue of the General Laws of the State of Maryland
authorizing the formation of corporations and with the intention of forming a
corporation.
ARTICLE I
NAME
----
The name of the corporation is INCOME OPPORTUNITIES FUND 2006, INC.
(the "Corporation").
ARTICLE II
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed is to act
as a closed-end, management investment company under the federal Investment
Company Act of 1940, as amended, and in effect from time to time (the
"Investment Company Act"), and to exercise and enjoy all of the powers, rights
and privileges granted to, or conferred upon, corporations by the General Laws
of the State of Maryland now or hereafter in force.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 300 Lombard
Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is The Corporation Trust Incorporated, a corporation
of this State, and the post-office address of the resident agent is The
Corporation Trust Incorporated, 300 Lombard Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is 200,000,000 shares, all initially classified as
one class called Common Stock, of the par value of Ten Cents ($0.10) per share,
and of the aggregate par value of Twenty Million Dollars ($20,000,000).
(2) The Board of Directors may amend the Charter of the Corporation,
without stockholder approval, to increase or decrease the aggregate number of
authorized shares of capital stock or to increase or decrease the number of
shares of stock of any class that the Corporation has the authority to issue.
(3) The Board of Directors may classify and reclassify any unissued
shares of capital stock into one or more additional or other classes or series
as may be established from time to time by setting or changing in any one or
more respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series provided, however, that the
total amount of shares of all classes or series shall not exceed the total
number of shares of capital stock authorized in the Charter.
(4) Unless otherwise expressly provided in the Charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, the holders of each class or series of capital stock shall be
entitled to dividends and distributions in such amounts and at such times as may
be determined by the Board of Directors, and the dividends and distributions
paid with respect to the various classes or series of capital stock may vary
among such classes and series.
(5) Unless otherwise expressly provided in the Charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, on each matter submitted to a vote of stockholders, each
holder of a share of capital stock of the Corporation shall be entitled to one
vote for each share standing in such holder's name on the books of the
Corporation, irrespective of the class or series thereof, and all shares of all
classes and series shall vote together as a single class; PROVIDED, HOWEVER,
that as to any matter with respect to which a separate vote of any class or
series is required by the Investment Company Act, or any rules, regulations or
orders issued thereunder, or by the Maryland General Corporation Law, such
requirement as to a separate vote by that class or series shall apply in lieu of
a general vote of all classes and series as described above.
(6) Notwithstanding any provision of the Maryland General Corporation
Law requiring a greater proportion than a majority of the votes of all classes
or series of capital stock of the Corporation (or of any class or series
entitled to vote thereon as a separate class or series) to take or authorize any
action, the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act, and any rules, regulations and orders issued thereunder)
to take such action upon the concurrence of a majority of the votes entitled to
be cast by holders of capital stock of the Corporation (or a majority of the
votes entitled to be cast by holders of a class or series as a separate class or
series) unless a greater proportion is specified in the Charter.
(7) Unless otherwise expressly provided in the Charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation.
(8) Any fractional shares shall carry proportionately all of the rights
of a whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(9) The presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast shall constitute a
quorum at any meeting of stockholders, except with respect to any matter which
requires approval by a separate vote of one or more classes or series of stock,
in which case the presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast by each class or
series entitled to vote as a separate class shall constitute a quorum.
(10) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of the Charter and the By-Laws of the
Corporation. As used in the Charter of the Corporation, the terms "Charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF
THE CORPORATION AND OF
THE DIRECTORS AND STOCKHOLDERS
------------------------------
(1) The initial number of directors of the Corporation shall be three
(3), which number may be increased or decreased pursuant to the By-Laws of the
Corporation but shall never be less than the minimum number permitted by the
General Laws of the State of Maryland. The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualify are:
WILLIAM E. ZITELLI, JR.
JODI PINEDO
ALLAN OSTER
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock of any class
or series, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable, without any action by the stockholders,
subject to such limitations as may be set forth in these Articles of
Incorporation or in the By-Laws of the Corporation or in the Maryland General
Corporation Law.
(3) Each director and each officer of the Corporation shall be
indemnified and advanced expenses by the Corporation to the full extent
permitted by the General Laws of the State of Maryland now or hereafter in
force, including the advance of expenses under the procedures and to the full
extent permitted by law, subject to the requirements of the Investment Company
Act. The foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled. No amendment of
these Articles of Incorporation or repeal of any provision hereof shall limit or
eliminate the benefits provided to directors and officers under this provision
in connection with any act or omission that occurred prior to such amendment or
repeal.
(4) To the fullest extent permitted by the General Laws of the State of
Maryland, or decisional law, as amended or interpreted, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation or
repeal of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(5) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act.
(6) A director elected by the holders of capital stock may be removed
(with or without cause), but only by action taken by the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the shares of capital stock then
entitled to vote in an election to fill that directorship.
(7) The enumeration and definition of the particular powers of the
Board of Directors included in the Charter shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the Charter of the Corporation, or construed as or
deemed by inference or otherwise in any manner to exclude or limit any powers
conferred upon the Board of Directors under the General Laws of the State of
Maryland now or hereinafter in force.
ARTICLE VI
DENIAL OF PREEMPTIVE RIGHTS
---------------------------
No stockholder of the Corporation shall by reason of his holding shares
of capital stock have any preemptive or preferential right to purchase or
subscribe to any shares of capital stock of the Corporation, now or hereafter to
be authorized, or any notes, debentures or bonds or any other securities
convertible into shares of capital stock, now or hereafter to be authorized,
whether or not the issuance of any such shares, or notes, debentures, bonds or
other securities would adversely affect the dividend or voting rights of such
stockholder; except that the Board of Directors, in its sole discretion, may
issue shares of any class of stock of the Corporation, or any notes, debentures,
bonds, other securities convertible into shares of any class, either in whole or
in part, to the existing stockholders or holders of any class, series, or type
of stock or other securities at the time outstanding to the exclusion of any or
all of the holders of any or all of the classes, series or types of stock or
other securities at the time outstanding.
ARTICLE VII
DETERMINATION BINDING
---------------------
Any determination made in good faith and consistent with applicable
law, so far as accounting matters are involved, in accordance with accepted
accounting practice by or pursuant to the direction of the Board of Directors,
as to the amount of assets, obligations or liabilities of the Corporation, as to
the amount of net income of the Corporation from dividends and interest for any
period or amounts at any time legally available for the payment of dividends, as
to the amount of any reserves or as to the use, alteration or cancellation of
any reserves or charges set up and the propriety thereof, as to the time of or
purpose for creating reserves or as to the use, alteration or cancellation of
any reserves or charges (whether or not any obligation or liability for which
such reserves or as to the use, alteration or cancellation of any reserves or
charges shall have been created, shall have been paid or discharged or shall be
then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities "short,"
or an underwriting or the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations shall be
binding as aforesaid. No provision in this Charter shall be effective to (a)
require a waiver of compliance with any provision of the Securities Act of 1933,
as amended, or the Investment Company Act, or of any valid rule, regulation or
order of the Securities and Exchange Commission thereunder or (b) protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
ARTICLE VIII
LIMITED TERM OF EXISTENCE
-------------------------
The Corporation shall have a limited period of existence and shall
cease to exist at the close of business on December 31, 2006, except that the
Corporation shall continue to exist for the purpose of paying, satisfying, and
discharging any existing debts or obligations, collecting and distributing its
assets, and doing all other acts required to liquidate and wind up its business
and affairs. After the close of business on December 31, 2006, if the
Corporation has not liquidated and wound up its business and affairs, the
directors shall become trustees of the Corporation's assets for purposes of
liquidation with the full powers granted to directors of a corporation which has
voluntarily dissolved under Subtitle 4 of Title 3 of the Maryland General
Corporation Law or any successor statute as are necessary to liquidate the
Corporation and wind up its affairs, but in no event with lesser powers than the
powers granted by such subtitle under the Maryland General Corporation Law as of
the date of incorporation of the Corporation.
The Board of Directors may, to the extent it deems it appropriate,
adopt a plan of termination at any time during the twelve months immediately
preceding December 31, 2006, which plan of termination may set forth the terms
and conditions for implementing the termination of the Corporation's existence
under this Article VIII. Stockholders of the Corporation shall not be entitled
to vote on the adoption of any such plan or the termination of the Corporation's
existence under this Article VIII.
ARTICLE IX
PRIVATE PROPERTY OF STOCKHOLDERS
--------------------------------
The private property of stockholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
ARTICLE X
CONVERSION TO OPEN-END COMPANY
------------------------------
Notwithstanding any other provisions of these Articles of Incorporation
or the By-Laws of the Corporation, a favorable vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize an amendment to these Articles of Incorporation of
the Corporation that makes the Common Stock a "redeemable security" (as that
term is defined in section 2(a)(32) the Investment Company Act) unless such
action has previously been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of directors fixed in accordance
with the By-Laws of the Corporation, in which case the affirmative vote of the
holders of a majority of the outstanding shares of capital stock of the
Corporation entitled to vote thereon shall be required.
ARTICLE XI
MERGER, SALE OF ASSETS, LIQUIDATION
-----------------------------------
Notwithstanding any other provisions of these Articles of Incorporation
or the By-Laws of the Corporation, a favorable vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize (i) a merger or consolidation or statutory share
exchange of the Corporation with any other corporation, (ii) a sale of all or
substantially all of the assets of the Corporation (other than in the regular
course of its investment activities), or (iii) a liquidation or dissolution of
the Corporation before the end of its limited term of existence as provided in
Article VIII of these Articles of Incorporation, unless such action has
previously been approved, adopted or authorized by the affirmative vote of at
least two-thirds of the total number of directors fixed in accordance with the
By-Laws of the Corporation, in which case the affirmative vote of the holders of
a majority of the outstanding shares of capital stock of the Corporation
entitled to vote thereon shall be required.
ARTICLE XII
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in its Charter, in any manner now or hereafter
prescribed by Statute, including any amendment which alters the contract rights,
as expressly set forth in the Charter, of any outstanding stock and
substantially adversely affects the stockholders' rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
Notwithstanding any other provisions of these Articles of Incorporation or the
By-Laws of the Corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, these Articles of Incorporation or the
By-Laws of the Corporation), the amendment or repeal of Section (6) of Article
IV, Section (1), Section (3), Section (4), Section (5) and Section (6) of
Article V, Article VIII, Article IX, Article X, Article XI, or this Article XII,
of these Articles of Incorporation shall require the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of capital stock of the Corporation entitled to be voted on
the matter.
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator Income Opportunities
Fund 2006, Inc. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be his act.
Dated the 7th day
of October 1999
Patricia Gelfond
Exhibit (b)
BY-LAWS
OF
INCOME OPPORTUNITIES FUND 2006, INC.
ARTICLE I.
Offices
-------
Section 1. Principal Office. The principal office of the Corporation
shall be in the City of Baltimore and State of Maryland.
Section 2. Principal Executive Office. The principal executive office
of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices
in such places as the Board of Directors from time to time may determine.
ARTICLE II.
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. Except as otherwise required by the rules of
any stock exchange on which the Corporation's shares of stock may be listed, the
Corporation shall not be required to hold an annual meeting of its stockholders
in any year in which the election of directors is not required to be acted upon
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). In the event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors under the Investment Company Act,
such meeting shall be held no later than 120 days after the occurrence of the
event requiring the meeting. Any stockholders' meeting held in accordance with
this Section shall for all purposes constitute the annual meeting of
stockholders for the year in which the meeting is held.
In the event an annual meeting is required by the rules of a stock
exchange on which the Corporation's shares of stock are listed, the annual
meeting of the stockholders of the Corporation for the election of directors and
for the transaction of such other business as may properly be brought before the
meeting shall be held on such day and month of each year as shall be designated
annually by the Board of Directors.
Section 2. Special Meetings. Special meetings of the stockholders,
unless otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the written request of
the holders of at least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with Section
2-502(b) or (c) of the Maryland General Corporation Law.
Section 3. Place of Meetings. The annual meeting and any special
meeting of the stockholders shall be held at such place as the Board of
Directors from time to time may determine. Section 4. Notice of Meetings; Waiver
of Notice. Notice of the place, date and time of the holding of each annual and
special meeting of the stockholders and the purpose or purposes of each special
meeting shall be given personally or by mail or transmitted to the stockholder
by electronic mail to any electronic mail address of the stockholder or by any
other electronic means, not less than ten nor more than 90 days before the date
of such meeting, to each stockholder entitled to vote at such meeting and to
each other stockholder entitled to notice of the meeting. Notice by mail shall
be deemed to be duly given when deposited in the United States mail addressed to
the stockholder at his or her address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who, either
before or after the meeting, shall submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or unless the adjournment is for
more than 120 days after the original record date, notice of such adjourned
meeting need not be given if the time and place to which the meeting shall be
adjourned were announced at the meeting at which the adjournment is taken.
Section 5. Quorum. The presence in person or by proxy of the holders of
shares of stock entitled to cast one-third of the votes entitled to be cast
shall constitute a quorum at any meeting of stockholders, except with respect to
any matter which requires approval by a separate vote of one or more classes or
series of stock, in which case the presence in person or by proxy of the holders
of shares entitled to cast one-third of the votes entitled to be cast by each
class or series entitled to vote as a separate class or series shall constitute
a quorum. In the absence of a quorum no business may be transacted, except that
the holders of a majority of the shares of stock present in person or by proxy
and entitled to vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by these By-Laws,
until the holders of the requisite amount of shares of stock shall be so
present. At any such adjourned meeting at which a quorum may be present any
business may be transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by proxy, of
holders of the number of shares of stock of the Corporation in excess of a
majority thereof which may be required by the laws of the State of Maryland, the
Investment Company Act, or other applicable statute, the Charter, or these
By-Laws, for action upon any given matter shall not prevent action at such
meeting upon any other matter or matters which properly may come before the
meeting, if there shall be present thereat, in person or by proxy, holders of
the number of shares of stock of the Corporation required for action in respect
of such other matter or matters.
Section 6. Organization. At each meeting of the stockholders, the
Chairman of the Board (if one has been designated by the Board), or in his or
her absence or inability to act, the President, or in the absence or inability
to act of the Chairman of the Board and the President, a Vice President, shall
act as chairman of the meeting. The Secretary, or in his or her absence or
inability to act, any person appointed by the chairman of the meeting, shall act
as secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
Section 8. Business at Annual Meeting. No business may be transacted at
any meeting of stockholders, other than business that is either (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors (or any duly authorized committee thereof), (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors (or any duly authorized committee thereof) or (c) otherwise
properly brought before any meeting by any stockholder of the Corporation (i)
who is a stockholder of record on the date of the giving of the notice provided
for in Article II, Section 4 of these By-Laws and on the record date for the
determination of stockholders entitled to vote at any such meeting of
stockholders as determined in accordance with Article II, Section 9 hereof and
(ii) who complies with the notice procedures set forth in this Section 8.
In addition to any other applicable requirements, for business to be
properly brought before a meeting by a stockholder, such stockholder must have
given timely notice thereof in proper written form to the Secretary of the
Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
(a) with respect to the Corporation's first annual meeting of stockholders, not
later than the close of business on the tenth (10th) calendar day following the
day on which public disclosure of the date on which the first annual meeting
shall be held is first made (provided that such annual meeting shall be held
within ninety (90) calendar days of such public disclosure of the date); and (b)
thereafter, not less than sixty (60) calendar days nor more than ninety (90)
calendar days prior to the anniversary date of the immediately preceding annual
meeting of stockholders; provided, however, that in the event that the annual
meeting is called for a date that is not within thirty (30) calendar days before
or sixty (60) calendar days after such anniversary date, notice by the
stockholder in order to be timely must be so received not later than the close
of business on the later of the sixtieth (60th) calendar day prior to such
annual meeting or the fifteenth (15th) calendar day following the day on which
notice of the date of the annual meeting was mailed or public disclosure of the
date of the annual meeting was made, whichever first occurs. For purposes of
this Section 8, the date of a public disclosure shall include, but not be
limited to, the date on which such disclosure is made in a press release
reported by the Dow Jones News Services, the Associated Press or any comparable
national news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) (or
the rules and regulations thereunder) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or pursuant to Section 30 (or the rules and
regulations thereunder) of the Investment Company Act.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by such stockholder, (iv) a description of
all arrangements or understandings between such stockholder and any other person
or persons (including their names) in connection with the proposal of such
business by such stockholder and any material interest of such stockholder in
such business and (v) a representation that such stockholder intends to appear
in person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 8, provided, however, that, once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 8 shall be deemed to preclude discussion by
any stockholder of any such business. If the chairman of a meeting determines
that business was not properly brought before the meeting in accordance with the
foregoing procedures, the chairman shall declare to the meeting that the
business was not properly brought before the meeting and such business shall not
be transacted.
Section 9. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of the Corporation, except as may be otherwise provided in the Charter
with respect to the right, if any, of holders of preferred stock of the
Corporation to nominate and elect a specified number of directors in certain
circumstances. Nominations of persons for election to the Board of Directors may
be made at any annual meeting of stockholders, or at any special meeting of
stockholders called for the purpose of electing directors, (a) by or at the
direction of the Board of Directors (or any duly authorized committee thereof)
or (b) by any stockholder of the Corporation (i) who is a stockholder of record
on the date of the giving of the notice provided for in this Section 9 and on
the record date for the determination of stockholders entitled to vote at such
meeting and (ii) who complies with the notice procedures set forth in this
Section 9.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
(a) with respect to the Corporation's first annual meeting of stockholders, not
later than the close of business on the tenth (10th) calendar day following the
day on which public disclosure of the date on which the first annual meeting
shall be held is first made (provided that such annual meeting shall be held
within ninety (90) calendar days of such public disclosure of the date); (b)
thereafter, in the case of an annual meeting, not less than sixty (60) calendar
days nor more than ninety (90) calendar days prior to the anniversary date of
the immediately preceding annual meeting of stockholders; provided, however,
that in the event that the annual meeting is called for a date that is not
within thirty (30) calendar days before or sixty (60) calendar days after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the later of the sixtieth
(60th) calendar day prior to such annual meeting or the fifteenth (15th)
calendar day following the day on which notice of the date of the annual meeting
was mailed or public disclosure of the date of the annual meeting was made,
whichever first occurs; and (c) in the case of a special meeting of stockholders
called for the purpose of electing directors, not later than the close of
business on the fifteenth (15th) day following the day on which notice of the
date of the special meeting was mailed or public disclosure of the date of the
special meeting was made, whichever first occurs. For purposes of this Section
9, the date of a public disclosure shall include, but not be limited to, the
date on which such disclosure is made in a press release reported by the Dow
Jones News Services, the Associated Press or any comparable national news
service or in a document publicly filed by the Corporation with the Securities
and Exchange Commission pursuant to Sections 13, 14 or 15(d) (or the rules and
regulations thereunder) of the Exchange Act or pursuant to Section 30 (or the
rules and regulations thereunder) of the Investment Company Act.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder; and (b) as to
the stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Corporation which are owned beneficially or of record by such stockholder,
(iii) a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or persons (including
their names) pursuant to which the nomination(s) are to be made by such
stockholder, (iv) a representation that such stockholder intends to appear in
person or by proxy at the meeting to nominate the persons named in its notice
and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 9. If the chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.
Section 10. Voting. Except as otherwise provided by statute or the
Charter, each holder of record of shares of stock of the Corporation having
voting power shall be entitled at each meeting of the stockholders to one vote
for every share of such stock standing in his or her name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 9 of this Article or, if such record date shall not have been so fixed,
then at the later of (i) the close of business on the day on which notice of the
meeting is mailed or (ii) the thirtieth (30) day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or her as proxy by signing a
writing authorizing another person to act as proxy. Such signing may be
accomplished by the stockholder or the stockholder's authorized agent signing
the writing or causing the stockholder's signature to be affixed to the writing
by any reasonable means, including facsimile signature. A stockholder may
authorize another person to act as proxy by transmitting, or authorizing the
transmission of, an authorization for the person to act as proxy to (i) the
person authorized to act as proxy or (ii) any other person authorized to receive
the proxy authorization on behalf of the person authorized to act as the proxy,
including a proxy solicitation firm or proxy support service organization. The
authorization referred to in the preceding sentences may be transmitted by U.S.
mail, couriour service, personal delivery, a telegram, cablegram, datagram,
electronic mail, or any other electronic or telephonic means and a copy,
facsimile telecommunication, or other reliable reproduction of the writing or
transmission authorized in this paragraph may be substituted for the original
writing or transmission for any purpose for which the original writing or
transmission could be used.
No proxy shall be valid after the expiration of eleven months from the
date thereof, unless otherwise provided in the proxy. Every proxy shall be
revocable at the pleasure of the stockholder executing it, except in those cases
where such proxy states that it is irrevocable and where an irrevocable proxy is
permitted by law. Except as otherwise provided by statute, the Charter or these
By-Laws, any corporate action to be taken by vote of the stockholders (other
than the election of directors, which shall be by a plurality of votes cast)
shall be authorized by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or represented by proxy
and entitled to vote on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his or her proxy, if there be such
proxy, and shall state the number of shares voted.
Section 11. Fixing of Record Date for a Meeting. The Board of Directors
may set a record date for the purpose of determining stockholders entitled to
vote at any meeting of the stockholders. The record date, which may not be prior
to the close of business on the day the record date is fixed, shall be not more
than 90 nor less than ten days before the date of the meeting of the
stockholders. All persons who were holders of record of shares at such time, and
not others, shall be entitled to vote at such meeting and any adjournment
thereof.
Section 12. Inspectors. The Board, in advance of any meeting of
stockholders, may appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his or her duties, shall
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his or her
ability. The inspectors shall determine the number of shares outstanding and the
voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, and the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as inspector of an
election of directors. Inspectors need not be stockholders.
Section 13. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute or the Charter, any action required to be taken at
any annual or special meeting of stockholders, or any action which may be taken
at any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if the following are filed
with the records of stockholders' meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder entitled to vote
on the matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III.
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the Charter,
the business and affairs of the Corporation shall be managed under the direction
of the Board of Directors. All powers of the Corporation may be exercised by or
under authority of the Board of Directors except as conferred on or reserved to
the stockholders by law or by the Charter or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed
from time to time by resolution of the Board of Directors adopted by a majority
of the entire Board of Directors then in office; provided, however, that in no
event shall the number of directors be less than the minimum permitted by the
Maryland General Corporation Law nor more than 15. Any vacancy created by an
increase in the number of directors may be filled in accordance with Section 6
of this Article III. No reduction in the number of directors shall have the
effect of removing any director from office prior to the expiration of his or
her term unless such director specifically is removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need not be
stockholders. As long as any preferred stock of the Corporation is outstanding,
the number of directors shall be not less than five.
Section 3. Election and Term of Directors. Directors shall be elected
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article II of these By-Laws,
directors shall be elected at the next meeting held. The term of office of each
director shall be from the time of his election and qualification until the
election of directors next succeeding his election and until his successor shall
have been elected and shall have qualified, or until his death, or until he
shall have resigned or until December 31 of the year in which he shall have
reached seventy-two years of age, or until he shall have been removed as
hereinafter provided in these By-Laws, or as otherwise provided by statute or by
the Charter.
Section 4. Resignation. A director of the Corporation may resign at any
time by giving written notice of his or her resignation to the Board or the
Chairman of the Board or the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may be
removed (with or without cause) by the stockholders by a vote of sixty-six and
two-thirds percent (66 2/3%) of the outstanding shares of capital stock then
entitled to vote in the election of such director.
Section 6. Vacancies. Subject to the provisions of the Investment
Company Act, any vacancies in the Board of Directors, whether arising from
death, resignation, removal, an increase in the number of directors or any other
cause, shall be filled by a vote of a majority of the Board of Directors then in
office, regardless of whether they constitute a quorum.
Section 7. Place of Meetings. Meetings of the Board may be held at such
place as the Board from time to time may determine or as shall be specified in
the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board may be held
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 10. Telephone Meetings. Members of the Board of Directors or of
any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act, participation in a meeting by these means
constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting
of the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least 24 hours before the time at
which such meeting is to be held, or by first-class mail, postage prepaid,
addressed to him or her at his or her residence or usual place of business, at
least three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special meeting
need not be given to any director who, either before or after the meeting, shall
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver of notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two (unless
there is only one director) of the members of the entire Board shall be present
in person at any meeting of the Board in order to constitute a quorum for the
transaction of business at such meeting, and except as otherwise expressly
required by Maryland General Corporation Law, the Charter, these By-Laws, the
Investment Company Act, or other applicable statute, the act of a majority of
the directors present at any meeting at which a quorum is present shall be the
act of the Board. In the absence of a quorum at any meeting of the Board, a
majority of the directors present thereat may adjourn such meeting to another
time and place until a quorum shall be present thereat. Notice of the time and
place of any such adjourned meeting shall be given to the directors who were not
present at the time of the adjournment and, unless such time and place were
announced at the meeting at which the adjournment was taken, to the other
directors. At any adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the meeting as originally
called.
Section 14. Organization. The Board, by resolution adopted by a
majority of the entire Board, may designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his or her
absence or inability to act, another director chosen by a majority of the
directors present, shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his or her absence or inability to act, any person appointed
by the Chairman) shall act as secretary of the meeting and keep the minutes
thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject
to the provisions of the Investment Company Act, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
the committee, as the case may be, consent thereto in writing, and the writings
or writing are filed with the minutes of the proceedings of the Board or the
committee.
Section 16. Compensation. Directors may receive compensation for
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
Directors to direct that the purchase, sale, retention and disposal of portfolio
securities and other assets and the other investment practices of the
Corporation at all times are consistent with the investment policies and
restrictions with respect to securities investments and otherwise of the
Corporation, as recited in the Prospectus of the Corporation included in the
registration statement of the Corporation relating to the initial public
offering of its capital stock, as filed with the Securities and Exchange
Commission and as required by the Investment Company Act (or as such investment
policies and restrictions may be modified by the Board of Directors, or, if
required, by a majority vote of the stockholders of the Corporation in
accordance with the Investment Company Act). The Board, however, may delegate
the duty of management of the assets and the administration of its day to day
operations to an individual or corporate management company and/or investment
adviser pursuant to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of renewals thereof, of
the Board of Directors and/or the stockholders of the Corporation in accordance
with the provisions of the Investment Company Act.
ARTICLE IV.
Committees
----------
Section 1. Executive Committee. The Board, by resolution adopted by a
majority of the entire board, may designate an Executive Committee consisting of
two or more of the directors of the Corporation, which committee shall have and
may exercise all of the powers and authority of the Board with respect to all
matters other than:
(i) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Charter;
(ii) the filling of vacancies on the Board of Directors;
(iii) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive Committee;
(iv) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the
Investment Company Act, or the taking of any other action required to be
taken by the Board of Directors by the Investment Company Act;
(v) the amendment or repeal of these By-Laws or the adoption of new
By-Laws;
(vi) the amendment or repeal of any resolution of the Board which by
its terms may be amended or repealed only by the Board;
(vii) the declaration of dividends and, except to the extent permitted
by law, the issuance of capital stock of the Corporation; and
(viii) the approval of any merger or share exchange which does not
require stockholder approval.
The Executive Committee shall keep written minutes of its proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors from
time to time, by resolution adopted by a majority of the whole Board, may
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the Board
of Directors, by resolution, may prescribe.
Section 3. General. One-third, but not less than two, of the members of
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of any
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or she or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall be
deemed to prevent the Board from appointing one or more committees consisting in
whole or in part of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any authority or
power of the Board in the management of the business or affairs of the
Corporation except as may be prescribed by the Board.
ARTICLE V.
Officers, Agents and Employees
------------------------------
Section 1. Number of Qualifications. The officers of the Corporation
shall be a President, a Secretary and a Treasurer, each of whom shall be elected
by the Board of Directors. The Board of Directors may elect or appoint one or
more Vice Presidents and also may appoint such other officers, agents and
employees as it may deem necessary or proper. Any two or more offices may be
held by the same person, except the offices of President and Vice President, but
no officer shall execute, acknowledge or verify any instrument in more than one
capacity. Such officers shall be elected by the Board of Directors each year a
meeting of the Board of Directors, each to hold office until the next meeting of
the stockholders and until his or her successor shall have been duly elected and
shall have qualified, or until his or her death, or until he or she shall have
resigned, or have been removed, as hereinafter provided in these By-Laws. The
Board from time to time may elect such officers (including one or more Assistant
Vice Presidents, one or more Assistant Treasurers and one or more Assistant
Secretaries) and such agents, as may be necessary or desirable for the business
of the Corporation. The President also shall have the power to appoint such
assistant officers (including one or more Assistant Vice Presidents, one or more
Assistant Treasurers and one or more Assistant Secretaries) as may be necessary
or appropriate to facilitate the management of the Corporation's affairs. Such
officers and agents shall have such duties and shall hold their offices for such
terms as may be prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at
any time by giving written notice of resignation to the Board, the Chairman of
the Board, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors. Such
removal shall be without prejudice to such person's contract rights, if any, but
the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her control.
Section 6. Bonds or Other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his or her duties, in such amount and
with such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), the President shall preside at all meetings of the stockholders
and of the Board of Directors. He or she shall have, subject to the control of
the Board of Directors, general charge of the business and affairs of the
Corporation. He or she may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he or she may
delegate these powers.
Section 8. Vice President. Each Vice President shall have such powers
and perform such duties as the Board of Directors or the President from time to
time may prescribe.
Section 9. Treasurer. The Treasurer shall:
(i) have charge and custody of, and be responsible for, all of the
funds and securities of the Corporation, except those which the Corporation
has placed in the custody of a bank or trust company or member of a
national securities exchange (as that term is defined in the Exchange Act)
pursuant to a written agreement designating such bank or trust company or
member of a national securities exchange as custodian of the property of
the Corporation;
(ii) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(iii) cause all moneys and other valuables to be deposited to the
credit of the Corporation;
(iv) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(v) disburse the funds of the Corporation and supervise the investment
of its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(vi) in general, perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him
or her by the Board or the President.
Section 10. Secretary. The Secretary shall:
(i) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;
(ii) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(iii) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;
(iv) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly
kept and filed; and
(v) in general, perform all of the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him
or her by the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any officer
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI.
Indemnification
---------------
Section 1. General Indemnification. Each officer and director of the
Corporation shall be indemnified by the Corporation to the full extent permitted
under the Maryland General Corporation Law, except that such indemnity shall not
protect any such person against any liability to the Corporation or any
stockholder thereof to which such person otherwise would be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office. Absent a court
determination that an officer or director seeking indemnification was not liable
on the merits or guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office,
the decision by the Corporation to indemnify such person must be based upon the
reasonable determination of independent legal counsel or the vote of a majority
of a quorum of the directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to the proceeding
("non-party independent directors"), after review of the facts, that such
officer or director is not guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and to
the full extent permitted under the Maryland General Corporation Law; provided,
however, that the person seeking indemnification shall provide to the
Corporation a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met and a written undertaking to repay any such advance, if it ultimately should
be determined that the standard of conduct has not been met, and provided
further that at least one of the following additional conditions is met:
(i) the person seeking indemnification shall provide a security in
form and amount acceptable to the Corporation for his or her undertaking;
(ii) the Corporation is insured against losses arising by reason of
the advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion, shall determine, based on a
review of facts readily available to the Corporation at the time the
advance is proposed to be made, that there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Corporation may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under the Maryland
General Corporation Law, from liability arising from his or her activities as an
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any officer or director of the Corporation that
protects or purports to protect such person from liability to the Corporation or
to its stockholders to which such officer or director otherwise would be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
The Corporation may indemnify, make advances or purchase insurance to
the extent provided in this Article VI on behalf of an employee or agent who is
not an officer or director of the Corporation.
Section 2. Other Rights. The indemnification provided by this Article
VI shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of stockholders or
disinterested directors or otherwise, both as to action by a director or officer
of the Corporation in his or her official capacity and as to action by such
person in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such person.
ARTICLE VII.
Capital Stock
-------------
Section 1. Stock Certificates. Each holder of stock of the Corporation
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation owned by him or her, provided, however, that
certificates for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by or in the name of
the Corporation by the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with
the seal of the Corporation. Any or all of the signatures or the seal on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate shall be issued, it may be issued by the Corporation with the same
effect as if such officer, transfer agent or registrar were still in office at
the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall be
kept at the principal executive office of the Corporation correct and complete
books and records of account of all the business and transactions of the
Corporation.
Section 3. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
Section 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
certificates representing shares of stock of the Corporation immediately shall
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board, in its discretion, may require such owner or his or her legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions. The
Board may fix, in advance, a date not more than 90 days preceding the date fixed
for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of
the Corporation or his or her agent may inspect and copy during usual business
hours the Corporation's By-Laws, minutes of the proceedings of its stockholders,
annual statements of its affairs, and voting trust agreements on file at its
principal office.
ARTICLE VIII.
Seal
----
The seal of the Corporation shall be circular in form and shall bear,
in addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal" and "Maryland". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX.
Fiscal Year
-----------
The Board of Directors shall have the power from time to time to fix
the fiscal year of the Corporation by a duly adopted resolution.
ARTICLE X.
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of Directors of the
Corporation from time to time may determine.
Section 2. Custodians. All securities and other investments shall be
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation from time to time may determine. Every arrangement
entered into with any bank or other company for the safekeeping of the
securities and investments of the Corporation shall contain provisions complying
with the Investment Company Act, and the general rules and regulations
thereunder.
ARTICLE XI.
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution from time to time shall designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds or
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer or pursuant
to any procedure approved by the Board of Directors, subject to applicable law.
ARTICLE XII.
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange Commission shall be selected annually by the Board of Directors and
ratified by the stockholders in accordance with the provisions of the Investment
Company Act.
ARTICLE XIII.
Annual Statement
----------------
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of the
Corporation and at such other times as may be directed by the Board. A report to
the stockholders based upon each such examination shall be mailed to each
stockholder of record of the Corporation on such date with respect to each
report as may be determined by the Board, at his or her address as the same
appears on the books of the Corporation. Such annual statement also shall be
available at the annual meeting of stockholders and shall be placed on file at
the Corporation's principal office in the State of Maryland, and if no annual
meeting is held pursuant to Article II, Section 1, such annual statement of
affairs shall be placed on file as the Corporation's principal office within 120
days after the end of the Corporation's fiscal year. Each such report shall show
the assets and liabilities of the Corporation as of the close of the period
covered by the report and the securities and other assets in which the funds of
the Corporation then were invested. Such report also shall show the
Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the period covered by the
report and any other information required by the Investment Company Act, and
shall set forth such other matters as the Board or such firm of independent
public accountants shall determine.
ARTICLE XIV.
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by the
affirmative vote of a majority of the Board of Directors. The stockholders shall
have no power to make, amend, alter or repeal By-Laws.
