As filed with the Securities and Exchange Commission on April 11, 2003
Securities Act File No. 333-_____
Investment Company Act File No. 811-21286
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. | |
Post-Effective Amendment No. | |
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 4 |X|
----------------------------
Preferred Income Strategies Fund, Inc.
(Exact Name of Registrant as Specified In Charter)
----------------------------
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(Registrant's Telephone Number, including Area Code): (609) 282-2800
-----------------------------
Terry K. Glenn
Preferred Income Strategies Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
-------------------------
Copies to:
Bradley J. Lucido, Esq. Frank P. Bruno, Esq.
FUND ASSET MANAGEMENT, L.P. SIDLEY AUSTIN BROWN & WOOD LLP
P.O. Box 9011 787 Seventh Avenue
Princeton, New Jersey 08543-9011 New York, New York 10019-6018
-------------------------
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any securities being registered on this form are to be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), other than securities offered in
connection with dividend or interest reinvestment plans, check the following
box. | |
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. |X|
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT
===================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Being Offering Price Aggregate Registration
Securities Being Registered Registered(1) Per Unit(1) Offering Price(1) Fee(2)
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Auction Market Preferred Stock.... 40 shares $25,000 $1,000,000 $80.90
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid to the designated lockbox of the Securities and Exchange Commission 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 of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated April 11, 2003
PROSPECTUS
$
Preferred Income Strategies Fund, Inc.
Auction Market Preferred Stock ("AMPS")
Shares, Series A
Shares, Series B
Shares, Series C
Shares, Series D
Shares, Series E
Liquidation Preference $25,000 Per Share
------------------------
Preferred Income Strategies Fund, Inc. is a recently organized,
diversified, closed-end management investment company. The primary investment
objective of the Fund is to provide common stockholders with current income.
The secondary investment objective of the Fund is to provide common
stockholders with capital appreciation. Under normal market conditions, at
least 80% of the Fund's assets will be invested in a portfolio of preferred
securities, including convertible preferred securities. The Fund intends to
invest at least 80% of its total assets in preferred securities or debt
securities that are rated investment grade or, if unrated, are considered by
the Fund's investment adviser to be of comparable quality. The Fund may invest
up to 20% of its total assets in preferred securities or debt securities that
are rated below investment grade or, if unrated, are considered by the Fund's
investment adviser to be of comparable quality. The Fund allocates its
investments among various industries and among issuers in such industries. The
Fund will invest at least 25% of its total assets in the industries comprising
the financial services sector. The Fund also will emphasize investments in the
industries comprising the utilities sector; however, the Fund will not invest
25% or more of its total assets in any one of the industries comprising the
utilities sector. Emphasis on these sectors may subject the Fund to certain
risks. Under current market conditions, the Fund expects to invest primarily
in fully taxable preferred securities. The Fund may invest without limitation
in U.S. dollar denominated securities of issuers domiciled outside the United
States. There can be no assurance that the Fund's investment objectives will
be realized.
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. The Fund's statement of additional information
contains further information about the Fund and is incorporated by reference
(legally considered to be part of this prospectus). You may request a free
copy by writing or calling the Fund at (800) 543-6217.
------------------------
Investing in the AMPS involves certain risks that are described in the
"Risk Factors and Special Considerations" section beginning on page of
this prospectus. The minimum purchase amount on the AMPS is $25,000.
Per Share Total
--------------------- -----------------
Public offering price................................ $25,000 $
Underwriting discount................................ $ $
Proceeds, before expenses, to the Fund............... $ $
The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.
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.
One certificate for each series of AMPS will be ready for delivery to the
nominee of The Depository Trust Company on or about , 2003.
-----------------
Merrill Lynch & Co.
-----------------
The date of this prospectus is , 2003.
TABLE OF CONTENTS
Page
----
Offering Summary.............................................................1
Risk Factors And Special Considerations......................................3
Financial Highlights.........................................................8
The Fund.....................................................................9
Use Of Proceeds..............................................................9
Capitalization...............................................................9
Portfolio Composition.......................................................10
Investment Objectives and Policies..........................................10
Other Investment Policies...................................................16
Description Of AMPS.........................................................26
The Auction.................................................................30
Rating Agency Guidelines....................................................38
Investment Advisory and Management Arrangements.............................39
Taxes.......................................................................40
Description of Capital Stock................................................41
Custodian...................................................................43
Underwriting................................................................44
Transfer Agent, Dividend Disbursing Agent and Registrar.....................45
Accounting Services Provider................................................45
Legal Opinions..............................................................45
Independent Auditors And Experts............................................45
Table of Contents of Statement of Additional Information....................46
Glossary ...................................................................47
-----------------
Information about the Fund can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Call 1-202-942-8090 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. 20549-0102.
-----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have 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
underwriters are 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 only as of the date
on the front cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that date.
OFFERING SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus and the statement of additional
information.
The Offering The Fund is offering a total of shares of
Auction Market Preferred Stock, Series A;
shares of Auction Market Preferred Stock, Series
B; shares of Auction Market Preferred Stock,
Series C; shares of Auction Market Preferred
Stock, Series D; and shares of Auction
Market Preferred Stock, Series E, each at a
purchase price of $25,000 per share plus
accumulated dividends, if any, from the date the
shares are first issued. The shares of AMPS are
being offered by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), as
underwriter.
The AMPS of each series will be shares of
preferred stock of the Fund that entitle their
holders to receive cash dividends at an annual
rate that may vary for the successive dividend
periods for each series. In general, except as
described below, each dividend period for each
series of AMPS following the initial dividend
period will be seven days in the case of Series
[ ] AMPS and 28 days in the case of Series [ ]
AMPS. The applicable dividend for a particular
dividend period will be determined by an auction
conducted on the business day next preceding the
start of that dividend period.
Investors and potential investors in shares of
AMPS of each series may participate in auctions
for the AMPS through their broker-dealers.
Generally, AMPS investors will not receive
certificates representing ownership of their
shares. Ownership of AMPS will be maintained in
book-entry form by the securities depository (The
Depository Trust Company) or its nominee for the
account of the investor's agent member (generally
the investor's broker-dealer). The investor's
agent member, in turn, will maintain records of
such investor's beneficial ownership of AMPS.
Dividends and Dividend
Periods Dividends on each series of AMPS will be
cumulative from the date the shares are first
issued and payable at the annualized cash
dividend rate for the initial dividend period on
the initial dividend payment as follows:
Initial Initial Dividend Initial Dividend
Dividend Period Payment
AMPS Series Rate Ending Date
----------- ---- ------ ----
A %
B %
C %
D %
E %
After the initial dividend period, each dividend
period for each series of AMPS will generally
consist of seven days in the case of Series [ ]
AMPS and 28 days in the case of Series [ ] AMPS;
provided however, that before any auction, the
Fund may decide, subject to certain limitations
and only if it gives notice to holders, to
declare a special dividend period of up to five
years.
After the initial dividend period, in the case of
dividend periods that are not special dividend
periods, dividends generally will be payable on
each succeeding [fourth] in the case of
the Series A AMPS, [fourth] in the case of
the Series B AMPS, [fourth] in the case of
the Series C AMPS, [fourth] in the case of
the Series D AMPS and [fourth] in the case
of the Series E AMPS.
Dividends for each series of AMPS will be paid
through the securities depository (The Depository
Trust Company) on each dividend payment date for
each series of AMPS.
For each subsequent dividend period, the auction
agent (The Bank of New York) will hold an auction
to determine the cash dividend rate on the shares
of each series of AMPS.
Determination of Maximum
Dividend Rates Generally, the applicable dividend rate for any
dividend period for shares of AMPS of each series
will not be more than the maximum applicable rate
attributable to such shares. The maximum
applicable rate for each series of AMPS will
depend on the credit rating assigned to the
shares and on the length of the dividend period.
The maximum applicable rate will be the applicable
percentage of the reference rate. The reference
rate is the applicable "AA" Composite Commercial
Paper Rate (for a dividend period or a special
dividend period of fewer than 183 days) or the
applicable U.S. Treasury Bill Rate (for a special
dividend period of 183 days or more). The
applicable percentage as so determined is further
subject to upward but not downward adjustment in
the discretion of the Board of Directors of the
Fund after consultation with the broker-dealers
participating in the auctions for the AMPS. The
applicable percentage is as follows:
Applicable
Percentage
of Reference
Credit Ratings Rate
-------------- ------------
Moody's Fitch
------- -----
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 225%
Below Baa3 Below BBB- 275%
There is no minimum applicable dividend rate for
any dividend period.
Asset Maintenance Under the Fund's Articles Supplementary creating
multiple series of AMPS (the "Articles
Supplementary"), the Fund must maintain:
o asset coverage of the AMPS as required by
the rating agencies rating the AMPS, and
o asset coverage of the AMPS of at least 200%
as required by the Investment Company Act of
1940 (the "1940 Act").
The Fund estimates that, based on the composition
of its portfolio at , 2003, asset
coverage of the AMPS as required by the 1940 Act
would be approximately % immediately after
the Fund issues the shares of AMPS offered by
this prospectus representing approximately [36%]
of the Fund's capital, or approximately [56%] of
the Fund's common stock equity, immediately after
the issuance of such AMPS.
Mandatory
Redemption If the required asset coverage is not maintained
or, when necessary, restored, the Fund must
redeem shares of AMPS at the price of $25,000 per
share plus accumulated but unpaid dividends
thereon (whether or not earned or declared). The
provisions of the 1940 Act may restrict the
Fund's ability to make such a mandatory
redemption.
Optional Redemption The Fund may, at its option, choose to redeem all
or a portion of the shares of AMPS of each series
on any dividend payment date at the price of
$25,000 per share, plus accumulated but unpaid
dividends thereon (whether or not earned or
declared) plus any applicable premium.
Liquidation
Preference The liquidation preference (that is, the amount
the Fund must pay to holders of AMPS if the Fund
is liquidated) of each share of AMPS will be
$25,000, plus an amount equal to accumulated but
unpaid dividends (whether or not earned or
declared).
Ratings The AMPS will be issued with a rating of Aaa from
Moody's Investors Service, Inc. ("Moody's") and
AAA from Fitch, Inc. ("Fitch").
Voting Rights The 1940 Act requires that the holders of AMPS
and any other preferred stock, voting as a
separate class, have the right to elect at least
two directors at all times and to elect a
majority of the directors at any time when
dividends on the AMPS or any other preferred
stock are unpaid for two full years. The Fund's
charter and the 1940 Act require holders of AMPS
and any other preferred stock to vote as a
separate class on certain other matters.
2
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund's AMPS should not constitute a complete
investment program.
Investment Considerations. Investors in AMPS should consider the
following factors:
o The credit ratings of the AMPS could be reduced while an investor
holds the AMPS.
o Neither broker-dealers nor the Fund are obligated to purchase shares
of AMPS in an auction or otherwise nor is the Fund required to
redeem shares of AMPS in the event of a failed auction.
o If sufficient bids do not exist in an auction, the applicable
dividend rate will be the maximum applicable dividend rate, and in
such event, owners of AMPS wishing to sell will not be able to sell
all, and may not be able to sell any, AMPS in the auction. As a
result, investors may not have liquidity of investment.
Secondary Market. The broker-dealers intend to maintain a secondary
trading market in the AMPS outside of auctions; however, they have no
obligation to do so and there can be no assurance that a secondary market for
the AMPS will develop or, if it does develop, that it will provide holders
with a liquid trading market. The AMPS will not be registered on any stock
exchange or on any automated quotation system. An increase in the level of
interest rates likely will have an adverse effect on the secondary market
price of the AMPS, and a selling shareholder may have to sell AMPS between
auctions at a price per share of less than $25,000.
Rating Agencies. The Fund will issue the AMPS only if the AMPS have
received a rating of Aaa from Moody's and AAA from Fitch. As a result of such
ratings the Fund will be subject to guidelines of Moody's, Fitch or one or
more substitute nationally recognized statistical ratings organizations that
may issue ratings for its preferred stock. These guidelines may impose asset
coverage or portfolio composition requirements that are more stringent than
those imposed by the 1940 Act and may prohibit or limit the use by the Fund of
certain portfolio management techniques or investments. The Fund does not
expect these guidelines to prevent the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objectives and
policies.
Interest Rate Risk. The Fund issues shares of AMPS, which generally pay
dividends based on short-term interest rates. The Fund generally will purchase
preferred and debt securities that pay fixed or adjustable rate dividends. If
short-term interest rates rise, dividend rates on the shares of AMPS may rise
so that the amount of dividends paid to the holders of shares of AMPS exceeds
the income from the Fund's portfolio securities. Because income from the
Fund's entire investment portfolio (not just the portion of the portfolio
purchased with the proceeds of the AMPS offering) is available to pay
dividends on the shares of AMPS, dividend rates on the shares of AMPS would
need to greatly exceed the Fund's net portfolio income before the Fund's
ability to pay dividends on the shares of AMPS would be jeopardized. If market
interest rates rise, this could negatively impact the value of the Fund's
investment portfolio, reducing the amount of assets serving as asset coverage
for the AMPS.
Market Risk and Selection Risk. Market risk is the risk that the market
will go down in value, including the possibility that the market will go down
sharply and unpredictably. Selection risk is the risk that the securities that
Fund management selects will underperform the relevant market indices, or
other funds with similar investment objectives and investment strategies.
Preferred Securities. The Fund invests primarily in a portfolio of
preferred securities, including convertible preferred securities that may be
converted into common stock or other securities of the same or a different
issuer. There are special risks associated with investing in preferred
securities:
o Subordination. Investments in preferred securities entail a higher
level of credit risk than more senior debt instruments because
preferred securities are subordinated to bonds and other debt
instruments in an issuer's capital structure in terms of priority to
corporate income and liquidation payments.
o Limited Voting Rights. Holders of preferred securities usually have
no voting rights with respect to the issuing company, although
certain types of preferred securities provide their holders with the
right to elect directors if preferred dividends have been in arrears
for a specified number of periods. When those voting rights apply,
once the issuer pays all the arrearages, the preferred security
holders no longer have voting rights.
o Redemption Rights. Certain preferred securities may contain special
redemption features that grant the issuer of the preferred
securities a right to redeem the securities prior to a specified
date. As with all call provisions, a special redemption by the
issuer may negatively impact the return of the security held by the
Fund.
3
o Deferral. Preferred securities also may include provisions that
require or permit the issuer, at its discretion, to defer dividend
distributions for a stated period or periods without any adverse
consequences to the issuer. If the Fund owns a preferred security
that is deferring its dividend distributions, the Fund may be
required to report and possibly distribute income for tax purposes
although it has not yet received such income.
o Liquidity. Preferred securities may be substantially less liquid
than many other securities, such as common stocks.
o Non-Cumulative Preferred Securities. Dividends on non-cumulative
preferred securities do not accrue. Unlike cumulative preferred
securities, if a dividend on a share of non-cumulative preferred
stock is not paid on the dividend payment date, that dividend
ordinarily will never be paid.
o Auction Rate or Remarketed Preferred Securities. Auction rate or
remarketed preferred securities are adjustable preferred securities
the dividends on which are determined at periodically held auctions
or through remarketings. If sufficient bids do not exist at an
auction (in case of auction rate preferred securities) or if a
failed remarketing occurs (in the case of remarketed preferred
securities), the Fund may not be able to sell all, and may not be
able to sell any, of its auction rate or remarketed preferred
securities through the auction or remarketing process. As a result,
the Fund's investment in such stock may be illiquid.
Dividends Received Deduction. Based on the current market for preferred
securities, the Fund expects to invest primarily in taxable preferred
securities the income from which does not qualify for the Dividends Received
Deduction under Section 243 of the Code. The Dividends Received Deduction
generally allows corporations to deduct 70% of dividends received from
domestic corporations from their income. Since, the Fund currently expects to
invest primarily in taxable preferred securities, most of the Fund's
distributions will not qualify for the Dividends Received Deduction. In
addition, it is expected that Fund distributions derived from income on
taxable preferred securities will not be excludable from taxable income under
certain proposals currently being discussed by federal government officials.
Discussion of these proposals is ongoing, so their impact on the Fund and its
stockholders cannot be predicted. Changes in the tax treatment of preferred
securities and payments thereon may result in an increase in the supply of and
demand for preferred securities making payments eligible for the Dividends
Received Deduction. If such changes in the preferred securities market were to
occur, the Fund may invest a greater percentage of its assets in preferred
securities making payments eligible for the Dividends Received Deduction then
is currently anticipated.
Tax and Accounting Risk. The Fund may invest in preferred securities or
other securities the federal income tax treatment of which may not be clear or
may be subject to recharacterization by the Internal Revenue Service. It could
be more difficult for the Fund to comply with the tax requirements applicable
to regulated investment companies if the tax characterization of the Fund's
investments or the tax treatment of the income from such investments were
successfully challenged by the Internal Revenue Service. Additionally, the
Financial Accounting Standards Board currently is reviewing accounting
guidelines relating to taxable preferred securities. To the extent that a
change in the guidelines could adversely affect the market for, and
availability of, these securities, the Fund may be adversely affected.
Investment Emphasis. Under normal market conditions, the Fund will invest
at least 25% of its total assets in the industries comprising the financial
services sector. The Fund also will emphasize investments in the utilities
sector; however, the Fund will not invest 25% or more of its total assets in
any one of the industries comprising the utilities sector. The Fund is
expected to have significant exposure to the companies comprising the
financial services industries and, to a lesser extent, to the utilities
industries. As a result, the Fund's investments may be subject to greater risk
and market fluctuation than a fund that invests in securities representing a
broader range of investment alternatives. These policies also make the Fund
more susceptible to adverse economic or regulatory occurrences affecting the
financial services and utilities industries.
Financial Services Sector Risk. The Fund's emphasis on securities of
financial services companies makes it more susceptible to adverse conditions
affecting such industries than a fund that does not have its assets invested
to a similar degree in such issuers. Issuers in the financial services sector
are subject to a variety of factors that may
4
adversely affect their business or operations, including extensive regulation
at the federal and/or state level and, to the extent that they operate
internationally, in other countries, changes in prevailing interest rates,
general economic conditions and other industry specific risks. See "Other
Investment Policies--Investment Emphasis" herein.
Utilities Sector Risk. The Fund's emphasis on securities of utilities
issuers makes it more susceptible to adverse conditions affecting such
industries than a fund that does not have its assets invested to a similar
degree in such issuers. Issuers in the utilities sector are subject to a
variety of factors that may adversely affect their business or operations,
including high interest costs in connection with capital construction
programs, governmental regulations, the effects of economic slowdowns and
surplus capacity, increased competition from other providers of utility
services, technological innovations that may render existing plants, equipment
or products obsolete, inexperience with and potential losses resulting from a
developing deregulatory environment, increased costs and reduced availability
of certain types of fuel, occasionally reduced availability and high costs of
natural gas for resale, the effects of energy conservation, the effects of a
national energy policy and lengthy delays and greatly increased costs and
other problems associated with the design, construction, licensing, regulation
and operation of nuclear facilities for electric generation See "Other
Investment Policies--Investment Emphasis" herein.
Net Asset Value; Interest Rate Sensitivity; Credit Quality and Other
Market Conditions. Generally, when interest rates go up, the value of fixed
income securities, such as preferred and debt securities, goes down.
Therefore, the net asset value of a fund that invests in fixed income
securities changes as interest rates fluctuate. During periods of declining
interest rates, an issuer may exercise its option to redeem preferred
securities or prepay principal of debt securities earlier than scheduled,
forcing the Fund to reinvest in lower yielding securities. During periods of
rising interest rates, the average life of certain types of securities may be
extended because of slower than expected principal payments. This may lock in
a below market interest rate, increase the duration and reduce the value of
the security. A decline in the credit quality or financial condition of
issuers of fixed income securities in which the Fund invests may result in the
value of such securities held by the Fund, and hence the Fund's net asset
value, going down. A serious deterioration in the credit quality or financial
condition of an issuer could cause a permanent decrease in the Fund's net
asset value. Furthermore, volatility in the capital markets and other adverse
market conditions may result in a decrease in the value of the securities held
by the Fund. Given that the Fund uses market prices to value many of its
investments, any decrease in the market value of the fixed income securities
held by the Fund will result in a decrease in the Fund's net asset value.
Leverage. The Fund may borrow money, issue debt or issue shares of
preferred stock, including the AMPS. The Fund may borrow money and issue debt
securities in amounts up to 33 1/3%, and may issue shares of preferred stock,
including the AMPS, in amounts up to 50%, of the value of its total assets to
finance additional investments. Under current market conditions it is
anticipated that the AMPS will represent approximately [36%] of the Fund's
capital, including capital raised by the issuance of such AMPS. Leverage
creates certain risks, which can be significant. If the dividend rate on the
AMPS exceeds the net rate of return on the Fund's portfolio, the leverage will
result in a lower net asset value than if the Fund were not leveraged, and the
Fund's ability to pay dividends and meet its asset coverage requirements on
the AMPS would be reduced. Any decline in the net asset value of the Fund's
investments also could increase the risk of the Fund failing to meet its asset
coverage requirements, of losing its expected ratings on the AMPS or, in an
extreme case, of the Fund's current investment income not being sufficient to
meet the dividend requirements on the AMPS. As a result, the Fund may need to
liquidate investments in order to fund a redemption of some or all of the
AMPS. If the Fund is liquidated, preferred stockholders, including holders of
AMPS, will be entitled to receive liquidating distributions before any
distribution is made to the Fund's common stockholders.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset coverage,
borrowing base and portfolio composition requirements and additional covenants
that may affect the Fund's ability to pay dividends and distributions in
certain instances. The Fund also may be required to pledge its assets to the
lenders in connection with certain types of borrowings. Interest payments on
borrowings must be made prior to the payment of dividends on preferred stock,
including AMPS. If the Fund is liquidated while borrowings are outstanding,
lenders will be entitled to receive liquidating distributions before any
distribution is made to preferred stockholders, including holders of AMPS. As
long as the AMPS are rated by Moody's or Fitch, however, it is anticipated
that the use of borrowings for leverage will be prohibited. Some of the Fund's
portfolio management techniques also may provide investment leverage to the
Fund's portfolio as discussed below under "Portfolio Management Techniques."
5
Portfolio Management Techniques. The Fund may engage in various portfolio
strategies both to seek to increase the return of the Fund and to hedge its
portfolio against adverse effects from movements in interest rates and in the
securities markets. These strategies include the use of derivatives, such as
indexed securities, inverse securities, options, futures, options on futures,
interest rate transactions, credit default swaps and short sales. Such
strategies subject the Fund to the risk that, if the Investment Adviser
incorrectly forecasts market values, interest rates or other applicable
factors, the Fund's performance could suffer. Certain of these strategies such
as inverse securities, credit default swaps and short sales may provide
investment leverage to the Fund's portfolio. The Fund is not required to use
derivatives or other portfolio strategies to enhance income or to hedge its
portfolio and may not do so. There can be no assurance that the Fund's
portfolio strategies will be effective. Some of the derivative strategies that
the Fund may use to enhance its return are riskier than its hedging
transactions and have speculative characteristics. Such strategies do not
attempt to limit the Fund's risk of loss.
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. 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'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 liquid securities similar to those borrowed. The Fund will also be
required to segregate similar collateral with its custodian. 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. The
Fund also may make a short sale ("against the box") by selling a security that
the Fund owns or has the right to acquire without the payment of further
consideration. The Fund's potential for loss is greater if it does not own the
security that it is short selling.
Options and Futures Transactions. The Fund may engage in options and
futures transactions to reduce its exposure to interest rate movements or to
seek to enhance its return. If the Fund incorrectly forecasts market values,
interest rates or other factors, the Fund's performance could suffer. The Fund
also may suffer a loss if the other party to the transaction fails to meet its
obligations. The Fund is not required to enter into options and futures
transaction for hedging purposes or to enhance its return and may choose not
to do so.
Interest Rate Swaps. In order to hedge the value of the Fund's portfolio
against interest rate fluctuations or to enhance the Fund's return the Fund
may enter into interest rate swap transactions. In swap transactions, there is
a risk that yields will move in the direction opposite of the direction
anticipated by the Fund, which would cause the Fund to make payments to its
counterparty in the transaction that could adversely affect Fund performance.
The Fund is not required to enter into interest rate swaps for hedging
purposes or to enhance its return and may choose not to do so.
Foreign Securities. The Fund may invest without limitation in securities
of issuers domiciled outside the United States, provided that the securities
are U.S. dollar denominated or otherwise provide for payment to the Fund in
U.S. dollars. The Fund's investments in such issuers involve certain risks
that are not involved in domestic investments, including fluctuation in
foreign interest rates, future foreign political and economic developments and
the possible imposition of exchange controls or other governmental laws or
regulations.
Liquidity of Investments. Certain fixed income securities, including
preferred and debt securities, in which the Fund invests may 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.
Debt Securities. The Fund may invest up to 20% of its total assets in
debt securities. Debt securities, such as bonds, involve credit risk. This is
the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial
condition and on the terms of the bonds. These securities are also subject to
interest rate risk. This is the risk that the value of the security may fall
when interest rates rise. In general, the market price of debt securities with
longer maturities will go up or down more in response to changes in interest
rates than the market price of shorter term securities.
6
High Yield Securities. The Fund may invest up to 20% of its total assets
in preferred securities or debt securities that are rated below investment
grade or, if unrated, are considered by the Investment Adviser to be of
comparable quality. Non-investment grade securities are often referred to as
"high yield" securities, or in the case of non-investment grade debt
securities, "junk bonds." Investments in high yield securities entail a higher
level of credit risk (loss of income and/or principal) than investments in
higher rated securities. Securities rated in the lower rating categories are
considered to be predominantly speculative with respect to capacity to pay
interest and repay principal. Issuers of high yield securities may be highly
leveraged and may not have available to them more traditional methods of
financing. New issuers also may be inexperienced in managing their debt
burden. The issuer's ability to service its debt obligations may be adversely
affected by business developments unique to the issuer, the issuer's inability
to meet specific projected business forecasts or the inability of the issuer
to obtain additional financing. High yield securities are often unsecured and
subordinated to other creditors of the issuer.
Convertible Securities and Common Stock. The preferred securities and
debt securities in which the Fund invests may be convertible into the issuer's
or a related party's common shares. Convertible securities generally offer
lower dividend yields or interest rates than non-convertible securities of
similar quality. As with all fixed income securities, the market values of the
fixed convertible securities that the Fund may invest in tend to decline as
interest rates increase and, conversely, to increase as interest rates
decline. However, when the market price of the common stock underlying a
convertible security exceeds the conversion price, the convertible security
tends to reflect the market price of the underlying common stock. As the
market price of the underlying common stock declines, the convertible security
tends to trade increasingly on a yield basis and thus may not decline in price
to the same extent as the underlying common stock.
The Fund may invest up to 20% of its total assets in common stocks. The
Fund does not currently intend to invest directly in common stocks but may
acquire and hold common stocks pursuant to a convertible feature in a
security, in unit offerings, in an exchange offer, or in connection with a
restructuring or bankruptcy of the security or similar transactions. Common
stocks may be more susceptible to adverse changes in market value due to
issuer specific events or general movements in the equities markets.
Market Disruption. The terrorist attacks in the United States on
September 11, 2001 have had a disruptive effect on the securities markets,
some of which were closed for a four-day period. These terrorist attacks and
related events, including current U.S. military actions in Iraq, have led to
increased short term markets volatility and may have long term effects on U.S.
and world economies and markets. Similar disruptions of the financial markets
could impact interest rates, auctions, secondary trading, ratings, credit
risk, inflation and other factors relating to the Fund's AMPS.
Antitakeover Provisions. The Fund's Articles of Incorporation and By-laws
and the General Corporation Law of the State of Maryland include provisions
that could limit the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors. Such
provisions could limit the ability of stockholders to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund.
7
FINANCIAL HIGHLIGHTS
Information contained in the table below shows the unaudited operating
performance of the Fund from the commencement of the Fund's investment
operations on March 28, 2003, 2002 to , 2003. Since the Fund was
recently organized and commenced operations on March 28, 2003, the table
covers a portion of time during which a substantial portion of the Fund's
portfolio was held in temporary investments pending investment in longer term
securities that meet the Fund's investment objectives and policies.
Accordingly, the information presented may not provide a meaningful picture of
the Fund's operating performance.
For the Period
March 28, 2003+
to , 2003
===================
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Common stock net asset value, beginning of period............... $
-------------------
Investment income-- net.........................................
Realized and unrealized gain on investments-- net...............
-------------------
Total from investment operations................................
-------------------
Offering costs..................................................
-------------------
Investment income-- net.........................................
Common stock net asset value, end of period..................... $ .
===================
Market price per share, end of period........................... $ .
===================
Total Investment Return:**
Based on market price per share................................. ( . %)++
===================
Based on common stock net asset value per share................. . %++
===================
Ratios Based on Average Net Assets of Common Stock:
Total expenses.................................................. . %*
===================
Total investment income-- net................................... . %*
===================
Investment income-- net, to common stock shareholders........... . %*
===================
Ratios Based on Total Average Net Assets:
Total expenses.................................................. . %*
===================
Total investment income-- net................................... . %*
===================
Supplemental Data:
Net assets, applicable to common stock, end of period
(in thousands) $ ,
===================
Portfolio turnover.............................................. . %
===================
-----------------
* Annualized.
** Total investment returns based on market value, which can be significantly greater
or lesser than the net asset value, may result in substantially different returns.
Total investment returns exclude the effects of sales charges.
+ Commencement of operations.
++ Aggregate total investment return.
THE FUND
Preferred Income Strategies Fund, Inc. (the "Fund") is a recently
organized, diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on January 23, 2003, and
has registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund's principal office is located at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and its telephone number is (609) 282-2800.
The Fund commenced operations on March 28, 2003 upon the closing of an
initial public offering of 36,000,000 shares of its common stock. The net
proceeds of such offering were approximately $858,890,000 after the payment of
offering expenses and the deduction of the underwriting discount. In
connection with the initial public offering of the Fund's common stock, the
underwriters were granted an option to purchase up to an additional 5,400,000
shares of common stock to cover overallotments. On April 10, 2003, the Fund
issued an additional 2,000,000 shares of common stock pursuant to the
underwriters' partial exercise of the overallotment option for additional net
proceeds to the Fund of $47,750,000 after the deduction of the underwriting
discount.
8
The Board of Directors of the Fund may at any time consider a merger,
consolidation or other form of reorganization of the Fund with one or more
other closed-end investment companies advised by the Fund's investment adviser
with similar investment objectives and policies as the Fund. Any such merger,
consolidation or other form of reorganization would require the prior approval
of the Board of Directors and the stockholders of the Fund. See "Description
of Capital Stock--Certain Provisions of the Articles of Incorporation and
By-Laws."
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ after
payment of offering expenses (estimated to be $ ) and the deduction of
the underwriting discount.
Due to current illiquidity and scarcity of available securities in the
preferred securities markets, investments that in the judgment of the
Investment Adviser are appropriate investments for the Fund may not be
immediately available. Therefore, the Fund expects that there will be an
initial investment period of between [three and six months] following the
completion of this offering, depending on market conditions and the
availability of appropriate securities, before it is invested in accordance
with its investment objectives and policies. Pending such investment, it is
anticipated that all or a portion of the proceeds will be invested in U.S.
Government securities or high grade, short term money market instruments. See
"Investment Objectives and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund
as of , 2003 and as adjusted to give effect to the issuance of the
shares of AMPS offered hereby.
Actual As Adjusted
------------------ ---------------
Shareholders' equity:
Capital Stock (200,000,000 shares authorized)
Preferred stock, par value $.10 per share (no shares issued; shares of AMPS
issued and outstanding, as adjusted, at $25,000 per
share liquidation preference)............................................... -- $
================== ===============
Common stock, par value $.10 per share ( shares
issued and outstanding)..................................................... $
Capital in excess of par value attributable to common
stock.......................................................................
Undistributed investment income--net...........................................
Unrealized depreciation on investments--net....................................
------------------ ---------------
Net assets..................................................................... $ $
================== ===============
PORTFOLIO COMPOSITION
As of , 2003, approximately % of the market value of
the Fund's portfolio was invested in long term investments and approximately
% of the market value of the Fund's portfolio was invested in short term
investments. The following table sets forth certain information with respect
to the composition of the Fund's long term investments as of , 2003.
Number of Value
Moody's* Fitch* S&P* Issues (in thousands) Percent
-------------------- ------------------ -------------------- ----------------- -------------------- -----------------
Aaa AAA AAA $ %
Aa AA AA
A A A
Baa BBB BBB
Ba BB BB
B B B
9
(table continued)
Caa CCC CCC
Ca CC CC
C C C
DDD D
DD
D
-------------------- ----------------- -------------------- -----------------
Total........... $ %
==================== ================= ==================== =================
-------------
* Ratings: Using the higher of Moody's, Fitch or Standard & Poor's ("S&P") ratings on the Fund's long term
investments. See "Schedule of Investments." Moody's rating categories may be modified further by a 1, 2 or 3 in Aa,
A, Baa, Ba, B and Caa ratings. Fitch rating categories may be modified further by a plus (+) or minus (-) in AA, A,
BBB, BB, B and CCC. S&P rating categories may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and
CCC ratings.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is to provide common
stockholders with current income. The secondary investment objective of the
Fund is to provide common stockholders with capital appreciation. The Fund's
investment objectives are fundamental policies and may not be changed without
the approval of a majority of the outstanding voting securities of the Fund
(as defined in the 1940 Act).
The Fund seeks to achieve its objectives by investing primarily in a
portfolio of preferred securities, including convertible preferred securities
that may be converted into common stock or other securities of the same or a
different issuer ("preferred securities"). Under normal market conditions and
after the initial investment period following this offering, the Fund will
invest at least 80% of its assets in preferred securities. For this purpose,
"assets" means net assets, including assets acquired from the sale of AMPS or
other preferred stock, plus the amount of any borrowings for investment
purposes. This is a non-fundamental policy and may be changed by the Board of
Directors of the Fund provided that stockholders are provided with at least 60
days' prior notice of any change as required by the rules under the 1940 Act.
Under normal market conditions, the Fund intends to invest primarily in fully
taxable preferred securities. The Fund's portfolio of preferred securities may
include both fixed and adjustable rate securities. There can be no assurance
that the Fund's investment objectives will be realized.
The Fund may invest without limitation in securities of issuers domiciled
outside the United States that are U.S. dollar denominated investments or
otherwise provide for payment to the Fund in U.S. dollars.
The Fund allocates its investments among various industries and among
issuers in such industries based on the Investment Adviser's evaluation of
market and economic conditions. Under normal circumstances, the Fund will
invest at least 25% of its total assets in the industries comprising the
financial services sector. The Fund also will emphasize investments in the
utilities sector; however, the Fund will not invest 25% or more of its total
assets in any one of the industries comprising the utilities sector. Emphasis
on these sectors may subject the Fund to certain risks.
Under normal market conditions and after the initial investment period
following this offering, the Fund will invest at least 80% of its total assets
in preferred securities or debt securities that are rated investment grade by
the established rating services (Baa or higher by Moody's Investors Service,
Inc. ("Moody's"), BBB or higher by Standard & Poor's ("Standard & Poor's") or
BBB or higher by Fitch, Inc. ("Fitch")) or, if unrated, are considered by Fund
Asset Management, L.P. (the "Investment Adviser") to be of comparable quality.
The Fund may invest up to 20% of its total assets in securities rated below
investment grade (Ba or lower by Moody's, BB or lower by Standard & Poor's or
BB or lower by Fitch) or, if unrated, are considered by the Investment Adviser
to be of comparable quality, provided that such securities are issued by an
issuer having outstanding a class of senior debt rated investment grade.
Securities rated Baa by Moody's, BBB by Standard & Poor's or BBB by
Fitch, although investment grade, are considered to have speculative
characteristics. Securities rated Baa by Moody's are considered by Moody's as
medium to lower medium grade securities; they are neither highly protected nor
poorly secured; dividend or interest payments and capital or principal
security, as the case may be, appear to Moody's to be adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over time; and in the opinion of
10
Moody's, securities in this rating category lack outstanding investment
characteristics. Standard & Poor's regards such securities as having an
adequate capacity to pay dividends or interest and repay capital or principal,
as the case may be; whereas such securities normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely, in the opinion of Standard & Poor's, to lead to a weakened
capacity to pay dividends or interest and repay capital or principal for
securities in this category than in higher rating categories. Securities rated
BBB by Fitch are considered by Fitch to have adequate capacity for timely
payment of financial commitments, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. Securities rated
Ba by Moody's, BB by Standard & Poor's and BB by Fitch are considered to have
speculative elements and a greater vulnerability to default than higher rated
securities. Below investment grade securities and comparable unrated
securities involve substantial risk of loss, are considered speculative with
respect to the issuer's ability to pay interest and any required redemption or
principal payments and are susceptible to default or decline in market value
due to adverse economic and business developments. The descriptions of the
investment grade rating categories by Moody's, Standard & Poor's and Fitch,
including a description of their speculative characteristics, are set forth in
Appendix A. All references to securities ratings by Moody's, Standard & Poor's
and Fitch in this prospectus shall, unless otherwise indicated, include all
securities within each such rating category (i.e., Baa1, Baa2 and Baa3 in the
case of Moody's, BBB+ and BBB- in the case of Standard & Poor's and BBB+ and
BBB- in the case of Fitch). All percentage and ratings limitations on
securities in which the Fund may invest apply at the time of making an
investment and shall not be considered violated if an investment rating is
subsequently downgraded to a rating that would have precluded the Fund's
initial investment in such security or weighted average portfolio. In the
event that the Fund disposes of a portfolio security subsequent to its being
downgraded, the Fund may experience a greater risk of loss than if such
security had been sold prior to such downgrade.
The Fund also may invest up to 20% of its total assets in common stocks.
The Fund does not currently intend to invest directly in common stocks but may
acquire and hold common stocks pursuant to a convertible feature in a
security, in unit offerings, in an exchange offer, or in connection with a
restructuring or bankruptcy of the security or similar transactions.
The allocation of the Fund's assets in various types of preferred, debt
and equity securities may vary from time to time depending on the Investment
Adviser's assessment of market conditions.
The Fund may engage in various portfolio strategies to seek to enhance
its return or to hedge its portfolio against movements in interest rates
through the use of derivatives, such as indexed and inverse securities,
options, futures, options on futures, interest rate transactions, credit
default swaps and short selling. Each of these portfolio strategies is
described below. There can be no assurance that the Fund will employ these
strategies or that, if employed, they will be effective.
The Fund may vary its investment policies for temporary defensive
purposes during periods in which the Investment Adviser believes that
conditions in the securities markets or other economic, financial or political
conditions warrant. Under such conditions, the Fund for temporary defensive
purposes may invest up to 100% of its total assets in securities issued or
guaranteed by the United States Government or its instrumentalities or
agencies, certificates of deposit, bankers' acceptances and other bank
obligations, commercial paper rated in the highest category by an established
rating agency, or other debt securities deemed by the Investment Adviser to be
consistent with a defensive posture, or may hold its assets in cash.
For so long as the AMPS are rated by Moody's or Fitch, the Fund's use of
certain portfolio management techniques or investments will be subject to
limitations described under "Rating Agency Guidelines" herein and in the
statement of additional information.
The Fund may invest in, among other things, the types of instruments
described below:
Description of Preferred Securities
General. Under normal market conditions and after the initial investment
period following the Fund's common stock offering, the Fund will invest at
least 80% of its total assets in preferred securities. Generally, preferred
securities receive dividends in priority to distributions on common stock and
usually have a priority of
11
claim over common stockholders if the issuer of the stock is liquidated.
Preferred securities include "hybrid" or taxable preferred securities and
traditional preferred stocks whose dividends qualify for the Dividends
Received Deduction as described below. Preferred securities have certain
characteristics of both debt and equity securities. Like debt securities,
preferred securities' rate of income is generally contractually fixed. Like
equity securities, preferred securities do not have rights to precipitate
bankruptcy filings or collection activities in the event of missed payments.
Furthermore, preferred securities are generally in a subordinated position in
an issuer's capital structure and their value is heavily dependent on the
profitability of the issuer rather than on any legal claims to specific assets
or cash flows.
Taxable Preferred Securities. Based on current market conditions, the
Fund intends to invest primarily in taxable preferred securities (often
referred to as "hybrid" preferred securities), the payments on which are not
eligible for the dividends received deduction allowed to corporate
shareholders ("Dividends Received Deduction") pursuant to Section 243 of the
Internal Revenue Code of 1986, as amended (the "Code"). Such payments
constitute deductible interest expense for issuers thereof rather than
dividends eligible for the Dividends Received Deduction. Pursuant to Section
243 of the Code, corporations generally may deduct 70% of the dividend income
they receive from domestic corporations. Corporate stockholders of a regulated
investment company, for which status the Fund intends to qualify, generally
are permitted to claim a deduction with respect to that portion of their
dividend distributions attributable to amounts received by the regulated
investment company that qualify for the Dividends Received Deduction. However,
many preferred securities pay dividends that are not eligible for the
Dividends Received Deduction. The taxable preferred securities in which the
Fund intends to invest typically offer additional yield spread versus other
types of preferred securities due to the fact that payments made with respect
to such preferred securities do not qualify for the Dividends Received
Deduction. Accordingly, any corporate stockholder should assume that none of
the distributions it receives from the Fund will qualify for the Dividends
Received Deduction. In addition, it is expected that Fund distributions
derived from income on taxable preferred securities will not be excludable
from taxable income under certain proposals currently being discussed by
federal government officials. Discussion of these proposals is ongoing, so
their impact on the Fund and its stockholders cannot be predicted. Changes in
the tax treatment of preferred securities and payments thereon may result in
an increase in the supply of and demand for preferred securities making
payments eligible for the Dividends Received Deduction. If such changes in the
preferred securities market were to occur, the Fund may invest a greater
percentage of its assets in preferred securities making payments eligible for
the Dividends Received Deduction than is currently anticipated. Taxable
preferred securities are a comparatively new asset class. Taxable preferred
securities include but are not limited to: trust originated preferred
securities, monthly income preferred securities, quarterly income bond
securities, quarterly income debt securities, quarterly income preferred
securities, corporate trust securities, public income notes and other trust
preferred securities.
Taxable preferred securities are typically issued by an affiliated
business trust of a corporation, generally in the form of beneficial interests
in subordinated debentures or similarly structured securities. The taxable
preferred securities market consists of both fixed and adjustable coupon rate
securities that are either perpetual in nature or have stated maturity dates.
The taxable preferred securities market is generally divided into the "$25
par" and the "institutional" segments. The $25 par segment is typified by
securities that are listed on the New York Stock Exchange (the "NYSE"), which
trade and are quoted "flat"(i.e., without accrued dividend income that is not
included in the trading price) and which are typically callable at par value
five years after their original issuance date. The institutional segment is
typified by $1,000 par value securities that are not exchange listed, which
trade and are quoted on an "accrued income" basis, and which typically have a
minimum of 10 years of call protection (at premium prices) from the date of
their original issuance.
Taxable preferred securities normally constitute junior and fully
subordinated liabilities of an issuer or the beneficiary of a guarantee that
is junior and fully subordinated to the other liabilities of the guarantor. In
addition, taxable preferred securities often permit the issuer to defer the
payment of income for a specified period, which may be eighteen months or
more, without triggering an event of default. Because of their subordinated
position in the capital structure of an issuer, the ability to defer payments
for extended periods of time without adverse consequence to the issuer, and
certain other features (such as restrictions on common dividend payments by
the issuer or ultimate guarantor when cumulative payments on the taxable
preferred securities have not been made), issuers and investors generally
treat taxable preferred securities as close substitutes for traditional
preferred securities. Taxable preferred securities have many of the key
characteristics of equity due to their subordinated position in an issuer's
capital
12
structure and because their quality and value are heavily dependent on the
profitability of the issuer rather than on any legal claims to specific assets
or cash flows.
Taxable preferred securities are often issued with a final maturity date,
although some are perpetual in nature. In certain instances, the final
maturity date may be extended and/or the final payment of principal may be
deferred at the issuer's option for a specified time without any adverse
consequence to the issuer. No redemption can typically take place unless all
cumulative payment obligations have been met, although issuers may be able to
engage in open-market repurchases without regard to any cumulative dividends
payable. A portion of the portfolio may include investments in non-cumulative
preferred securities, whereby the issuer does not have an obligation to make
up any arrearages to its stockholders. Should an issuer default on its
obligations under such a security, the amount of dividends the Fund pays to
stockholders may be adversely affected.
Many taxable preferred securities are issued by trusts or other special
purpose entities established by operating companies, and are not direct
obligations of the operating company. At the time a trust or special purpose
entity sells its preferred securities to investors, the trust or special
purpose entity purchases debt of the operating company (with terms comparable
to those of the securities issued by the trust or special purpose entity),
which enables the operating company to deduct for federal income tax purposes
the interest paid on the debt held by the trust or special purpose entity. The
trust or special purpose entity is generally required to be treated as
transparent for federal income tax purposes such that the holders of the
taxable preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company.
Accordingly, dividend payments made with respect to such taxable
preferred securities are treated as interest rather than dividends for federal
income tax purposes and, as such, are not eligible for the Dividends Received
Deduction. The trust or special purpose entity in turn would be a holder of
the operating company's debt and would have priority with respect to the
operating company's assets over the operating company's common stockholders,
but would typically be subordinated to other classes of the operating
company's debt. Typically a taxable preferred security has a rating that is
slightly below that of its corresponding operating company's senior debt
securities. As a result of their subordinated position in an issuer's capital
structure, taxable preferred securities typically offer investors a higher
interest payment compared to the senior debt securities of the operating
company.
Traditional Fixed Rate Preferred Securities. Unlike taxable preferred
securities, traditional fixed rate preferred securities generally have fixed
dividend rates for the life of the issue and typically, unless issued by a
foreign corporation, pay dividends that qualify for the Dividends Received
Deduction. They can be perpetual, with no mandatory redemption date, or issued
with a fixed mandatory redemption date. Certain issues of preferred securities
are convertible into other equity securities. Perpetual preferred securities
provide a fixed dividend throughout the life of the issue, with no mandatory
retirement provisions, but may be callable. Sinking fund preferred securities
provide for the redemption of a portion of the issue on a regularly scheduled
basis with, in most cases, the entire issue being retired at a future date.
The value of fixed rate preferred securities can be expected to vary inversely
with interest rates. Certain fixed rate preferred securities have features
intended to provide some degree of price stability. These features may include
an auction mechanism at some specified future date. The auction feature is
normally intended to enhance the probability that a preferred securities
stockholder will be able to dispose of its holdings close to a pre-specified
price, typically equal to par or a stated value. Other price stability
mechanisms include convertibility into an amount of common equity of the same
issuer at some specified future date, typically in amounts not greater than
par value of the underlying preferred securities. Another common form of fixed
rate preferred securities is the traditional convertible preferred security,
which permits the holder to convert into a specified number of shares at the
holder's option at any time prior to a specified date. Innovative preferred
securities and convertible preferred securities are less liquid than the
traditional fixed rate preferred security.
Dividends on any series of preferred stock may be cumulative or
non-cumulative. Cumulative dividends accumulate until paid out, so if on the
dividend payment date no dividend is declared such obligation will exist and
take precedence over any common stock dividends until paid out. Non-cumulative
dividends do not accrue and any omitted dividends will never be paid.
Adjustable Rate Preferred Securities. Unlike traditional fixed rate
preferred securities, adjustable rate preferred securities are preferred
securities that have a dividend rate that adjusts periodically to reflect
changes in the general level of interest rates. Adjustable rate preferred
securities generally pay dividends that qualify for the
13
Dividends Received Deduction. The adjustable feature is intended to make the
market value of these securities less sensitive to changes in interest rates
than similar securities with fixed dividend rates.
The dividend rate on adjustable rate preferred securities typically is
determined quarterly according to an adjustment formula established at the
time of issuance of such securities that cannot be changed without approval of
the holders thereof. Although adjustment formulas vary among issues, they
typically involve a fixed relationship either to: (1) rates on specific
classes of debt securities issued by the U.S. Treasury, such as the highest
base rate yield of the 90-day Treasury bill, the 10-year Treasury note, or
either the 20-year or 30-year Treasury bond or (2) London Interbank Offered
Rate, with limits (known as "collars") on the minimum dividend rate that may
be paid. As the maximum dividend rate is approached, any further increase in
interest rates may adversely affect the market value of the stock. As the
minimum dividend rate is approached, any further decrease in interest rates
may positively affect the market value of the preferred securities.
The market values of outstanding issues of adjustable rate preferred
securities may fluctuate in response to changing market conditions. In the
event that market participants in a particular issue demand a different yield
than the adjustment formulas produce, the market price will change to produce
the desired yield. The dividend yield demanded by market participants may vary
with changing perceptions of credit quality and the relative levels of short
term and long term interest rates, as well as other factors. Most of the
adjustable rate preferred securities currently outstanding are perpetual.
Auction Rate Preferred Securities. Auction rate preferred securities pay
dividends that adjust based upon periodic auctions. Such preferred securities
are similar to short term corporate money market instruments in that an
auction rate preferred stockholder has the opportunity to sell the preferred
securities at par in an auction, through which buyers set the dividend rate in
a bidding process for the next pre-determined dividend period. The dividend
rate set in the auction depends upon market conditions and the credit quality
of the particular issuer. Typically, the auction rate preferred securities'
dividend rate is limited to a specified maximum percentage of an external
commercial paper index as of the auction date. Further, the terms of auction
rate preferred securities generally provide that they are redeemable by the
issuer at certain times or under certain conditions.
Remarketed Preferred Securities. Like buyers of auction rate preferred
securities, buyers of shares of a series of remarketed preferred securities
receive a uniform dividend rate. In a remarketing, however, unlike an auction,
the dividend rate and dividend period are set by remarketing agents, taking
into account sell and hold orders from existing holders, the rates and number
of shares sought by potential buyers and prevailing market conditions. During
the remarketing process, remarketing agents use their reasonable best efforts
to remarket the remarketed preferred securities tendered for sale in the
remarketing. The dividend rate for each dividend period will be the rate per
annum that the remarketing agents determine, in their sole discretion, to be
the lowest rate, giving effect to the allocation of shares of remarketed
preferred stock among dividend periods of different lengths, that will enable
the remarketing agents to sell at par all shares tendered for sale in the
remarketing.
--------------------------
From time to time, preferred securities issues have been, and may in the
future be, offered having features other than those described herein. The Fund
reserves the right to invest in these securities if the Investment Adviser
believes that doing so would be consistent with the Fund's investment
objectives and policies. Since the market for these instruments would be new,
the Fund may have difficulty disposing of them at a suitable price and time.
In addition to limited liquidity, these instruments may present other risks,
such as high price volatility.
Description of Convertible Securities
A convertible security is a bond, debenture, note or preferred security
that may be converted into or exchanged for a prescribed amount of common
stock or other securities of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred securities until the convertible
security matures or is redeemed, converted or exchanged. Convertible
securities have several unique investment characteristics such as (i) higher
yields than common stocks, but lower yields than comparable nonconvertible
securities, (ii) a lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics, and (iii) the
14
potential for capital appreciation if the market price of the underlying
common stock increases. Holders of convertible securities have a claim on the
assets of the issuer prior to the common stockholders but may be subordinated
to similar non-convertible securities of the same issuer. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund may
be required to permit the issuer to redeem the security, convert it into the
underlying common stock or other securities or sell it to a third party.
Description of Debt Securities
The Fund may invest up to 20% of its total assets in debt securities with
ratings equivalent to those of the preferred securities in which the Fund may
invest. Debt securities in which the Fund may invest include: securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
and custodial receipts therefor; securities issued or guaranteed by a foreign
government or any of its political subdivisions, authorities, agencies or
instrumentalities or by international or supranational entities; corporate
debt securities including notes, bonds and debentures; certificates of deposit
and bankers' acceptances, or time deposits; commercial paper; and mortgage
related securities. These securities may be of any maturity. The value of debt
securities can be expected to vary inversely with interest rates.
Description of Common Stocks
The Fund may invest up to 20% of its total assets in common stocks. The
Fund currently has no intention to invest directly in common stocks but may
acquire and hold common stock pursuant to a convertible feature in a security,
in unit offerings, in an exchange offer, or in connection with a restructuring
or bankruptcy of a portfolio security or similar transaction. Common stocks
are shares of a corporation or other entity that entitle the holder to a pro
rata share of the profits, if any, of the corporation without preference over
any other stockholder or class of stockholders, including holders of such
entity's preferred securities and other senior equity securities. Common stock
usually carries with it the right to vote and frequently an exclusive right to
do so.
Illiquid Securities
The Fund may invest in preferred securities, debt securities and other
securities that lack a 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 upon disposition of the security,
which may be less than would be obtained for a comparable more liquid
security. The Fund has no limitation on the amount of its investments that are
not readily marketable or are subject to restrictions on resale. Such
investments may affect the Fund's ability to realize the net asset value in
the event of a voluntary or involuntary liquidation of its assets. See "Net
Asset Value" for information with respect to the valuation of illiquid
securities.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Investment Emphasis
Under normal market conditions, the Fund will invest at least 25% of its
total assets in the industries comprising the financial services sector. The
Fund also expects to have significant exposure to the industries comprising
the utilities sector. If adverse economic conditions prevail in the financial
services industries sector at some future date, the Fund, for defensive
purposes may temporarily invest less than 25% of its total assets in the
industries comprising the financial services sector.
Financial Services. Under normal market conditions, the Fund will invest
at least 25% of its total assets in securities issued by companies in the
industries comprising the financial services sector. The companies in the
financial services sector are companies principally engaged in financial
services. A company is principally engaged in financial services if it owns
financial service related assets that constitute at least 50% of its revenue
from
15
providing financial services. The financial services industries includes bank
holding companies, commercial banks, industrial banks, savings institutions,
credit unions, finance companies, diversified financial services companies,
investment banking firms, securities brokerage houses, commodity brokerage
houses, investment advisory companies, leasing companies, life insurance
companies, property insurance companies, casualty insurance companies,
multi-line insurance companies and companies providing similar services.
The Fund's emphasis on securities of financial services companies makes
it more susceptible to adverse conditions affecting such industries than a
fund that does not have its assets invested to a similar degree in such
issuers. Issuers in the financial services sector are subject to a variety of
factors that may adversely affect their business or operations, including
extensive regulation at the federal and/or state level and, to the extent that
they operate internationally, in other countries. Each of these industries
also may be significantly affected by changes in prevailing interest rates,
general economic conditions and industry specific risks. The enactment of new
legislation and regulation, as well as changes in the interpretation and
enforcement of existing laws and regulations, may directly affect the manner
of operations and profitability of participants in the financial services
sector. From time to time, changes in law and regulation have permitted
greater diversification of their financial products, but their ability to
expand by acquisition or branching across state lines and to engage in
non-banking activities continues to be limited. Federal or state law and
regulations require banks, bank holding companies, broker dealers and
insurance companies to maintain minimum levels of capital and liquidity. Bank
regulators have broad authority and can impose sanctions, including
conservatorship or receivership, on non- complying banks even when these banks
continue to be solvent, thereby possibly resulting in the elimination of
stockholders' equity.
Utilities. From time to time the Fund also will have significant exposure
to issuers in the industries comprising the utilities sector; however, the
Fund will not invest 25% or more of its total assets in any one of the
industries comprising the utilities sector. These industries include companies
primarily engaged in the generation, transmission, sale or distribution of
electric energy; the distribution, purification and treatment of water; the
provision of sewage management, treatment or other sanitary services; the
production, transmission or distribution of natural gas; and the provision of
pollution control or abatement services.
The Fund's emphasis on securities of utilities issuers makes it more
susceptible to adverse conditions affecting such industries than a fund that
does not have its assets invested to a similar degree in such issuers. Issuers
in the utilities sector are subject to a variety of factors that may adversely
affect their business or operations, including high interest costs in
connection with capital construction programs, governmental regulation of
rates charged to customers, costs associated with environmental and other
regulations, the effects of economic slowdowns and surplus capacity, increased
competition from other providers of utility services, technological
innovations that may render existing plants, equipment or products obsolete,
inexperience with and potential losses resulting from a developing
deregulatory environment, including losses and regulatory issues in connection
with energy trading, increased costs and reduced availability of certain types
of fuel, occasionally reduced availability and high costs of natural gas for
resale, the effects of energy conservation, and the potential that costs
incurred by the utility, such as the cost of fuel, change more rapidly than
the rate the utility is permitted to charge its customers, and the effects of
a national energy policy and lengthy delays and greatly increased costs and
other problems associated with the design, construction, licensing, regulation
and operation of nuclear facilities for electric generation, including, among
other considerations, the problems associated with the use of radioactive
materials and the disposal of radioactive wastes.
There are substantial differences between the regulatory practices and
policies of various jurisdictions, and any given regulatory agency may make
major shifts in policy from time to time. There is no assurance that
regulatory authorities will, in the future, grant rate increases or that such
increases will be adequate to permit the payment of dividends on preferred or
common stocks. Additionally, existing and possible future regulatory
legislation may make it even more difficult for these utilities to obtain
adequate relief. Certain of the issuers of securities held in the Fund's
portfolio may own or operate nuclear generating facilities. Governmental
authorities may from time to time review existing policies and impose
additional requirements governing the licensing, construction and operation of
nuclear power plants. Prolonged changes in climatic conditions can also have a
significant impact on both the revenues of an electric and gas utility as well
as the expenses of a utility, particularly a hydro-based electric utility.
The nature of regulation of the utility industries is evolving both in
the United States and in foreign countries. In recent years, changes in
regulation in the United States increasingly have allowed utility companies to
16
provide services and products outside their traditional geographic areas and
lines of business, creating new areas of competition within the industries. In
some instances, utility companies are operating on an unregulated basis.
Because of trends toward deregulation and the evolution of independent power
producers as well as new entrants to the field of telecommunications,
non-regulated providers of utility services have become a significant part of
their respective industries. The emergence of competition and deregulation may
result in certain utility companies being able to earn more than their
traditional regulated rates of return, while others may be forced to defend
their core business from increased competition and may be less profitable.
Reduced profitability, as well as new uses of funds (such as for expansion,
operations or stock buybacks) could result in cuts in dividend payout rates.
Indexed and Inverse Floating Obligations
The Fund may invest in securities whose potential returns are directly
related to changes in an underlying index or interest rate, known as indexed
securities. The return on indexed securities will rise when the underlying
index or interest rate rises and fall when the index or interest rate falls.
The Fund also may invest in securities whose return is inversely related to
changes in an interest rate ("inverse floaters"). In general, inverse floaters
change in value in a manner that is opposite to most bonds--that is, interest
rates on inverse floaters will decrease when short term rates increase and
increase when short term rates decrease. Investments in indexed securities and
inverse floaters may subject the Fund to the risk of reduced or eliminated
interest payments. Investments in indexed securities also may subject the Fund
to loss of principal. In addition, certain indexed securities and inverse
floaters may increase or decrease in value at a greater rate than the
underlying interest rate, which effectively leverages the Fund's investment.
As a result, the market value of such securities will generally be more
volatile than that of fixed rate securities. Both indexed securities and
inverse floaters can be derivative securities and can be considered
speculative.
Interest Rate Transactions
In order to hedge the value of the Fund's portfolio against interest rate
fluctuations or to enhance the Fund's return, 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 may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to seek to
enhance its return. However, the Fund also may invest in interest rate swaps
to seek to enhance income or to 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). The Fund is not required to pursue
these portfolio strategies and may choose not to do so. The Fund cannot
guarantee that any strategies it uses will work.
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 segregated 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 segregated by the
Fund's custodian.
17
The Fund also may engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. 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 (i.e., 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 ("NRSROs") 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 interest rate swaps. Payments from transactions in interest rate
swaps generally will be taxable as ordinary income to stockholders. See
"Taxes."
Credit Default Swap Agreements
The Fund may enter into credit default swap agreements. The credit
default swap agreement may have as reference obligations one or more
securities that are not currently held by the Fund. The protection "buyer" in
a credit default contract may be obligated to pay the protection "seller" an
upfront or a periodic stream of payments over the term of the contract
provided that no credit event on a reference obligation has occurred. If a
credit event occurs, the seller generally must pay the buyer the "par
value"(full notional value) of the swap in exchange for an equal face amount
of deliverable obligations of the reference entity described in the swap, or
the seller may be required to deliver the related net cash amount, if the swap
is cash settled. The Fund may be either the buyer or seller in the
transaction. If the Fund is a buyer and no credit event occurs, the Fund may
recover nothing if the swap is held through its termination date. However, if
a credit event occurs, the buyer generally may elect to receive the full
notional value of the swap in exchange for an equal face amount of deliverable
obligations of the reference entity that may have little or no value. As a
seller, the Fund generally receives an upfront payment or a fixed rate of
income throughout the term of the swap, which typically is between six months
and three years, provided that there is no credit event. If a credit event
occurs, generally the seller must pay the buyer the full notional value of the
swap in exchange for an equal face amount of deliverable obligations of the
reference entity that may have little or no value. As a seller, the Fund
generally receives an upfront payment or a fixed rate of income throughout the
term of the swap, which typically is between six months and three years,
provided that there is no credit event. If a credit event occurs, generally
the seller must pay the buyer the full notional value of the swap in exchange
for an equal face amount of deliverable obligations of the reference entity
that may have little or no value. As the seller, the Fund would effectively
add leverage to its portfolio because, in addition to its total net assets,
the Fund would be subject to investment exposure on the notional amount of the
swap.
Credit default swap agreements involve greater risks than if the Fund had
invested in the reference obligation directly since, in addition to general
market risks, credit default swaps are subject to illiquidity risk,
counterparty risk and credit risks. The Fund will enter into credit default
swap agreements only with counterparties who are rated investment grade
quality by at least one NRSRO at the time of entering into such transaction or
whose creditworthiness is believed by the Investment Adviser to be equivalent
to such rating. A buyer generally also will lose its investment and recover
nothing should no credit event occur and the swap is held to its termination
date. If a credit event were to occur, the value of any deliverable obligation
received by the seller, coupled with the upfront or periodic payments
previously received, may be less than the full notional value it pays to the
buyer, resulting in a
18
loss of value to the Fund. The Fund's obligations under a credit default swap
agreement will be accrued daily (offset against any amounts owing to the
Fund). The Fund will at all times segregate with its custodian in connection
with each such transaction unencumbered liquid securities or cash with a value
at least equal to the Fund's exposure (any accrued but unpaid net amounts owed
by the Fund to any counterparty), on a marked-to-market basis (as calculated
pursuant to requirements of the Securities and Exchange Commission (the
"Commission")). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction and will
avoid any potential leveraging of the Fund's portfolio. Such segregation will
not limit the Fund's exposure to loss.
Investments in Foreign Securities
The Fund may invest without limitation in preferred securities and debt
securities of issuers domiciled outside of the United States that are U.S.
dollar denominated or provide for payment to the Fund in U.S. dollars.
Investment in foreign securities involves certain risks not involved in
domestic investments.
Public Information. Many of the foreign securities held by the Fund will
not be registered with the Commission nor will the issuers thereof be subject
to the reporting requirements of such agency. Accordingly, there may be less
publicly available information about the foreign issuer of such securities
than about a U.S. issuer, and such foreign issuers may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of U.S. issuers. Traditional investment measurements, such
as price/earnings ratios, as used in the United States, may not be applicable
to such securities, particularly those issued in certain smaller, emerging
foreign capital markets. Foreign issuers, and issuers in smaller, emerging
capital markets in particular, generally are not subject to uniform
accounting, auditing and financial reporting standards or to practices and
requirements comparable to those applicable to domestic issuers.
Trading Volume, Clearance and Settlement. Foreign financial markets,
while often growing in trading volume, have, for the most part, substantially
less volume than U.S. markets, and securities of many foreign companies are
less liquid and their prices may be more volatile than securities of
comparable domestic companies. Foreign markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Further,
satisfactory custodial services for investment securities may not be available
in some countries having smaller, emerging capital markets, which may result
in the Fund incurring additional costs and delays in transporting and
custodying such securities outside such countries. Delays in settlement could
result in periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems or the risk of intermediary counterparty failures
could cause the Fund to miss attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell
the security, could result in possible liability to the purchaser.
Government Supervision and Regulation. There generally is less
governmental supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States. For example, there may
be no comparable provisions under certain foreign laws to insider trading and
similar investor protection securities laws that apply with respect to
securities transactions consummated in the United States. Further, brokerage
commissions and other transaction costs on foreign securities exchanges
generally are higher than in the United States.
Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by
foreign persons, or limit the amount of investment by foreign persons in a
particular company, or limit the investment by foreign persons in a company to
only a specific class of securities that may have less advantageous terms than
securities of the company available for purchase by nationals. Certain
countries may restrict investment opportunities in issuers or industries
deemed important to national interests.
A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their
capital markets. In accordance with the 1940 Act, the Fund may invest up to
10% of its total assets in securities of closed-end investment companies, not
more than 5% of which may be invested in any one such company. This
restriction on investments in securities of closed-end investment companies
may limit
19
opportunities for the Fund to invest indirectly in certain smaller capital
markets. Shares of certain closed-end investment companies may at times be
acquired only at market prices representing premiums to their net asset
values. If the Fund acquires shares in closed-end investment companies,
stockholders would bear both their proportionate share of the Fund's
(including investment advisory fees) and, indirectly, the expenses of such
closed-end investment companies. The Fund also may seek, at its own cost, to
create its own investment entities under the laws of certain countries.
Foreign Sub-Custodians and Securities Depositories. Rules adopted under
the 1940 Act permit the Fund to maintain its foreign securities and cash in
the custody of certain eligible non-U.S. banks and securities depositories.
Certain banks in foreign countries may not be eligible sub-custodians for the
Fund, in which event the Fund may be precluded from purchasing securities in
certain foreign countries in which it otherwise would invest or the Fund may
incur additional costs and delays in providing transportation and custody
services for such securities outside of such countries. The Fund may encounter
difficulties in effecting on a timely basis portfolio transactions with
respect to any securities of issuers held outside their countries. Other banks
that are eligible foreign sub-custodians may be recently organized or
otherwise lack extensive operating experience. In addition, in certain
countries there may be legal restrictions or limitations on the ability of the
Fund to recover assets held in custody by foreign sub-custodians in the event
of the bankruptcy of the sub-custodian.
Options
Call Options. 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 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.
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 in which 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 the 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 enters into 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 is authorized to write (i.e., sell) uncovered call options
on securities in which it may invest but that are not currently held by the
Fund. The principal reason for writing uncovered call options is to realize
income without committing capital to the ownership of the underlying
securities. When writing uncovered call options, the Fund must deposit and
maintain sufficient margin with the broker dealer through which it made the
uncovered call option as collateral to ensure that the securities can be
purchased for delivery if and when the option is exercised. In addition, the
Fund will segregate with its custodian in connection with each such
transaction unencumbered liquid securities or cash with a value at least equal
to the Fund's exposure (the difference between the unpaid amounts owed by the
Fund on such transaction minus any collateral deposited with the broker
dealer), on a marked-to-market basis (as calculated pursuant to requirements
of the Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction and will
avoid any potential leveraging of the Fund's portfolio. Such segregation will
not limit the Fund's exposure to loss. During periods of declining securities
prices or when prices are stable, writing uncovered calls can be a profitable
strategy to increase the Fund's income with minimal capital risk. Uncovered
calls are riskier than covered calls because there is no underlying security
held by the Fund that can act as a partial hedge. Uncovered calls have
speculative characteristics and the potential for loss is unlimited. When an
uncovered call is exercised, the Fund must purchase the underlying security to
meet its call obligation. There is also a risk, especially with less liquid
preferred and debt securities, that
20
the securities may not be available for purchase. If the purchase price
exceeds the exercise price, the Fund will lose the difference.
Put Options. The Fund is authorized to purchase put options to hedge
against a decline in the value of its securities or to enhance its return. By
buying a put option, the Fund acquires 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 that 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 is also authorized to write (i.e., sell) uncovered put options
on securities in which it may invest but that the Fund does not currently have
a corresponding short position or has not deposited cash equal to the exercise
value of the put option with the broker dealer through which it made the
uncovered put option as collateral. The principal reason for writing uncovered
put options is to receive premium income and to acquire a security at a net
cost below the current market value. The Fund has the obligation to buy the
securities at an agreed upon price if the securities decrease below the
exercise price. If the securities price increases during the option period,
the option will expire worthless and the Fund will retain the premium and will
not have to purchase the securities at the exercise price. The Fund will
segregate with its custodian in connection with such transaction unencumbered
liquid securities or cash with a value at least equal to the Fund's exposure,
on a marked-to-market basis (as calculated pursuant to requirements of the
Commission). Such segregation will ensure that the Fund has assets available
to satisfy its obligations with respect to the transaction and will avoid any
potential leveraging of the Fund's portfolio. Such segregation will not limit
the Fund's exposure to loss. The Fund also may purchase uncovered put options.
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 or to seek 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 (the "CFTC"). Transactions by the Fund in futures contracts and
financial futures are subject to limitations as described in the statement of
additional information under "Investment Objectives and Policies--Financial
Futures and Options Thereon."
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 that 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 also will
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
21
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 utilized 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 segregated 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
that 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 that 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.
22
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 that 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. The risk particularly applies to the Fund's use of
futures and options thereon when it generally uses 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. Utilization of options and futures and options thereon through
uncovered call options and uncovered put options are highly speculative
strategies. If the price of the uncovered option moves in the direction not
anticipated by the Fund, the Fund's losses will not be limited.
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 and 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 may make short
sales both as a form of hedging to offset potential declines in long positions
in similar securities and in order to seek to enhance return.
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 liquid securities similar to those borrowed. The Fund also
will be required to segregate similar collateral with its custodian to the
extent, if any, necessary so that the value of both collateral amounts 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 also may make short sales "against the box." These transactions
will involve either short sales of securities retained in the Fund's portfolio
or securities which it has the right to acquire without the payment of further
consideration.
Other Investment Strategies
Repurchase Agreements and Purchase and Sale Contracts. The Fund may
invest in securities pursuant to repurchase agreements and purchase and sale
contracts. Repurchase agreements and purchase and sale contracts may be
entered into only with a member bank of the Federal Reserve System or primary
dealer in U.S. Government
23
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; whereas, in the case of purchase and sale
contracts, the prices take into account accrued interest. Such agreements
usually cover short periods, such as under one week. 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; the Fund does not have the
right to seek additional collateral in the case of purchase and sale
contracts. 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.
A purchase and sale contract differs from a repurchase agreement in that the
contract arrangements stipulate that the securities are owned by the Fund. In
the event of a default under such a repurchase agreement or a purchase and
sale contract, 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.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with respect to its portfolio investments subject to the investment
restrictions set forth herein. Reverse repurchase agreements involve the sale
of securities held by the Fund with an agreement by the Fund to repurchase the
securities at an agreed upon price, date and interest payment. The use by the
Fund of reverse repurchase agreements leverages the Fund's investment since
the proceeds derived from such reverse repurchase agreements may be invested
in additional securities. As a result, the market value of such securities
generally will be more volatile than that of other portfolio investments. At
the time the Fund enters into a reverse repurchase agreement, it may segregate
with its custodian liquid instruments having a value not less than the
repurchase price (including accrued interest). If the Fund segregates such
liquid instruments a reverse repurchase agreement will not be considered a
borrowing by the Fund; however, under circumstances in which the Fund does not
segregate such liquid instruments, such reverse repurchase agreement will be
considered a borrowing for the purpose of the Fund's limitation on borrowings.
Reverse repurchase agreements involve the risk that the market value of the
securities acquired in connection with the reverse repurchase agreement may
decline below the price of the securities the Fund has sold but is obligated
to repurchase. Also, reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale by the Fund in
connection with the reverse repurchase agreement may decline in price. 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. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
Lending of Portfolio Securities. The Fund may lend securities with a
value not exceeding 33-1/3% of its total assets or the limit prescribed by
applicable law to banks, brokers and other financial institutions. In return,
the Fund receives collateral in cash or securities issued or guaranteed by the
U.S. Government, 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 Fund
maintains the ability to obtain the right to vote or consent on proxy
proposals involving material events affecting securities loaned. The Fund
receives the income on the loaned securities. Where the Fund receives
securities as collateral, the Fund receives a fee for its loans from the
borrower and does not receive the income on the collateral. Where the Fund
receives cash collateral, it may invest such collateral and retain the amount
earned, net of any amount rebated to the borrower. As a result, the Fund's
yield may increase. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities within the
standard time period for settlement of securities transactions. The Fund is
obligated to return the collateral to the borrower at the termination of the
loan. The Fund could suffer a loss in the event the Fund must return the cash
collateral and there are losses on investments made, with the cash collateral.
In the event the borrower defaults on any of its obligations with respect to a
securities loan, the Fund could suffer a loss where there are losses on
investments made with the cash collateral or, where the value of the
securities collateral falls below the market value of the borrowed securities.
The Fund could also
24
experience delays and costs in gaining access to the collateral. The Fund may
pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. The Fund has received an exemptive order from the
Commission permitting it to lend portfolio securities to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") or its affiliates and to
retain an affiliate of the Fund as lending agent. See "Portfolio
Transactions."
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. When such transactions are negotiated, the price,
which generally is 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
commitment transactions 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 other liquid instruments 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 at all times
will 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.
Standby Commitment Agreements. The Fund from time to time may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security that
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement the Fund may be paid a commitment fee, regardless
of whether or not the security ultimately is issued. The Fund will enter into
such agreements only for the purpose of investing in the security underlying
the commitment at a yield and price which is considered advantageous to the
Fund. The Fund at all times will segregate with the custodian cash or other
liquid instruments with a value equal to the purchase price of the securities
underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
reasonably can be expected to be issued and the value of the security
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount of the
commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.
------------------------
The Fund may in the future employ new or additional investment strategies
and instruments if those strategies and instruments are consistent with the
Fund's investment objectives and are permissible under applicable regulations
governing the Fund.
25
DESCRIPTION OF AMPS
General
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of this prospectus.
The AMPS of each series will be shares of preferred stock that entitle
their holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods for each such series. After the
Initial Dividend Period, each Subsequent Dividend Period for each series of
AMPS generally will be a 7-Day Dividend Period in the case of Series [ ] AMPS
and a 28-Day Dividend Period in the case of Series [ ] AMPS; provided however,
that prior to any Auction, the Fund may elect, subject to certain limitations
described herein, upon giving notice to holders thereof, a Special Dividend
Period. The Applicable Rate for a particular Dividend Period will be
determined by an Auction conducted on the Business Day before the start of
such Dividend Period. Beneficial Owners and Potential Beneficial Owners of
shares of AMPS may participate in Auctions therefor, although, except in the
case of a Special Dividend Period, Beneficial Owners desiring to continue to
hold all of their shares of AMPS regardless of the Applicable Rate resulting
from Auctions need not participate. For an explanation of Auctions and the
method of determining the Applicable Rate, see "The Auction" herein and in the
statement of additional information.
The following is a brief description of the terms of the shares of AMPS.
This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the Fund's Articles of Incorporation
and Articles Supplementary, including the provisions thereof establishing the
AMPS. The Fund's Articles of Incorporation and the form of Articles
Supplementary establishing the terms of the AMPS have been filed as exhibits
to the Registration Statement of which this prospectus is a part.
Dividends
General. The holders of shares of AMPS will be entitled to receive, when,
as and if declared by the Board of Directors of the Fund, out of funds legally
available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid in preference to and in
priority over any dividends so declared and payable on the Fund's common
stock.
Dividends on the shares of AMPS will accumulate from the date on which
the Fund originally issues the shares of AMPS (the "Date of Original Issue")
and will be payable on the dates described below. Dividends on shares of AMPS
with respect to the Initial Dividend Period shall be payable on the Initial
Dividend Payment Date. Following the Initial Dividend Payment Date for AMPS,
dividends on AMPS will be payable, at the option of the Fund, either (i) with
respect to any 7-Day Dividend Period, 28-Day Dividend Period and any Short
Term Dividend Period of 35 or fewer days, on the day next succeeding the last
day thereof or (ii) with respect to any Short Term Dividend Period of more
than 35 days and with respect to any Long Term Dividend Period, monthly on the
first Business Day of each calendar month during such Short Term Dividend
Period or Long Term Dividend Period and on the day next succeeding the last
day thereof (each such date referred to in clause (i) or (ii) being referred
to herein as a "Normal Dividend Payment Date"), except that if such Normal
Dividend Payment Date is not a Business Day, the Dividend Payment Date shall
be the first Business Day next succeeding such Normal Dividend Payment Date.
Thus, following the Initial Dividend Payment Date for AMPS, dividends
generally will be payable (in the case of Dividend Periods which are not
Special Dividend Periods) on each succeeding [fourth] in the case of
the Series A AMPS, [fourth] in the case of the Series B AMPS, [fourth]
in the case of the Series C AMPS, [fourth] in the case of the
Series D AMPS and [fourth] in the case of the Series E AMPS. Although
any particular Dividend Payment Date may not occur on the originally scheduled
date because of the exceptions discussed above, the next succeeding Dividend
Payment Date, subject to such exceptions, will occur on the next following
originally scheduled date. If for any reason a Dividend Payment Date cannot be
fixed as described above, then the Board of Directors shall fix the Dividend
Payment Date. The Board of Directors by resolution prior to authorization of a
dividend by the Board of Directors may change a Dividend Payment Date if such
change does not adversely affect the contract rights of the holders of shares
of AMPS set forth in the Charter. The Initial Dividend Period, 7-Day Dividend
Periods, 28-Day Dividend Periods and Special Dividend Periods are
26
hereinafter sometimes referred to as "Dividend Periods." Each dividend payment
date determined as provided above is hereinafter referred to as a "Dividend
Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which holder
is expected to be the nominee of the Securities Depository. See "The Auction
-- Securities Depository." The Securities Depository will credit the accounts
of the Agent Members of the Existing Holders in accordance with the Securities
Depository's normal procedures which provide for payment in same-day funds.
The Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the
nominee of the Securities Depository. Any dividend payment made on shares of
AMPS first shall be credited against the earliest declared but unpaid
dividends accumulated with respect to such shares.
Holders of shares of AMPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described under "Non-Payment Period; Late Charge." No interest will
be payable in respect of any dividend payment or payments on the shares of
AMPS which may be in arrears.
The amount of cash dividends per share of any series of AMPS payable (if
declared) on the Initial Dividend Payment Date, each Dividend Payment Date of
each 7-Day Dividend Period, each Dividend Payment Date of each 28-Day Dividend
Period and each Dividend Payment Date of each Short Term Dividend Period shall
be computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and for which dividends
are payable on such Dividend Payment Date and the denominator of which will be
365, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of cash dividends per share of AMPS payable (if declared) on any Dividend
Payment Date shall be computed by multiplying the Applicable Rate for such
Dividend Period by a fraction, the numerator of which will be such number of
days in such part of such Dividend Period that such share was outstanding and
for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
Notification of Dividend Period. With respect to each Dividend Period
that is a Special Dividend Period, the Fund, at its sole option and to the
extent permitted by law, by telephonic and written notice (a "Request for
Special Dividend Period") to the Auction Agent and to each Broker-Dealer, may
request that the next succeeding Dividend Period for a series of AMPS will be
a number of days (other than seven in the case of Series [ ] AMPS and other
than 28 in the case of Series [ ] AMPS), evenly divisible by seven, and not
fewer than seven nor more than 364 in the case of a Short Term Dividend Period
or one whole year or more but not greater than five years in the case of a
Long Term Dividend Period, specified in such notice, provided that the Fund
may not give a Request for Special Dividend Period (and any such request shall
be null and void) unless, for any Auction occurring after the initial Auction,
Sufficient Clearing Bids were made in the last occurring Auction and unless
full cumulative dividends and any amounts due with respect to redemptions have
been paid in full. Such Request for Special Dividend Period, in the case of a
Short Term Dividend Period, shall be given on or prior to the second Business
Day but not more than seven Business Days prior to an Auction Date for the
AMPS and, in the case of a Long Term Dividend Period, shall be given on or
prior to the second Business Day but not more than 28 days prior to an Auction
Date for a series of AMPS. Upon receiving such Request for Special Dividend
Period, the Broker-Dealers jointly shall determine whether, given the factors
set forth below, it is advisable that the Fund issue a Notice of Special
Dividend Period for the AMPS as contemplated by such Request for Special
Dividend Period and the Optional Redemption Price of the AMPS during such
Special Dividend Period and the Specific Redemption Provisions and shall give
the Fund and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In the event the Response indicates that it is advisable that the Fund
give a notice of a Special Dividend Period for the series of AMPS, the Fund,
by no later than the second Business Day prior to such Auction Date may give a
notice (a "Notice of Special Dividend Period") to
27
the Auction Agent, the Securities Depository and each Broker-Dealer. See
"Description of AMPS -- Dividends -- Notification of Dividend Period" in the
statement of additional information for a detailed description of these
procedures.
Determination of Dividend Rate. The dividend rate on shares of the AMPS
during the period from and including the Date of Original Issue for each
series of AMPS to but excluding the Initial Dividend Payment Date (the
"Initial Dividend Period") with respect to each series of AMPS will be the
rate per annum set forth above under "Offering Summary." Commencing on the
Initial Dividend Payment Date for each series of AMPS, the Applicable Rate on
each series of AMPS for each Subsequent Dividend Period, which Subsequent
Dividend Period shall be a period commencing on and including a Dividend
Payment Date and ending on and including the calendar day prior to the next
Dividend Payment Date (or calendar day prior to the last Dividend Payment Date
in a Dividend Period if there is more than one Dividend Payment Date), shall
be equal to the rate per annum that results from the Auction with respect to
such Subsequent Dividend Period. The Initial Dividend Period and Subsequent
Dividend Period for AMPS is referred to herein as a "Dividend Period." Cash
dividends shall be calculated as set forth above under "Dividends -- General."
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
Fund may not declare dividends or make other distributions on shares of common
stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, as applicable (and after giving effect thereto),
asset coverage (as defined in the 1940 Act) with respect to the outstanding
shares of AMPS would be less than 200% (or such other percentage as in the
future may be required by law). The Fund estimates that, based on the
composition of its portfolio at , 2003, asset coverage with
respect to shares of AMPS would be approximately % representing
approximately [36%] of the Fund's capital and [56%] of the Fund's common stock
equity immediately after the issuance of the shares of AMPS offered hereby.
Under the Code, the Fund, among other things, must distribute at least 90% of
its investment company taxable income each year in order to maintain its
qualification for tax treatment as a regulated investment company. The
foregoing limitations on dividends, distributions and purchases under certain
circumstances may impair the Fund's ability to maintain such qualification.
See "Taxes" in the statement of additional information.
Upon any failure to pay dividends on shares of AMPS for two years or
more, the holders of the shares of AMPS will acquire certain additional voting
rights. See "Voting Rights" below. Such rights shall be the exclusive remedy
of the holders of shares of AMPS upon any failure to pay dividends on shares
of the Fund.
Asset Maintenance
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities which are
stock, including the shares of AMPS (or such other asset coverage as in the
future may be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are stock of a closed-end investment company as a
condition of paying dividends on its common stock) ("1940 Act AMPS Asset
Coverage"). If the Fund fails to maintain 1940 Act AMPS Asset Coverage and
such failure is not cured as of the last Business Day of the following month
(the "1940 Act Cure Date"), the Fund will be required under certain
circumstances to redeem certain of the shares of AMPS. See "Redemption" below.
The 1940 Act AMPS Asset Coverage immediately following the issuance of
AMPS offered hereby (after giving effect to the deduction of the underwriting
discount and offering expenses for the shares of AMPS) will be computed as
follows:
28
Value of Fund assets less
liabilities not constituting
senior securities = $ = %
-------------------------------------- --------------------
Senior securities
representing indebtedness
plus liquidation value of the
shares of AMPS
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
the last Business Day of each week (a "Valuation Date") Moody's Eligible
Assets and Fitch Eligible Assets each having in the aggregate a Discounted
Value at least equal to the AMPS Basic Maintenance Amount. The AMPS Basic
Maintenance Amount includes the sum of (i) the aggregate liquidation value of
AMPS then outstanding and (ii) certain accrued and projected payment
obligations of the Fund. See "Description of AMPS -- Asset Maintenance -- AMPS
Basic Maintenance Amount" in the statement of additional information. If the
Fund fails to meet such requirement as of any Valuation Date and such failure
is not cured on or before the tenth Business Day after such Valuation Date
(the "AMPS Basic Maintenance Cure Date"), the Fund will be required under
certain circumstances to redeem certain of the shares of AMPS. Upon any
failure to maintain the required Discounted Value, the Fund will use its best
efforts to alter the composition of its portfolio to reattain a Discounted
Value at least equal to the AMPS Basic Maintenance Amount on or prior to the
AMPS Basic Maintenance Cure Date. See "Redemption" herein and in the statement
of additional information.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided in the statement
of additional information, the Fund, at its option, may redeem shares of AMPS,
in whole or in part, out of funds legally available therefor, at the Optional
Redemption Price per share on any Dividend Payment Date; provided that no
share of AMPS may be redeemed at the option of the Fund during (a) the Initial
Dividend Period with respect to such series of shares or (b) a Non-Call Period
to which such share is subject. "Optional Redemption Price" means $25,000 per
share of AMPS plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) to the date fixed for redemption plus any
applicable redemption premium, if any, attributable to the designation of a
Premium Call Period. The Fund has the authority to redeem the AMPS for any
reason and may redeem all or part of the outstanding shares of AMPS if it
anticipates that the Fund's leveraged capital structure will result in a lower
rate of return to holders of common stock for any significant period of time
than that obtainable if the common stock were unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share,
shares of AMPS to the extent permitted under the 1940 Act and Maryland law, on
a date fixed by the Board of Directors, if the Fund fails to maintain Fitch
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or to satisfy
the 1940 Act AMPS Asset Coverage and such failure is not cured on or before
the AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. "Mandatory
Redemption Price" means $25,000 per share of AMPS plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption.
For a discussion of the allocation procedures to be used if fewer than
all of the outstanding AMPS of either series are to be redeemed and for a
discussion of other redemption procedures, see "Description of AMPS --
Redemption" in the statement of additional information.
Liquidation Rights
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of AMPS will be entitled to
receive, out of the assets of the Fund available for distribution to
shareholders, before any distribution or payment is made upon any shares of
common stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount
of any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the date of distribution, and after
29
such payment the holders of AMPS will be entitled to no other payments. If
such assets of the Fund shall be insufficient to make the full liquidation
payment on each outstanding series of AMPS and liquidation payments on any
other outstanding class or series of preferred stock of the Fund ranking on a
parity with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of such shares of AMPS and the holders of shares
of such other class or series ratably in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of liquidation distribution to which they are entitled, the holders of
AMPS will not be entitled to any further participation in any distribution of
assets by the Fund. A consolidation, merger or share exchange of the Fund with
or into any other entity or entities or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of
the assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
Voting Rights
Except as otherwise indicated in this prospectus and the statement of
additional information and except as otherwise required by applicable law,
holders of shares of AMPS will be entitled to one vote per share on each
matter submitted to a vote of stockholders of the Fund and will vote together
with holders of shares of common stock as a single class.
The 1940 Act and the Articles Supplementary require that the holders of
preferred stock, including the AMPS, voting as a separate class, have the
rights to elect two of the Fund's Directors at all times and to elect a
majority of the Directors at any time that two full years' dividends on the
AMPS are unpaid. The holders of AMPS will vote as a separate class or classes
on certain other matters as required under the Articles Supplementary, the
1940 Act and Maryland law. In addition, each series of AMPS may vote as a
separate series under certain circumstances. See "Description of AMPS --
Voting Rights" in the statement of additional information.
THE AUCTION
General
Holders of the shares of AMPS of each series will be entitled to receive
cumulative cash dividends on their shares when, as and if declared by the
Board of Directors of the Fund, out of funds legally available therefor, on
the Initial Dividend Payment Date with respect to the Initial Dividend Period
and, thereafter, on each Dividend Payment Date with respect to a Subsequent
Dividend Period (generally a period of seven days in the case of Series [ ]
AMPS and 28 days in the case of Series [ ] AMPS subject to certain exceptions
set forth under "Description of AMPS -- Dividends-General") at the rate per
annum equal to the Applicable Rate for each such Dividend Period.
The provisions of the Articles Supplementary establishing the terms of
the shares of AMPS offered hereby will provide that the Applicable Rate for
each series of AMPS for each Dividend Period after the Initial Dividend Period
therefor will be equal to the rate per annum that the Auction Agent advises
has resulted on the Business Day preceding the first day of such Dividend
Period due to implementation of the auction procedures set forth in the
Articles Supplementary (the "Auction Procedures") in which persons determine
to hold or offer to purchase or sell shares of AMPS of such series. The
Auction Procedures are attached as Appendix C to the statement of additional
information.
Each periodic operation of such procedures with respect to the shares of
AMPS is referred to hereinafter as an "Auction." If, however, the Fund should
fail to pay or duly provide for the full amount of any dividend on shares of
AMPS of any series or the redemption price of shares of AMPS of such series
called for redemption, the Applicable Rate for shares of AMPS will be
determined as set forth under "Description of AMPS -- Dividends-Non-Payment
Period; Late Charge" in the statement of additional information.
Auction Agent Agreement. The Fund will enter into an agreement (the
"Auction Agent Agreement") with The Bank of New York (together with any
successor bank or trust company or other entity entering into a similar
agreement with this Fund, the "Auction Agent"), which provides, among other
things, that the Auction Agent will
30
follow the Auction Procedures for the purpose of determining the Applicable
Rate for the AMPS. The Fund will pay the Auction Agent compensation for its
services under the Auction Agent Agreement.
Broker-Dealer Agreements. The Auction Agent will enter into agreements
with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
and , and may enter into similar agreements
(collectively, the "Broker-Dealer Agreements") with one or more other
broker-dealers (collectively, the "Broker-Dealers") selected by the Fund,
which provide for the participation of such Broker-Dealers in Auctions.
Merrill Lynch is an affiliate of the Investment Adviser in that they share a
common parent, Merrill Lynch & Co., Inc.
Securities Depository. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the shares of
AMPS of each series. One or more registered certificates for all of the shares
of each series of AMPS initially will be registered in the name of Cede, as
nominee of the Securities Depository. The certificate will bear a legend to
the effect that such certificate is issued subject to the provisions
restricting transfers of shares of AMPS of the series to which it relates
contained in the Articles Supplementary. Cede initially will be the holder of
record of all shares of AMPS, and Beneficial Owners will not be entitled to
receive certificates representing their ownership interest in such shares. The
Securities Depository will maintain lists of its participants and will
maintain the positions (ownership interests) of shares of AMPS held by each
Agent Member, whether as the Beneficial Owner thereof for its own account or
as nominee for the Beneficial Owner thereof. Payments made by the Fund to
holders of AMPS will be duly made by making payments to the nominee of the
Securities Depository.
Auction Procedures
The following is a brief discussion of the procedures to be used in
conducting Auctions. Separate auctions will be conducted for each series of
AMPS. This summary is qualified by reference to the Auction Procedures set
forth in Appendix C to the statement of additional information. The Settlement
Procedures to be used with respect to Auctions are set forth in Appendix B to
the statement of additional information.
Auction Date. An Auction to determine the Applicable Rate for the shares
of each series of AMPS offered hereby for each Dividend Period (other than the
Initial Dividend Period therefor) will be held on the first Business Day (as
hereinafter defined) preceding the first day of such Dividend Period, which
first day is also a Dividend Payment Date for the preceding Dividend Period
(the date of each Auction being referred to herein as an "Auction Date").
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York are authorized or obligated by law to close. Auctions for
shares of Series A AMPS for Dividend Periods after the Initial Dividend Period
normally will be held every [fourth] after the preceding Dividend
Payment Date, and each subsequent Dividend Period normally will begin on the
following (also a Dividend Payment Date). Auctions for shares of
Series B AMPS for Dividend Periods after the Initial Dividend Period normally
will be held every [fourth] after the preceding Dividend Payment
Date, and each subsequent Dividend Period normally will begin on the following
(also a Dividend Payment Date). Auctions for shares of Series C AMPS for
Dividend Periods after the Initial Dividend Period normally will be held every
[fourth] after the preceding Dividend Payment Date, and each
subsequent Dividend Period normally will begin on the following [fourth]
(also a Dividend Payment Date). Auctions for shares of Series D
AMPS for Dividend Periods after the Initial Dividend Period normally will be
held every [fourth] after the preceding Dividend Payment Date, and
each subsequent Dividend Period normally will begin on the following
(also a Dividend Payment Date). Auctions for shares of Series E AMPS for
Dividend Periods after the Initial Dividend Period normally will be held every
[fourth] after the preceding Dividend Payment Date, and each
subsequent Dividend Period normally will begin on the following
(also a Dividend Payment Date). The Auction Date and the first day of the
related Dividend Period (both of which must be Business Days) need not be
consecutive calendar days. For example, in most cases, if the that
normally would be an Auction Date for Series A AMPS is not a Business Day,
then such Auction Date will be the preceding and the first day of
the related Dividend Period will continue to be the following . See
"Description of AMPS -- Dividends" for information concerning the circumstances
under which a Dividend Payment Date may fall on a date other than the days
specified above, which may affect the Auction Date.
31
Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by
telephone a:
(i) Hold Order -- indicating the number of outstanding shares,
if any, of AMPS that such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for the next Dividend
Period for such shares;
(ii) Bid -- indicating the number of outstanding shares, if
any, of AMPS that such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next Dividend Period for
such shares is not less than the rate per annum then specified by
such Beneficial Owner; and/or
(iii) Sell Order -- indicating the number of outstanding
shares, if any, of AMPS that such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next Dividend Period
for such shares; and
(b) Broker-Dealers will contact customers who are Potential
Beneficial Owners of shares of AMPS to determine whether such Potential
Beneficial Owners desire to submit Bids indicating the number of shares
of AMPS which they offer to purchase provided that the Applicable Rate
for the next Dividend Period for such shares is not less than the rates
per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to
a Broker-Dealer and the communication by a Broker-Dealer, whether or not
acting for its own account, to the Auction Agent of the foregoing information
is hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted
by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or
by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on
any Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders
with respect to shares of AMPS then held by such Beneficial Owner, as well as
Bids for additional shares of AMPS. For information concerning the priority
given to different types of Orders placed by Beneficial Owners, see
"Submission of Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent.
The Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage will be
determined based on the lower of the credit rating or ratings assigned on such
date to such shares by Moody's and Fitch (or if Moody's or Fitch or both shall
not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) as
follows:
Credit Ratings Applicable Percentage
-------------- of Reference Rate
-----------------
Moody's Fitch
----------------- -------------
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 225%
Below Baa3 Below BBB- 275%
32
There is no minimum Applicable Rate in respect of any Dividend Period.
The Applicable Percentage as so determined may be further subject to
upward but not downward adjustment in the discretion of the Board of Directors
of the Fund after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance with
the AMPS Basic Maintenance Amount. The Fund will take all reasonable action
necessary to enable Fitch and Moody's to provide a rating for the AMPS,
subject to the Fund's ability to terminate compliance with the rating agency
guidelines discussed under "Rating Agency Guidelines." If either Fitch or
Moody's, or both, shall not make such a rating available and subject to the
Fund's ability to terminate compliance with the rating agency guidelines
discussed under "Rating Agency Guidelines," Merrill Lynch or its affiliates
and successors, after obtaining the Fund's approval, will select another NRSRO
(a "Substitute Rating Agency") or two other NRSROs ("Substitute Rating
Agencies") to act as a Substitute Rating Agency or Substitute Rating Agencies,
as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a Beneficial
Owner. A Broker-Dealer thus may submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner and therefore participate in
an Auction as an Existing Holder or Potential Holder on behalf of both itself
and its customers. Any Order placed with the Auction Agent by a Broker-Dealer
as or on behalf of a Beneficial Owner or a Potential Beneficial Owner will be
treated in the same manner as an Order placed with a Broker-Dealer by a
Beneficial Owner or a Potential Beneficial Owner. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect of any AMPS
held by it or its customers who are Beneficial Owners will be treated in the
same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an
Order in respect of AMPS held by it, as described in the next paragraph.
Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder
or a Potential Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the
priority given to different types of Orders placed by Existing Holders, see
"Submission of Orders by Broker-Dealers to Auction Agent." Each purchase or
sale in an Auction will be settled on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement" below.
If one or more Orders covering in the aggregate all of the outstanding
shares of AMPS held by a Beneficial Owner are not submitted to the Auction
Agent prior to the Submission Deadline, either because a Broker-Dealer failed
to contact such Beneficial Owner or otherwise, the Auction Agent shall deem a
Hold Order (in the case of an Auction relating to a Dividend Period which is
not a Special Dividend Period of more than 28 days) and a Sell Order (in the
case of an Auction relating to a Special Dividend Period of more than 28 days)
to have been submitted on behalf of such Beneficial Owner covering the number
of outstanding shares of AMPS held by such Beneficial Owner and not subject to
Orders submitted to the Auction Agent.
If all of the outstanding shares of AMPS are subject to Submitted Hold
Orders, the Dividend Period next succeeding the Auction automatically shall be
the same length as the immediately preceding Dividend Period, and the
Applicable Rate for the next Dividend Period for all shares of AMPS of such
series will be 80% of the Reference Rate on the date of the applicable
Auction.
For the purposes of an Auction, shares of AMPS for which the Fund shall
have given notice of redemption and deposited moneys therefor with the Auction
Agent in trust or segregated in an account at the Fund's custodian bank for
the benefit of the Auction Agent, as set forth under "Description of AMPS --
Redemption" in the statement of additional information, will not be considered
as outstanding and will not be included in such Auction. Pursuant to the
Articles Supplementary of the Fund, the Fund will be prohibited from reissuing
and its affiliates
33
(other than Merrill Lynch) will be prohibited from transferring (other than to
the Fund) any shares of AMPS they may acquire. Neither the Fund nor any
affiliate of the Fund may submit an Order in any Auction, except that an
affiliate of the Fund that is a Broker-Dealer (i.e., Merrill Lynch) may submit
an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00
p.m., New York City time, on each Auction Date, or such other time on the
Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Fund) as the Existing
Holder or Potential Holder in respect of the shares of AMPS subject to such
Orders. Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent will round such
rate per annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(a) any Hold Order will be considered valid up to and including the
number of outstanding shares of AMPS held by such Existing Holder,
provided that if more than one Hold Order is submitted by such Existing
Holder and the number of shares of AMPS subject to such Hold Orders
exceeds the number of outstanding shares of AMPS held by such Existing
Holder, the number of shares of AMPS subject to each of such Hold Orders
will be reduced pro rata so that such Hold Orders, in the aggregate, will
cover exactly the number of outstanding shares of AMPS held by such
Existing Holder;
(b) any Bids will be considered valid, in the ascending order of
their respective rates per annum if more than one Bid is submitted by
such Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the number
of outstanding shares of AMPS subject to any Hold Order referred to in
clause (a) above (and if more than one Bid submitted by such Existing
Holder specifies the same rate per annum and together they cover more
than the remaining number of shares that can be the subject of valid Bids
after application of clause (a) above and of the foregoing portion of
this clause (b) to any Bid or Bids specifying a lower rate or rates per
annum, the number of shares subject to each of such Bids will be reduced
pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of outstanding shares); and the number of outstanding
shares, if any, subject to Bids not valid under this clause (b) shall be
treated as the subject of a Bid by a Potential Holder; and
(c) any Sell Order will be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the sum of the number of shares of AMPS subject to Hold
Orders referred to in clause (a) above and the number of shares of AMPS
subject to valid Bids by such Existing Holder referred to in clause (b)
above; provided that, if more than one Sell Order is submitted by any
Existing Holder and the number of shares of AMPS subject to such Sell
Orders is greater than such excess, the number of shares of AMPS subject
to each of such Sell Orders will be reduced pro rata so that such Sell
Orders, in the aggregate, will cover exactly the number of shares of AMPS
equal to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of AMPS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. Not earlier than the Submission Deadline for each Auction,
the Auction Agent will assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as
submitted or deemed submitted by a Broker-Dealer hereinafter being referred to
as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as
the case may be, or as a "Submitted Order") and will determine the excess of
the number of outstanding shares of AMPS over the number of outstanding shares
of AMPS subject to Submitted Hold Orders (such excess
34
being referred to as the "Available AMPS") and whether Sufficient Clearing
Bids have been made in such Auction. Sufficient Clearing Bids will have been
made if the number of outstanding shares of AMPS that are the subject of
Submitted Bids of Potential Holders with rates per annum not higher than the
Maximum Applicable Rate equals or exceeds the number of outstanding shares
that are the subject of Submitted Sell Orders (including the number of shares
subject to Bids of Existing Holders specifying rates per annum higher than the
Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate per annum specified in the Submitted Bids (the
"Winning Bid Rate") which would result in the number of shares subject to
Submitted Bids specifying such rate per annum or a lower rate per annum being
at least equal to the Available AMPS. If Sufficient Clearing Bids have been
made, the Winning Bid Rate will be the Applicable Rate for the next Dividend
Period for all shares of AMPS then outstanding.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 7-Day
Dividend Period (in the case of Series [ ] AMPS) and a 28-Day Dividend Period
(in the case of Series [ ] AMPS), and the Applicable Rate for such Dividend
Period will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that
have Submitted Sell Orders will not be able to sell in the Auction all, and
may not be able to sell any, shares of AMPS subject to such Submitted Sell
Orders. See "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares." Thus, under some circumstances, Beneficial
Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected
in the order of priority set forth in the Auction Procedures with the result
that Existing Holders and Potential Holders of AMPS will sell, continue to
hold and/or purchase shares of AMPS as set forth below. Existing Holders that
submit or are deemed to have submitted Hold Orders will continue to hold the
shares of AMPS subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Winning Bid Rate or a Submitted Sell Order
will sell the outstanding shares of AMPS subject to such Submitted Bid or
Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will purchase the number
of shares of AMPS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bids, unless the
number of outstanding shares of AMPS subject to all such Submitted Bids
of Existing Holders is greater than the excess of the Available AMPS over
the number of shares of AMPS accounted for in clauses (b) and (c) above,
in which event each Existing Holder with such a Submitted Bid will sell a
number of outstanding shares of AMPS determined on a pro rata basis based
on the number of outstanding shares of AMPS subject to all such Submitted
Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will purchase any Available
AMPS not accounted for in clause (b), (c) or (d) above on a pro rata
basis based on the shares of AMPS subject to all such Submitted Bids of
Potential Holders.
35
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
continue to hold the outstanding shares of AMPS subject to such Submitted
Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
purchase the number of shares of AMPS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Maximum Applicable Rate or a Submitted
Sell Order will sell a number of outstanding shares of AMPS determined on
a pro rata basis based on the outstanding shares of AMPS subject to all
such Submitted Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will
round up or down the number of shares of AMPS being sold or purchased on such
Auction Date so that each share sold or purchased by each Existing Holder or
Potential Holder will be a whole share of AMPS. If any Potential Holder would
be entitled or required to purchase less than a whole share of AMPS, the
Auction Agent, in such manner as, in its sole discretion, it shall determine,
will allocate shares of AMPS for purchase among Potential Holders so that only
whole shares of AMPS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related shares of AMPS by
telephone at approximately 3:00 P.M., Eastern time, on the Auction Date for
such Auction. Each such Broker-Dealer that submitted an Order for the account
of a customer then will advise such customer whether such Bid or Sell Order
was accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling shares of AMPS as a result of the Auction and will
advise each customer purchasing or selling shares of AMPS to give instructions
to its Agent Member of the Securities Depository to pay the purchase price
against delivery of such shares or to deliver such shares against payment
therefor as appropriate. If a customer selling shares of AMPS as a result of
an Auction shall fail to instruct its Agent Member to deliver such shares, the
Broker-Dealer that submitted such customer's Bid or Sell Order will instruct
such Agent Member to deliver such shares against payment therefor. Each
Broker-Dealer that submitted a Hold Order in an Auction on behalf of a
customer also will advise such customer of the Applicable Rate for the next
Dividend Period for the AMPS. The Auction Agent will record each transfer of
shares of AMPS on the record book of Existing Holders to be maintained by the
Auction Agent.
In accordance with the Securities Depository's normal procedures, on the
day after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of shares of AMPS as determined in such
Auction. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment in same-day funds. If the
procedures of the Securities Depository applicable to AMPS shall be changed to
provide for payment in next-day funds, then purchasers may be required to make
payment in next-day funds. If the certificates for shares of AMPS are not held
by the Securities Depository or its nominee, payment will be made in same-day
funds to the Auction Agent against delivery of such certificates.
If any Existing Holder selling shares of AMPS in an Auction fails to
deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of AMPS in such Auction may deliver to such person a number
of whole shares of AMPS that is less than the number of shares that otherwise
was to be purchased by such person. In such event, the number of shares of
AMPS to be so delivered will be determined by such Broker-Dealer. Delivery of
36
such lesser number of shares will constitute good delivery. Each Broker-Dealer
Agreement also will provide that neither the Fund nor the Auction Agent will
have responsibility or liability with respect to the failure of a Potential
Beneficial Owner, Beneficial Owner or their respective Agent Members to
deliver shares of AMPS or to pay for shares of AMPS purchased or sold pursuant
to an Auction or otherwise.
Broker-Dealers
General. The Broker-Dealer Agreements provide that a Broker-Dealer may
submit Orders in Auctions for its own account, unless the Fund notifies all
Broker-Dealers that they no longer may do so; provided that Broker-Dealers may
continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an
Order for its own account in any Auction of any series of AMPS, it may have
knowledge of Orders placed through it in that Auction and therefore have an
advantage over other Bidders, but such Broker-Dealer would not have knowledge
of Orders submitted by other Broker-Dealers in that Auction.
Fees. The Auction Agent after each Auction will pay a service charge from
funds provided by the Fund to each Broker-Dealer on the basis of the purchase
price of shares of AMPS placed by such Broker-Dealer at such Auction. The
service charge (i) for any 7-Day Dividend Period or 28-Day Dividend Period
shall be payable at the annual rate of 0.25% of the purchase price of the
shares of AMPS placed by such Broker-Dealer in any such Auction and (ii) for
any Special Dividend Period shall be determined by mutual consent of the Fund
and any such Broker-Dealer or Broker-Dealers and shall be based upon a selling
concession that would be applicable to an underwriting of fixed or variable
rate preferred shares with a similar final maturity or variable rate dividend
period, respectively, at the commencement of the Dividend Period with respect
to such Auction. For the purposes of the preceding sentence, shares of AMPS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by
such Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold
such shares as a result of the Auction, (B) a Submitted Bid of a Potential
Beneficial Owner that resulted in such Potential Beneficial Owner purchasing
such shares as a result of the Auction or (C) a Submitted Hold Order.
Secondary Trading Market. The Broker-Dealers intend to maintain a
secondary trading market in the AMPS outside of Auctions; however, they have
no obligation to do so and there can be no assurance that a secondary market
for the AMPS will develop or, if it does develop, that it will provide holders
with a liquid trading market (i.e., trading will depend on the presence of
willing buyers and sellers and the trading price is subject to variables to be
determined at the time of the trade by the Broker-Dealers). The AMPS will not
be registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long-Term
Dividend Period, likely will have an adverse effect on the secondary market
price of the AMPS, and a selling shareholder may sell AMPS between Auctions at
a price per share of less than $25,000.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this prospectus.
The Fund intends that, so long as shares of AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's
and Fitch in connection with the Fund's receipt of a rating for such shares on
or prior to their Date of Original Issue of at least Aaa from Moody's and AAA
from Fitch. Moody's and Fitch, which are NRSROs, issue ratings for various
securities reflecting the perceived creditworthiness of such securities. The
Board of Directors of the Fund may determine that it is not in the best
interest of the Fund to continue to comply with the guidelines of Moody's or
Fitch (described below). If the Fund voluntarily terminates compliance with
Moody's or Fitch guidelines, the Fund will no longer be required to maintain a
Moody's Discounted Value or a Fitch Discounted Value, as applicable, at least
equal to the AMPS Basic Maintenance Amount. If the Fund voluntarily terminates
compliance with Moody's or Fitch's guidelines, or both, at the time of
termination, it must continue to be rated by at least one NRSRO.
37
The guidelines described below have been developed by Moody's and Fitch
in connection with issuances of asset-backed and similar securities, including
debt obligations and variable rate preferred stock, generally on a
case-by-case basis through discussions with the issuers of these securities.
The guidelines are designed to ensure that assets underlying outstanding debt
or preferred stock will be varied sufficiently and will be of sufficient
quality and amount to justify investment grade ratings. The guidelines do not
have the force of law but have been adopted by the Fund in order to satisfy
current requirements necessary for Moody's and Fitch to issue the above
described ratings for shares of AMPS, which ratings generally are relied upon
by institutional investors in purchasing such securities. The guidelines
provide a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act. See "Description of AMPS -- Asset
Maintenance" herein and in the Statement of Additional Information.
The Fund intends to maintain a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount. Moody's and Fitch each has
established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and Fitch guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value
at least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date, thereby incurring additional transaction costs
and possible losses and/or gains on dispositions of portfolio securities. To
the extent any such failure is not cured in a timely manner, shares of AMPS
will be subject to redemption. See "Description of AMPS -- Asset Maintenance"
and "Description of AMPS -- Redemption" herein and in the statement of
additional information.
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of AMPS, at any time, may change or
withdraw any such rating. As set forth in the Articles Supplementary, the
Board of Directors, without shareholder approval, may modify certain
definitions or restrictions that have been adopted by the Fund pursuant to the
rating agency guidelines, provided the Board of Directors has obtained written
confirmation from Moody's and Fitch that any such change would not impair the
ratings then assigned by Moody's and Fitch to the AMPS.
As described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines described above address the likelihood that a holder of shares of
AMPS will be able to sell such shares in an Auction. The ratings are based on
current information furnished to Moody's and Fitch by the Fund and the
Investment Adviser and information obtained from other sources. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The common stock has not been rated by a
NRSRO.
For additional information concerning the Moody's and Fitch ratings
guidelines, see "Rating Agency Guidelines" in the statement of additional
information.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by Merrill Lynch &
Co. Inc., ("ML & Co."), a financial services holding company and the parent of
Merrill Lynch, provides the Fund with investment advisory and administrative
services. The Investment Adviser acts as the investment adviser to more than
100 registered investment companies and offers investment advisory services to
individuals and institutional accounts. As of February 2003, the Investment
Adviser and its affiliates, including MLIM, had a total of approximately $439
billion in investment company and other portfolio assets under management,
including approximately $260 billion in fixed
38
income assets. This amount includes assets managed by certain affiliates of
the Investment Adviser. The Investment Adviser is a limited partnership, the
partners of which are ML & Co. and Princeton Services, Inc. The principal
business address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the direction
of the 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 Fund's portfolio managers will consider analyses from various
sources, make the necessary investment decisions, and place orders for
transactions accordingly. The Investment Adviser will also be responsible for
the performance of certain management services for the Fund. The Fund will be
managed by a team of investment professionals from the Investment Adviser. The
co-portfolio managers primarily responsible for the Fund's day-to-day
management are John Burger, Robert Peterson and Thomas Musmanno.
For its services, the Fund pays the Investment Adviser a monthly fee at
the annual rate of 0.60% of the Fund's average weekly net assets, plus the
proceeds of any outstanding borrowings used for leverage ("average weekly net
assets" means the average weekly value of the total assets of the Fund,
including the amount obtained from leverage and any proceeds from the issuance
of preferred stock, minus the sum of (i) accrued liabilities of the Fund, (ii)
any accrued and unpaid interest on outstanding borrowings and (iii)
accumulated dividends on shares of preferred stock). 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
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, 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. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting services.
TAXES
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its net investment
income, the Fund will not be subject to Federal income tax to the extent that
it distributes its net investment income and net realized capital gains. The
Fund intends to distribute substantially all of such income. If, in any
taxable year, the Fund fails to qualify as a RIC under the Code, it would be
taxed in the same manner as an ordinary corporation.
The Internal Revenue Service (the "IRS"), in a revenue ruling, held that
certain auction rate preferred stock would be treated as stock for Federal
income tax purposes. The terms of the AMPS are substantially similar, but not
identical, to the auction rate preferred stock discussed in the revenue
ruling, and in the opinion of Sidley Austin Brown & Wood LLP, counsel to the
Fund, the shares of AMPS will constitute stock of the Fund and distributions
with respect to shares of AMPS (other than distributions in redemption of
shares of AMPS subject to Section 302(b) of the Code) will constitute
dividends to the extent of the Fund's current and accumulated earnings and
profits as calculated for Federal income tax purposes. Nevertheless, it is
possible that the IRS might take a contrary position,
39
asserting, for example, that the shares of AMPS constitute debt of the Fund.
If this position were upheld, the discussion of the treatment of distributions
below would not apply. Instead, distributions by the Fund to holders of shares
of AMPS would constitute taxable interest income, whether or not they exceeded
the earnings and profits of the Fund. In such an event, the designations of
particular types of income, such as capital gains, income eligible for the
Dividends Received Deduction and income eligible for the foreign tax credit,
as described below, would not be effective.
Generally within 60 days after the end of the Fund's taxable year, the
Fund will tell you the amount of capital gain dividends and dividends eligible
for the Dividends Received Deduction, if any, you have received during the
year. Capital gain dividends are taxable as long-term capital gains to you
regardless of how long you have held your shares, and are generally taxed at
lower rates than ordinary income dividends. The IRS currently requires that a
RIC that has two or more classes of stock allocate to each class proportionate
amounts of each type of its income (e.g., ordinary income, capital gains and
any amounts eligible for the Dividends Received Deduction or the foregin tax
credit). Accordingly, the Fund intends to designate dividends paid to each
series of AMPS as capital gain dividends, eligible for the Dividends Received
Deduction or eligible for the foreign tax credit, as applicable, in proportion
to each series' share of total dividends paid during the year.
Because the Fund expects its portfolio to consist primarily of "hybrid"
or taxable preferred stock, most of the Fund's distributions generally will
not qualify for the dividends received deduction generally available to
corporate shareholders. In addition, most dividends from the Fund are not
expected to be excludable from an individual's taxable income under certain
proposals currently under discussion by federal government officials. Because
discussion of these proposals is ongoing, the impact of the proposals on the
Fund and its stockholders cannot be predicted.
If at any time when AMPS are outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of common stock until the asset coverage is restored.
See "Description of AMPS -- Restrictions on Dividends and Other Payments" in
the statement of additional information. This may prevent the Fund from
meeting certain distribution requirements for qualification as a RIC. Upon any
failure to meet the asset coverage requirements of the 1940 Act, the Fund, in
its sole discretion, may, and under certain circumstances will be required to,
redeem AMPS in order to maintain or restore the requisite asset coverage and
avoid the adverse consequences to the Fund and its stockholders of failing to
qualify as a RIC. See "Description of AMPS -- Redemption" in the statement of
additional information. There can be no assurance, however, that any such
action would achieve such objectives.
If you are neither a lawful permanent resident nor a citizen of the U.S.
or if you are a foreign entity, the Fund's ordinary income dividends (which
include distributions of net short-term capital gains) will generally be
subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. You may be
able to claim a credit or take a deduction for foreign taxes paid by the Fund
if certain requirements are met.
By law, your dividends and redemption proceeds will be subject to a
withholding tax if you have not provided a tax identification number or social
security number or if the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal
tax law of an investment of AMPS of the Fund. It is not a substitute for
personal tax advice. Consult your personal tax adviser about the potential tax
consequences of purchasing and holding AMPS under all applicable tax laws.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares initially were classified as common
stock. The Board of Directors is authorized, however, to classify and
reclassify any unissued shares of capital stock into one or more additional or
other classes or series as may be
40
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. In this regard, the Board
of Directors has reclassified shares of unissued common stock
as AMPS. For a description of the shares of AMPS, see "Description of AMPS"
herein and in the statement of additional information.
The following table shows the amount of (i) capital stock authorized,
(ii) capital stock held by the Fund for its own account and (iii) capital
stock outstanding for each class of authorized securities of the Fund as of ,
2003.
Amount Outstanding
Amount Held (Exclusive Of Amount
Amount By Fund For Held By Fund For
Title of Class Authorized Its Own Account Its Own Account)
-------------------------------------------- --------------- ------------------- ------------------------
Common Stock............................... -0-
Auction Market Preferred Stock.............
Series A AMPS......................... -0-
Series B AMPS......................... -0-
Series C AMPS......................... -0-
Series D AMPS......................... -0-
Series E AMPS......................... -0-
Common Stock
Holders of common stock are entitled to share equally in dividends
declared by the Board of Directors payable to holders of common stock and in
the net assets of the Fund available for distribution to holders of common
stock after payment of the preferential amounts payable to holders of any
outstanding preferred stock. Neither holders of common stock nor holders of
preferred stock have pre-emptive or conversion rights and shares of common
stock are not redeemable. The outstanding shares of common stock are fully
paid and non-assessable.
Holders of common stock are entitled to one vote for each share held and
will vote with the holders of any outstanding shares of AMPS or other
preferred stock on each matter submitted to a vote of holders of common stock,
except as described under "Description of AMPS -- Voting Rights" herein and in
the statement of additional information.
Shareholders are entitled to one vote for each share held. The shares of
common stock, AMPS and any other preferred stock do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of common
stock, AMPS and any other preferred stock voting for the election of Directors
can elect all of the Directors standing for election by such holders, and, in
such event, the holders of the remaining shares of common stock, AMPS and any
other preferred stock will not be able to elect any of such Directors.
So long as any shares of the Fund's preferred stock are outstanding,
holders of common stock will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on
preferred stock have been paid, and unless asset coverage (as defined in the
1940 Act) with respect to preferred stock would be at least 200% after giving
effect to such distributions. See "Description of AMPS - Restrictions on
Dividends and other Payments" herein and in the statement of additional
information."
The Fund will send unaudited reports at least semi-annually and
audited annual financial statements to all of its stockholders.
The shares of common stock commenced trading on the New York Stock
Exchange (the "NYSE") on March 26, 2003. At , 2003, the net asset
value per share of common stock was $ and the closing price per
share on the NYSE was $ .
41
Preferred Stock
Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of shares of AMPS. See "Description of AMPS." Under the 1940 Act,
the Fund is permitted to have outstanding more than one series of preferred
stock as long as no single series has priority over another series as to the
distribution of assets of the Fund or the payment of dividends. Neither
holders of common stock nor holders of preferred stock have pre-emptive rights
to purchase any shares of AMPS or any other preferred stock that might be
issued. It is anticipated that the net asset value per share of the AMPS will
equal its original purchase price per share plus accumulated dividends per
share.
Certain Provisions of the Charter and By-Laws
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving common stockholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director may be removed from office
with or without cause but only by vote of the holders of at least 66 2/3% of
the shares entitled to vote in an election to fill that directorship. A
director elected by all of the holders of capital stock may be removed only by
action of such holders, and a director elected by the holders of AMPS and any
other preferred stock may be removed only by action of AMPS and any other
preferred stock.
In addition, the Charter requires the favorable vote of the holders of at
least 66-2/3% of the Fund's shares to approve, adopt or authorize the
following:
o a merger or consolidation or statutory share exchange of the Fund
with any other corporation;
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;
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the By-laws, in which case the affirmative vote of a majority
of the Fund's shares of capital stock is required. Following any issuance of
preferred stock by the Fund, it is anticipated that the approval, adoption or
authorization of the foregoing also would require the favorable vote of a
majority of the Fund's shares of preferred stock, including the AMPS, then
entitled to be voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company
would require an amendment to the Fund's Articles of Incorporation. The
amendment would have to be declared advisable by the Board of Directors prior
to its submission to stockholders. Such an amendment would require the
favorable vote of the holders of at least 66-2/3% of the Fund's outstanding
shares of capital stock (including the AMPS and any other preferred stock)
entitled to be voted on the matter, voting as a single class (or a majority of
such shares if the amendment was previously approved, adopted or authorized by
two-thirds of the total number of Directors fixed in accordance with the
By-laws), and, assuming preferred stock is issued, the affirmative vote of a
majority of outstanding shares (as defined in the 1940 Act) of preferred stock
of the Fund (including the AMPS), voting as a separate class. Such a vote also
would satisfy a separate requirement in the 1940 Act that the change be
approved by the stockholders. Stockholders of an open-end investment company
may require the company to redeem their shares of common stock at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and the
common stock would no longer be listed on a stock exchange. Conversion to an
open-end investment company would also require redemption of all outstanding
shares of preferred stock (including the AMPS) and would require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the issuance of senior securities, the borrowing of money and the
purchase of illiquid securities.
42
The Charter and By-laws provide that the Board of Directors has the
power, to the exclusion of stockholders, to make, alter or repeal any of the
By-laws (except for any By-law specified not to be amended or repealed by the
Board), subject to the requirements of the 1940 Act. Neither this provision of
the Charter, nor any of the foregoing provisions of the Charter requiring the
affirmative vote of 66-2/3% of shares of capital stock of the Fund, can be
amended or repealed except by the vote of such required number of shares.
The Board of Directors has determined that the 66-2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of stockholders
generally. Reference should be made to the Articles of Incorporation 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 stockholder desires to nominate a person for election to
the Board of Directors or to transact any other business at an annual meeting
of stockholders. With respect to an annual meeting following the first annual
meeting of stockholders, 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 stockholders, the
notice must be given no later than the tenth calendar day following the day
upon which public disclosure of the date of the meeting is first made. Any
notice by a stockholder must be accompanied by certain information as provided
in the By-laws.
CUSTODIAN
The Fund's securities and cash are held under a custodian agreement with
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
43
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter")
has agreed, subject to the terms and conditions contained in a purchase
agreement with the Fund and the Investment Adviser, to purchase from the Fund
all of the shares of AMPS offered hereby. The Underwriter has agreed to
purchase all such shares if any are purchased.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
Underwriter may be required to make in respect of those liabilities.
The Underwriter is offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the Underwriter of
officer's certificates and legal opinions. The Underwriter reserves the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
Commissions and Discounts
The Underwriter has advised the Fund that it proposes initially to offer
the shares of AMPS to the public at the initial public offering price on the
cover page of this prospectus and to dealers at that price less a concession
not in excess of $ per share. The Underwriter may allow, and the dealers
may reallow, a discount not in excess of $ per share to other dealers.
There is a sales charge or underwriting discount of $ per share, which
is equal to % of the initial public offering price per share. After the
initial public offering, the public offering price, concession and discount
may be changed. Investors must pay for any AMPS purchased in the offering on
or before , 2003.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to the Fund.
Per Share Total
------------- --------
Public offering price $25,000 $
Underwriting discount $ $
Proceeds, before expenses, to the Fund $ $
The expenses of the offering, excluding underwriting discount, are
estimated at $ and are payable by the Fund.
Other Relationships
The Investment Adviser (and not the Fund) also has agreed to pay a fee to
Merrill Lynch quarterly at the annual rate of 0.10% of the Fund's average
weekly net assets (including assets attributable to any preferred stock that
may be outstanding), plus the proceeds of any outstanding borrowings used for
leverage, during the continuance of the Investment Advisory Agreement. The
maximum amount of this fee will not exceed 4.5% of the aggregate initial
offering price of the Fund's initial public offering of its common stock;
provided, that in determining when the maximum amount has been paid the value
of each of the quarterly payments shall be discounted at the annual rate of
10% back to the closing date of this offering. Merrill Lynch has agreed to
provide certain after-market services to the Investment Adviser designed to
maintain the visibility of the Fund on an ongoing basis and to provide
relevant information, studies or reports regarding the Fund and the closed-end
investment company industry.
Merrill Lynch will act in Auctions as a Broker-Dealer as set forth under
"The Auction -- General -- Broker-Dealer Agreements" and will be entitled to
fees for services as a Broker-Dealer as set forth under "The
44
Auction -- Broker-Dealers." Merrill Lynch also may provide information to be
used in ascertaining the Reference Rate.
The Fund also anticipates that Merrill Lynch may from time to time act as
a broker in connection with the execution of its portfolio transactions. See
"Portfolio Transactions." Merrill Lynch is an affiliate of the Investment
Adviser. See "Investment Restrictions" and "Portfolio Transactions" in the
statement of additional information.
The address of the Underwriter is 4 World Financial Center, New York, New
York 10080.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the
Fund's shares of AMPS is The Bank of New York, 100 Church Street, New York,
New York 10286. The transfer agent, dividend disbursing agent and registrar
for the Fund's shares of common stock is Equiserve, L.P., 150 Royall Street,
Canton, Massachusetts 02021.
ACCOUNTING SERVICES PROVIDER
State Street Bank and Trust Company, 500 College Road East, Princeton,
New Jersey 08540, provides certain accounting services for the Fund.
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby are
passed on for the Fund and the Underwriter by Sidley Austin Brown & Wood LLP,
New York, New York.
INDEPENDENT AUDITORS AND EXPERTS
, independent auditors, have audited the statement of assets and
liabilities of the Fund as of March 12, 2003 which is included in the
statement of additional information and in the Registration Statement. The
statement of assets and liabilities is included in reliance upon their report,
which is also included in the statement of additional information and the
Registration Statement, given on their authority as experts in accounting and
auditing.
45
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
----
Investment Objective and Policies...........................................1
Investment Restrictions.....................................................2
Description of AMPS.........................................................4
The Auction................................................................11
Rating Agency Guidelines...................................................11
Directors and Officers.....................................................26
Investment Advisory and Management Arrangements............................30
Portfolio Transactions.....................................................32
Taxes......................................................................34
Net Asset Value............................................................38
Additional Information.....................................................38
Report of Independent Auditors.............................................40
Statement of Assets and Liabilities........................................41
Schedule of Investments (Unaudited)........................................42
Financial Statements (Unaudited)...........................................43
Notes to Financial Statements (Unaudited)..................................44
APPENDIX A RATINGS OF SECURITIES.........................................A-1
APPENDIX B SETTLEMENT PROCEDURES.........................................B-1
APPENDIX C AUCTION PROCEDURES............................................C-1
46
GLOSSARY
"'AA' (AA) Composite Commercial Paper Rate," on any Valuation Date, means
(i) the Interest Equivalent of the rate on commercial paper placed on behalf
of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or
the equivalent of such rating by another nationally recognized statistical
rating organization, as such rate is made available on a discount basis or
otherwise by the Federal Reserve Bank of New York for the Business Day
immediately preceding such date, or (ii) in the event that the Federal Reserve
Bank of New York does not make available such a rate, then the arithmetic
average of the Interest Equivalent of the rate on commercial paper placed on
behalf of such issuers, as quoted on a discount basis or otherwise by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on
the Business Day immediately preceding such date. If one of the Commercial
Paper Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7
or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 60-day and
90-day rates on such commercial paper; (iv) 85 or more days but fewer than 99
days, such rate shall be the Interest Equivalent of the 90-day rate on such
commercial paper; (v) 99 or more days but fewer than 120 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 90-day and 120-day
rates on such commercial paper; (vi) 120 or more days but fewer than 141 days,
such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate
on such commercial paper.
"Agent Member" means the member of the Securities Depository that will
act on behalf of a Beneficial Owner of one or more shares of AMPS or on behalf
of a Potential Beneficial Owner.
"AMPS" means, as the case may be, the Auction Market Preferred Stock,
Series A; or the Auction Market Preferred Stock, Series B; or the Auction
Market Preferred Stock, Series C; or the Auction Market Preferred Stock,
Series D; or the Auction Market Preferred Stock, Series E, each with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared), of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page [29] of
this prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page [29]
of this prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page [8] of
the statement of additional information.
"Applicable Percentage" has the meaning set forth on page [33] of this
prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
"Approved Foreign Nation" has the meaning set forth on page [14] of the
statement of additional information.
"Approved Price" means the fair value as determined by the Fund in
accordance with the valuation procedures adopted from time to time by the
Board of Directors of the Fund and for which the Fund receives a
mark-to-market price (which, for the purpose of clarity, shall not mean Market
Value) from an independent source at least semi-annually.
47
"Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of multiple series
of AMPS.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Directors of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS.
"Auction Agent Agreement" means the agreement entered into between the
Fund and the Auction Agent which provides, among other things, that the
Auction Agent will follow the Auction Procedures for the purpose of
determining the Applicable Rate.
"Auction Date" has the meaning set forth on page [31] of this prospectus.
"Auction Procedures" means the procedures for conducting Auctions set
forth in Appendix C to the statement of additional information.
"Available AMPS" has the meaning set forth on pages [34 and 35] of this
prospectus.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Bid" has the meaning set forth on page [32] of this prospectus.
"Bidder" has the meaning set forth on page [32] of this prospectus.
"Board of Directors" or "Board" means the Board of Directors of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in the Auction
Procedures, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker-Dealer, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
The City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares
of AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including the Articles Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Fund
from time to time may appoint or, in lieu thereof, their respective affiliates
and successors.
48
"Common stock" means the common stock, par value $.10 per share, of the
Fund.
"Date of Original Issue" means, with respect to each share of AMPS, the
date on which such share first is issued by the Fund.
"Debt Securities" has the meaning set forth on pages [14] and [15] of the
statement of additional information.
"Deposit Securities" means cash, obligations and portfolio securities,
including Short Term Money Market Instruments that are Fitch Eligible Assets
and Moody's Eligible Assets, rated as least A2 (having a remaining maturity of
12 months or less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining
maturity of 12 months or less) F1+ by Fitch.
"Discount Factor" means a Moody's Discount Factor or a Fitch Discount
Factor, as the case may be.
"Discounted Value" of any asset of the Fund means (i) with respect to a
Fitch Eligible Asset, the quotient of the market value thereof divided by the
applicable Fitch Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the quotient of the market value thereof divided by the applicable
Moody's Discount Factor; provided, however, that with respect to a Fitch
Eligible Asset or Moody's Eligible Asset that is currently callable,
Discounted Value will be equal to the quotient as calculated above or the call
price, whichever is lower, and that with respect to any Fitch Eligible Asset
or Moody's Eligible Asset that is prepayable, the Discounted Value will be
equal to the quotient as calculated about or the par value, whichever is
lower.
"Dividend Payment Date" has the meaning set forth on page [27] of this
prospectus.
"Dividend Period" has the meaning set forth on pages [26 and 27] of this
prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or Fitch Eligible Assets,
as the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as may
be permitted by the Fund that is listed as the holder of record of shares of
AMPS in the records of the Auction Agent.
"Fitch" means Fitch, Inc. or its successors.
"Fitch Discount Factor" has the meaning set forth on pages [11 to 14] of
the statement of additional information.
"Fitch Eligible Assets" has the meaning set forth on pages [11 to 16] of
the statement of additional information.
"Fitch Exposure Period" means the period commencing on (and including) a
given Valuation Date and ending 49 days thereafter.
"Fitch Hedging Transactions" has the meaning set forth on page [17] of
the statement of additional information.
"Fitch Industry Classification" has the meaning set forth on pages [16
and 17] of the statement of additional information.
"Foreign Bonds" has the meaning set forth on page [14] of the statement
of additional information.
"Forward Commitment" has the meaning set forth on page [25] of the
statement of additional information.
49
"Fund" means Preferred Income Strategies Fund, Inc., a Maryland
corporation that is the issuer of the AMPS.
"Hold Order" has the meaning set forth on page [32] of this prospectus.
"Initial Dividend Payment Date" means the first Dividend Payment Date for
each series of AMPS.
"Initial Dividend Period" means the period from and including the Date of
Original Issue to but excluding the Initial Dividend Payment Date for each
series of the AMPS.
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"Lien" means any material lien, mortgage, pledge, security interest or
security agreement of any kind.
"Long Term Dividend Period" means a dividend period of one year or more
but not greater than five years.
"Mandatory Redemption Price" has the meaning set forth on page [29] of
this prospectus.
"Market Value" means the fair market value of an asset of the Fund as
computed as follows: readily marketable portfolio securities listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected on the consolidated tape at the close of the New York Stock
Exchange on the business day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at the mean of
the closing bid and asked prices on such day. If no bid or asked prices are
quoted on such day, then the security is valued by such method as the Board of
Directors shall determine in good faith to reflect its fair market value.
Readily marketable securities not listed on the New York Stock Exchange but
listed on other domestic or foreign securities exchanges or admitted to
trading on NASDAQ National List are valued in a like manner. Portfolio
securities traded on more than one securities exchange are valued at the last
sale price on the business day as of which such value is being determined as
reflected on the tape at the close of the exchange representing the principal
market for such securities. Readily marketable securities traded in the
over-the-counter market, including listed securities whose primary market is
believed by the Adviser to be over-the-counter, but excluding securities
admitted to trading on the NASDAQ National List, are valued at the mean of the
current bid and asked prices as reported by NASDAQ or, in the case of
securities not quoted by NASDAQ, the National Quotation Bureau or such other
comparable source as the Board of Directors deem appropriate to reflect their
fair market value. However, certain fixed income securities may be valued on
the basis of prices provided by a Pricing Service when such prices are
believed by the Board of Directors to reflect the fair market value of such
securities. The prices provided by a Pricing Service take into account
institutional size trading in similar groups of securities and any
developments related to specific securities. Where securities are traded on
more than one exchange and also over-the-counter, the securities will
generally be valued using the quotations the Board of Directors believes
reflect most closely the value of such securities.
"Maximum Applicable Rate" has the meaning set forth on page [32] of this
prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on pages [17 to 20]
of the statement of additional information.
"Moody's Eligible Assets" has the meaning set forth on pages [17 to 20]
of the statement of additional information.
50
"Moody's Exposure Period" means a period that is the same length or
longer than the number of days used in calculating the cash dividend component
of the AMPS Basic Maintenance Amount and shall initially be the period
commencing on a given Valuation Date and ending 49 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth on page [24] of
the statement of additional information.
"Moody's Industry Classification" has the meaning set forth on pages [22
to 23] of the statement of additional information.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page [28] of
this prospectus.
"1940 Act Cure Date" has the meaning set forth on page [28] of this
prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on pages [5 and 6] of the
statement of additional information.
"Non-Payment Period Rate" has the meaning set forth on page [6] of the
statement of additional information.
"Notice of Revocation" has the meaning set forth on page [5] of the
statement of additional information.
"Notice of Special Dividend Period" has the meaning set forth on page
[27] of this prospectus.
"NRSRO" means any nationally recognized statistical rating organization,
as that term is used in Rule 15a3-1 under the Securities and Exchange Act of
1934, as amended, or any successor provisions.
"Optional Redemption Price" has the meaning set forth on page [29] of
this prospectus.
"Order" has the meaning set forth on page [32] of this prospectus.
"Performing" means with respect to any asset, the issuer of such
investment is not in default of any payment obligations in respect thereof.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other person as
may be permitted by the Fund, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
"Pricing Service" means any pricing service designated by the Board of
Directors of the Fund and approved by Fitch or Moody's, as applicable, for
purposes of determining whether the Fund has Fitch Eligible Assets or Moody's
Eligible Assets, as applicable, with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
"Preferred stock" means preferred stock, par value $.10 per share, of the
Fund and includes the AMPS.
"Premium Call Period" has the meaning set forth under "Specific
Redemption Provisions" below.
51
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (ii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iii) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Bill Rate.
"Request for Special Dividend Period" has the meaning set forth on page
[27] of this prospectus.
"Rule 144A Securities" means securities which are restricted as to resale
under U.S. federal securities laws but are eligible for resale pursuant to
Rule 144A under the Securities Act.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.
"Securities Act" means the Securities Act of 1933, as amended from time
to time.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"28-Day Dividend Period" means a Dividend Period consisting of 28 days.
"Short Term Dividend Period" means a dividend period the number of days
in which are evenly divisible by seven, and not fewer than seven days nor more
than 364 days.
"Short Term Money Market Instrument" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Fund, the remaining term to maturity thereof is not in excess of 180 days:
(i) Commercial paper rated F1 by Fitch or A-1 by S&P if such
commercial paper matures in 30 days or P-1 by Moody's and either F1 by
Fitch or A-1+ by S&P if such commercial paper matures in over 30 days;
(ii) Demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof or the District of Columbia or (B) a United States branch office
or agency of a foreign depository institution (provided that such branch
office or agency is subject to banking regulation under the laws of the
United States, any state thereof or the District of Columbia);
(iii) Overnight funds;
(iv) U.S. Government Securities; and
(v) Eurodollar demand or time deposits in, or certificates of
deposit of, the head office or the London branch office of a depository
institution or trust company if the certificates of deposit, if any, and
the long-term unsecured debt obligations (other than such obligations the
ratings of which are based on the credit of a person or entity other than
such depository institution or trust company) of such depository
institution or trust company that have (1) credit ratings on such
Valuation Date of at least P-1 from Moody's and either F1+ from Fitch or
A-1+ from S&P, in the case of commercial paper or certificates of
deposit, and (2) credit ratings on each Valuation Date of at least Aa3
from Moody's and either AA- from Fitch or AA- from S&P, in the case of
long-term unsecured debt obligations; provided, however, that in the
52
case of any such investment that matures in no more than one Business Day
from the date of purchase or other acquisition by the Corporation, all of
the foregoing requirements shall be applicable except that the required
long-term unsecured debt credit rating of such depository institution or
trust company from Moody's, Fitch and S&P shall be at least A2, A and A,
respectively; and provided further, however, that the foregoing credit
rating requirements shall be deemed to be met with respect to a
depository institution or trust company if (1) such depository
institution or trust company is the principal depository institution in a
holding company system, (2) the certificates of deposit, if any, of such
depository institution or trust company are not rated on any Valuation
Date below P-1 by Moody's, F1+ by Fitch or A-1+ by S&P and there is no
long-term rating, and (3) the holding company shall meet all of the
foregoing credit rating requirements (including the preceding proviso in
the case of investments that mature in no more than one Business Day from
the date of purchase or other acquisition by the Corporation); and
provided further, that the interest receivable by the Corporation shall
not be subject to any withholding or similar taxes.
"Special Dividend Period" has the meaning set forth on page [27] of this
prospectus.
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period, either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Fund, after consultation
with the Auction Agent and the Broker-Dealers, during which the shares of AMPS
subject to such Dividend Period shall not be subject to redemption at the
option of the Fund and (ii) a period (a "Premium Call Period"), consisting of
a number of whole years and determined by the Board of Directors of the Fund,
after consultation with the Auction Agent and the Broker-Dealers, during each
year of which the shares of AMPS subject to such Dividend Period shall be
redeemable at the Fund's option at a price per share equal to $25,000 plus
accumulated but unpaid dividends plus a premium expressed as a percentage of
$25,000, as determined by the Board of Directors of the Fund after
consultation with the Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning set forth on page [34] of this
prospectus.
"Submitted Bid" has the meaning set forth on page [34] of this
prospectus.
"Submitted Hold Order" has the meaning set forth on page [34] of this
prospectus.
"Submitted Order" has the meaning set forth on page [34] of this
prospectus.
"Submitted Sell Order" has the meaning set forth on page [34] of this
prospectus.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
NRSRO or two NRSRO's, respectively, selected by Merrill Lynch, Pierce, Fenner
& Smith Incorporated, or its respective affiliates and successors, after
obtaining the Fund's approval, to act as a substitute rating agency or
substitute rating agencies, as the case may be, to determine the credit
ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning set forth on page [35] of this
prospectus.
"Treasury Bonds" means U.S. Treasury Bonds or Notes.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based
upon the yield for such securities having the next shorter and next longer
number of 30-day periods to maturity treating all Dividend Periods with a
length greater than the longest maturity for such securities as having a
length equal to such longest maturity, in all cases based upon data set forth
in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519)); provided,
however, if the most recent such statistical release shall not have been
published during the 15 days preceding the date of computation, the foregoing
computations
53
shall be based upon the average of comparable data as quoted to the Fund
by at least three recognized dealers in U.S. Government Securities
selected by the Fund.
"U.S. Government Securities" mean securities that are direct obligations
of, and obligations the timely payment of principal and interest on which is
fully guaranteed by, the United States of America or any agency or
instrumentality of the United States of America, the obligations of which are
backed by the full faith and credit of the United States of America and in the
form of conventional bills, bonds and notes.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent
of the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Bill Rate on such date. "Alternate Treasury
Bill Rate" on any date means the Interest Equivalent of the yield as
calculated by reference to the arithmetic average of the bid price quotations
of the actively traded Treasury Bill with a maturity most nearly comparable to
the length of the related Dividend Period, as determined by bid price
quotations as of any time on the Business Day immediately preceding such date,
obtained from at least three recognized primary U.S. Government securities
dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated
by reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of
New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government Securities dealers selected by
the Auction Agent.
"U.S. Treasury Strips" means securities based on U.S. Treasury Securities
created through the Separate Trading of Registered Interest and Principal of
Securities program.
"Valuation Date" has the meaning set forth on page [29] of this
prospectus.
"Winning Bid Rate" has the meaning set forth on page [35] of this
prospectus.
54
==============================================================================
$
PREFERRED INCOME STRATEGIES FUND, INC.
AUCTION MARKET PREFERRED STOCK ("AMPS")
Shares, Series A
Shares, Series B
Shares, Series C
Shares, Series D
Shares, Series E
---------------------------------------------
PROSPECTUS
---------------------------------------------
Merrill Lynch & Co.
, 2003
==============================================================================
The information contained in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
Registration Statement filed with the Securities and Exchange Commission is
effective. This statement of additional information is not a prospectus.
Subject To Completion
Preliminary Statement Of Additional Information Dated April 11, 2003
STATEMENT OF ADDITIONAL INFORMATION
$
Preferred Income Strategies Fund, Inc.
Auction Market Preferred Stock ("AMPS")
Shares, Series A
Shares, Series B
Shares, Series C
Shares, Series D
Shares, Series E
Liquidation Preference $25,000 Per Share
------------------------
Preferred Income Strategies Fund Inc. (the "Fund") is a recently
organized, diversified, closed-end management investment company that seeks to
provide common stockholders with current income. The secondary investment
objective of the Fund is to provide common stockholders with capital
appreciation. Under normal market conditions, at least 80% of the Fund's
assets will be invested in a portfolio of preferred securities, including
convertible preferred securities. The Fund intends to invest at least 80% of
its total assets in preferred securities or debt securities that are rated
investment grade or, if unrated, are considered by the Fund's investment
adviser to be of comparable quality. The Fund may invest up to 20% of its
total assets in preferred securities or debt securities that are rated below
investment grade or, if unrated, are considered by the Fund's investment
adviser to be of comparable quality. The Fund allocates its investments among
various industries and among issuers in such industries. The Fund will invest
at least 25% of its total assets in the industries comprising the financial
services sector. The Fund also will emphasize investments in the industries
comprising the utilities sector; however, the Fund will not invest 25% or more
of its total assets in any one of the industries comprising the utilities
sector. Emphasis on these sectors may subject the Fund to certain risks. Under
current market conditions, the Fund expects to invest primarily in fully
taxable preferred securities. The Fund may invest without limitation in U.S.
dollar denominated securities of issuers domiciled outside the United States.
There can be no assurance that the Fund's investment objective will be
realized. For more information on the Fund's investment objective and
policies, see "Investment Objective and Policies."
Certain capitalized terms not otherwise defined in this statement of
additional information have the meaning provided in the Glossary included as
part of the prospectus.
This statement of additional information is not a prospectus, but should
be read in conjunction with the prospectus of the Fund, which has been filed
with the Securities and Exchange Commission (the "Commission") and can be
obtained, without charge, by calling (800) 543-6217. The prospectus is
incorporated by reference into this statement of additional information, and
this statement of additional information is incorporated by reference into the
prospectus.
-------------------------
(R)Registered trademark of Merrill Lynch & Co., Inc.
-----------------------
Merrill Lynch & Co.
-----------------------
The date of this statement of additional information is , 2003.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
----
Investment Objective and Policies...........................................1
Investment Restrictions.....................................................2
Description of AMPS.........................................................4
The Auction................................................................11
Rating Agency Guidelines...................................................11
Directors and Officers.....................................................26
Investment Advisory and Management Arrangements............................30
Portfolio Transactions.....................................................32
Taxes......................................................................34
Net Asset Value............................................................38
Additional Information.....................................................38
Report of Independent Auditors.............................................40
Statement of Assets and Capital............................................41
Schedule of Investments (Unaudited)........................................42
Statement of Assets and Liabilities (Unaudited)............................43
Notes to Financial Statements (Unaudited)..................................44
APPENDIX A RATINGS OF SECURITIES.........................................A-1
APPENDIX B SETTLEMENT PROCEDURES.........................................B-1
APPENDIX C AUCTION PROCEDURES............................................C-1
INVESTMENT OBJECTIVE AND POLICIES
The primary investment objective of the Fund is to provide common
stockholders with current income. The secondary investment objective of the
Fund is to provide common stockholders with capital appreciation. The Fund's
investment objectives are fundamental policies and may not be changed without
the approval of a majority of the outstanding voting securities of the Fund
(as defined in the Investment Company Act of 1940 (the "1940 Act")).
The Fund seeks to achieve its objectives by investing primarily in a
portfolio of preferred securities, including convertible preferred securities
that may be converted into common stock or other securities of the same or a
different issuer ("preferred securities"). Under normal market conditions and
after the initial investment period following this offering, the Fund will
invest at least 80% of its assets in preferred securities. For this purpose,
"assets" means net assets, including assets acquired from the sale of
preferred stock, plus the amount of any borrowings for investment purposes.
This is a non-fundamental policy and may be changed by the Board of Directors
of the Fund provided that stockholders are provided with at least 60 days'
prior notice of any change as required by the rules under the 1940 Act. Under
normal market conditions, the Fund intends to invest primarily in fully
taxable preferred securities. The Fund's portfolio of preferred securities may
include both fixed and adjustable rate securities. There can be no assurance
that the Fund's investment objectives will be realized.
The Fund may invest without limitation in securities of issuers domiciled
outside the United States that are U.S. dollar denominated investments or
otherwise provide for payment to the Fund in U.S. dollars.
The Fund allocates its investments among various industries and among
issuers in such industries based on the Investment Adviser's evaluation of
market and economic conditions. Under normal circumstances, the Fund will
invest at least 25% of its total assets in the industries comprising the
financial services sector. The Fund also will emphasize investments in the
utilities sector; however, the Fund will not invest 25% or more of its total
assets in any one of the industries comprising the utilities sector. Emphasis
on these sectors may subject the Fund to certain risks.
Under normal market conditions and after the initial investment period
following this offering, the Fund will invest at least 80% of its total assets
in preferred securities or debt securities that are rated investment grade by
the established rating services (Baa or higher by Moody's Investors Service,
Inc. ("Moody's"), BBB or higher by Standard & Poor's ("Standard & Poor's") or
BBB or higher by Fitch, Inc. ("Fitch")) or, if unrated, are considered by Fund
Asset Management, L.P. (the "Investment Adviser") to be of comparable quality.
The Fund may invest up to 20% of its total assets in securities rated below
investment grade (Ba or lower by Moody's, BB or lower by Standard & Poor's or
BB or lower by Fitch) or, if unrated, are considered by the Investment Adviser
to be of comparable quality, provided that such securities are issued by an
issuer having outstanding a class of senior debt rated investment grade.
The Fund also may invest up to 20% of its total assets in common stocks.
The Fund does not currently intend to invest directly in common stocks but may
acquire and hold common stocks pursuant to a convertible feature in a
security, in unit offerings, in an exchange offer, or in connection with a
restructuring or bankruptcy of the security or similar transactions.
The allocation of the Fund's assets in various types of preferred, debt
and equity securities may vary from time to time depending on the Investment
Adviser's assessment of market conditions.
The Fund may engage in various portfolio strategies to seek to enhance
its return or to hedge its portfolio against movements in interest rates
through the use of derivatives, such as indexed and inversed securities,
options, futures, options on futures, interest rate transactions, credit
default swaps and short selling. Each of these portfolio strategies is
described below. There can be no assurance that the Fund will employ these
strategies or that, if employed, they will be effective.
The Fund may vary its investment policies for temporary defensive
purposes during periods in which the Investment Adviser believes that
conditions in the securities markets or other economic, financial or political
conditions warrant. Under such conditions, the Fund for temporary defensive
purposes may invest up to 100% of its
1
total assets in securities issued or guaranteed by the United States
Government or its instrumentalities or agencies, certificates of deposit,
bankers' acceptances and other bank obligations, commercial paper rated in the
highest category by an established rating agency, or other debt securities
deemed by the Investment Adviser to be consistent with a defensive posture, or
may hold its assets in cash.
Reference is made to "Investment Objectives and Policies" in the
prospectus for information regarding the types of securities that the Fund may
invest in to achieve its objectives.
Under normal market conditions, the Fund will invest at least 25% of its
total assets in the industries comprising the financial services sector. The
Fund also expects to have significant exposure to the industries comprising
the utilities sector. If adverse economic conditions prevail in the financial
services industries sector at some future date, the Fund, for defensive
purposes may temporarily invest less than 25% of its total assets in the
industries comprising the financial services sector. Reference is made to
"Other Investment Policies" in the prospectus for information regarding the
Fund's investment emphasis.
Some of the other types of investments or investment practices that the
Fund may invest or engage include indexed and inverse floating obligations,
interest rate transactions, credit default swap agreements, foreign
securities, options, financial futures and options thereon and short sales.
Reference is made to "Other Investment Policies" in the prospectus regarding
such investments or investment practices.
Other investment strategies utilized by the Fund include repurchase
agreements, purchase and sale contracts, reverse repurchase agreements,
lending of portfolio securities, when-issued securities, forward commitment
securities and standby commitment agreements. The Fund may employ new or
additional investment strategies and instruments if those strategies and
instruments are consistent with the Fund's investment objectives and are
permissible under applicable regulations governing the Fund. Reference is made
to "Other Investment Policies Other -- Investment Strategies" in the
prospectus regarding such strategies.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares of common stock and outstanding shares of AMPS and any
other preferred stock, voting together as a class, and the approval of a
majority of the outstanding shares of AMPS and any other preferred stock,
voting separately as a class (which for this purpose and under the 1940 Act
means the lesser of (i) 67% of the shares of each class of capital stock
represented at a meeting at which more than 50% of the outstanding shares of
each class of capital stock are represented or (ii) more than 50% of the
outstanding shares of each class of capital stock). The Fund may not:
1. Make any investment inconsistent with the Fund's classification
as a diversified company under the 1940 Act.
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, commodities or commodity contracts,
except that, to the extent permitted by applicable law, the Fund may
invest in securities directly or indirectly secured by real estate or
interests therein or issued by entities 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 1940 Act.
5. Underwrite securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
2
6. Make loans to other persons, except (i) the Fund shall not be
deemed to be making a loan to the extent that the Fund purchases bonds,
debentures or other corporate debt securities, preferred securities,
commercial paper, pass through instruments, bank loan participation
interests, certificates of deposit, bankers acceptances, repurchase
agreements or any similar instruments, and (ii) the Fund may lend its
portfolio securities in an amount not in excess of 33?% of its total
assets, taken at market value, provided that such loans shall be made in
accordance with the guidelines set forth in the prospectus.
7. Invest more than 25% of its total assets (taken at market value
at the time of each investment) in the securities of issuers in any one
industry, except that the Fund will invest at least 25% of its total
assets in the industries comprising the financial services sector;
provided that this limitation shall not apply with respect to obligations
issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors without stockholder approval, 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.
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 described under "Other Investment Policies."
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. Change its policy of investing, under normal circumstances, at
least 80% of the value of its assets in preferred securities, unless the
Fund provides its stockholders with at least 60 days' prior written
notice of such change. For these purposes, "assets" means net assets,
including assets acquired from the sale of preferred stock, plus the
amount of any borrowings for investment purposes.
If a percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not
be considered a violation.
For so long as shares of AMPS are rated by Moody's, the Fund will not
change additional investment restrictions (a), (b) or (c) unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the rating then assigned to the shares of AMPS by Moody's.
The Investment Adviser of the Fund and 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 1940 Act and the rules and regulations thereunder. Included
among such restricted transactions will be purchases from or sales to Merrill
Lynch of securities in transactions in which it acts as principal. See
"Portfolio Transactions."
3
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of the prospectus.
The AMPS of each series will be shares of preferred stock that entitle
their holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at an annualized rate that
may vary for the successive Dividend Periods for each series of AMPS. After
the Initial Dividend Period, each Subsequent Dividend Period for each series
of AMPS generally will be a 7-Day Dividend Period in the case of Series [ ]
AMPS and a 28-Day Dividend Period in the case of Series [ ] AMPS; provided,
however, that prior to any Auction, the Fund may elect, subject to certain
limitations described herein, upon giving notice to holders thereof, a Special
Dividend Period. The Applicable Rate for a particular Dividend Period will be
determined by an Auction conducted on the Business Day before the start of
such Dividend Period. Beneficial Owners and Potential Beneficial Owners of
shares of AMPS may participate in Auctions therefor, although, except in the
case of a Special Dividend Period of more than 28 days, Beneficial Owners
desiring to continue to hold all of their shares of AMPS regardless of the
Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
Appendix C -- "Auction Procedures."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of each series of AMPS will be represented
by one or more certificates registered in the name of the nominee of the
Securities Depository (initially expected to be Cede), and no person acquiring
shares of AMPS will be entitled to receive a certificate representing such
shares. See Appendix C -- "Auction Procedures." As a result, the nominee of
the Securities Depository is expected to be the sole holder of record of the
shares of AMPS. Accordingly, each purchaser of AMPS must rely on (i) the
procedures of the Securities Depository and, if such purchaser is not a member
of the Securities Depository, such purchaser's Agent Member, to receive
dividends, distributions and notices and to exercise voting rights (if and
when applicable) and (ii) the records of the Securities Depository and, if
such purchaser is not a member of the Securities Depository, such purchaser's
Agent Member, to evidence its beneficial ownership of shares of AMPS.
When issued and sold, the shares of AMPS will have a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) and will be fully paid and
non-assessable. See "Description of AMPS -- Liquidation Rights" in the
prospectus. The shares of AMPS will not be convertible into shares of common
stock or other capital stock of the Fund, and the holders thereof will have no
preemptive rights. Each series of AMPS will not be subject to any sinking fund
but will be subject to redemption at the option of the Fund at the Optional
Redemption Price on any Dividend Payment Date for such series (except during
the Initial Dividend Period and during a Non-Call Period) and, under certain
circumstances, will be subject to mandatory redemption by the Fund at the
Mandatory Redemption Price stated in the prospectus. See "Description of AMPS
-- Redemption" in the prospectus.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described in the prospectus, The Bank of New York will be
the transfer agent, registrar, dividend disbursing agent and redemption agent
for the shares of AMPS. The Auction Agent, however, will serve merely as the
agent of the Fund, acting in accordance with the Fund's instructions, and will
not be responsible for any evaluation or verification of any matters certified
to it.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any shares of
AMPS so long as the Fund is current in the payment of dividends on AMPS and on
any other capital stock of the Fund ranking on a parity with the AMPS with
respect to the payment of dividends or upon liquidation.
The following supplements the description of the terms of the shares of
AMPS set forth in the prospectus. This description does not purport to be
complete and is subject to and qualified in its entirety by reference to the
4
Fund's Charter and Articles Supplementary, including the provisions thereof
establishing the AMPS. The Fund's Charter and the form of Articles
Supplementary establishing the terms of the AMPS have been filed as exhibits
to the Registration Statement of which this statement of additional
information is a part.
Dividends
General. The holders of shares of each series of AMPS will be
entitled to receive, when, as and if declared by the Board of Directors of the
Fund, out of funds legally available therefor, cumulative cash dividends on
their shares, at the Applicable Rate determined as set forth below under
"Determination of Dividend Rate," payable on the respective dates set forth
below. Dividends on the shares of AMPS so declared and payable shall be paid
in preference to and in priority over any dividends so declared and payable on
the common stock.
Notification of Dividend Period. In determining whether the Fund
should issue a Notice of Special Dividend for a series of AMPS, the
Broker-Dealers will consider (i) existing short-term and long-term market
rates and indices of such short-term and long-term rates, (ii) existing market
supply and demand for short-term and long-term securities, (iii) existing
yield curves for short-term and long-term securities comparable to the AMPS,
(iv) industry and financial conditions which may affect the AMPS, (v) the
investment objectives of the Fund, and (vi) the Dividend Periods and dividend
rates at which current and potential beneficial holders of the AMPS would
remain or become beneficial holders. If the Broker-Dealers shall not give the
Fund and the Auction Agent a Response by such second Business Day or if the
Response states that given the factors set forth above it is not advisable
that the Fund give a Notice of Special Dividend Period for the series of AMPS,
the Fund may not give a Notice of Special Dividend Period in respect of such
Request for Special Dividend Period. In the event the Response indicates that
it is advisable that the Fund give a Notice of Special Dividend Period for the
series of AMPS, the Fund, by no later than the second Business Day prior to
such Auction Date, may give a notice (a "Notice of Special Dividend Period")
to the Auction Agent, the Securities Depository and each Broker-Dealer, which
notice will specify (i) the duration of the Special Dividend Period, (ii) the
Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related Response.
The Fund also shall provide a copy of such Notice of Special Dividend Period
to Moody's and Fitch. The Fund shall not give a Notice of Special Dividend
Period, and, if such Notice of Special Dividend Period shall have been given
already, shall give telephonic and written notice of its revocation (a "Notice
of Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction Date
if (x) either the 1940 Act AMPS Asset Coverage is not satisfied or the Fund
shall fail to maintain Fitch Eligible Assets and Moody's Eligible Assets each
with an aggregate Discounted Value at least equal to the AMPS Basic
Maintenance Amount, in each case on the Valuation Date immediately preceding
the Business Day prior to the relevant Auction Date on an actual basis and on
a pro forma basis giving effect to the proposed Special Dividend Period (using
as a pro forma dividend rate with respect to such Special Dividend Period the
dividend rate which the Broker-Dealers shall advise the Fund is an
approximately equal rate for securities similar to the AMPS with an equal
dividend period); provided that, in calculating the aggregate Discounted Value
of Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall
be deemed to be one week longer, (y) sufficient funds for the payment of
dividends payable on the immediately succeeding Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the close of business on
the third Business Day preceding the related Auction Date or (z) the
Broker-Dealers jointly advise the Fund that, after consideration of the
factors listed above, they have concluded that it is advisable to give a
Notice of Revocation. The Fund also shall provide a copy of such Notice of
Revocation to Moody's and Fitch. If the Fund is prohibited from giving a
Notice of Special Dividend Period as a result of the factors enumerated in
clause (x), (y) or (z) above or if the Fund gives a Notice of Revocation with
respect to a Notice of Special Dividend Period for any series of AMPS, the
next succeeding Dividend Period for that series will be a 7-Day Dividend
Period in the case of Series [ ] AMPS and a 28-Day Dividend Period in the case
of Series [ ] AMPS, provided that if the then current Dividend Period for
Series [ ] AMPS is a Special Dividend Period of less than 28 days], the next
succeeding Dividend Period for such series of AMPS will be the same length as
such current Dividend Period. In addition, in the event Sufficient Clearing
Bids are not made in any Auction or an Auction is not held for any reason, the
next succeeding Dividend Period will be a 7-Day Dividend Period (in the case
of Series [ ] AMPS) or a 28-Day Dividend Period (in the case of Series [ ]
AMPS), and the Fund may not again give a Notice of Special Dividend Period
(and any such attempted notice shall be null and void) until Sufficient
Clearing Bids have been made in an Auction with respect to a 7-Day Dividend
Period (in the case of Series [ ] AMPS) or a 28-Day Dividend Period (in the
case of Series [ ] AMPS).
5
Non-Payment Period; Late Charge. A Non-Payment Period will commence
if the Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
New York City time, on the Business Day preceding such Dividend Payment Date,
the full amount of any dividend on shares of AMPS payable on such Dividend
Payment Date or (ii) deposit, irrevocably in trust, in same-day funds, with
the Auction Agent by 12:00 noon, Eastern time, (A) on such Dividend Payment
Date the full amount of any cash dividend on such shares (if declared) payable
on such Dividend Payment Date or (B) on any redemption date for shares of AMPS
called for redemption, the Mandatory Redemption Price per share of such AMPS
or, in the case of an optional redemption, the Optional Redemption Price per
share. Such Non-Payment Period will consist of the period commencing on and
including the aforementioned Dividend Payment Date or redemption date, as the
case may be, and ending on and including the Business Day on which, by 12:00
noon, Eastern time, all unpaid cash dividends and unpaid redemption prices
shall have been so deposited or otherwise shall have been made available to
the applicable holders in same-day funds, provided that a Non-Payment Period
for any series of AMPS will not end unless the Fund shall have given at least
five days' but no more than 30 days' written notice of such deposit or
availability to the Auction Agent, the Securities Depository and all holders
of shares of AMPS of such series. Notwithstanding the foregoing, the failure
by the Fund to deposit funds as provided for by clause (ii) (A) or (ii) (B)
above within three Business Days after any Dividend Payment Date or redemption
date, as the case may be, in each case to the extent contemplated below, shall
not constitute a "Non-Payment Period."
The Applicable Rate for each Dividend Period for shares of AMPS of
any series, commencing during a Non-Payment Period, will be equal to the
Non-Payment Period Rate; and each Dividend Period commencing after the first
day of, and during, a Non-Payment Period shall be a 7-Day Dividend Period in
the case of Series [ ] AMPS and a 28-Day Dividend Period in the case of Series
[ ] AMPS, provided that if the preceding Dividend Period for Series [ ] AMPS
is a Special Dividend Period of less than 28 days, the Dividend Period
commencing during a Non-Payment Period for such series of AMPS will be the
same length as such preceding Dividend Period. Any dividend on shares of AMPS
due on any Dividend Payment Date for such shares (if, prior to the close of
business on the second Business Day preceding such Dividend Payment Date, the
Fund has declared such dividend payable on such Dividend Payment Date to the
persons who held such shares as of 12:00 noon, Eastern time, on the Business
Day preceding such Dividend Payment Date) or redemption price with respect to
such shares not paid to such persons when due may be paid to such persons in
the same form of funds by 12:00 noon, Eastern time, on any of the first three
Business Days after such Dividend Payment Date or due date, as the case may
be, provided that such amount is accompanied by a late charge calculated for
such period of non-payment at the Non-Payment Period Rate applied to the
amount of such non-payment based on the actual number of days comprising such
period divided by 365. In the case of a willful failure of the Fund to pay a
dividend on a Dividend Payment Date or to redeem any shares of AMPS on the
date set for such redemption, the preceding sentence shall not apply and the
Applicable Rate for the Dividend Period commencing during the Non-Payment
Period resulting from such failure shall be the Non-Payment Period Rate. For
the purposes of the foregoing, payment to a person in same-day funds on any
Business Day at any time will be considered equivalent to payment to that
person in New York Clearing House (next-day) funds at the same time on the
preceding Business Day, and any payment made after 12:00 noon, Eastern time,
on any Business Day shall be considered to have been made instead in the same
form of funds and to the same person before 12:00 noon, Eastern time, on the
next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable
Reference Rate, provided that the Board of Directors of the Fund shall have
the authority to adjust, modify, alter or change from time to time the initial
Non-Payment Period Rate if the Board of Directors of the Fund determines and
Moody's and Fitch (and any Substitute Rating Agency or Substitute Rating
Agencies, as the case may be, in lieu of Moody's or Fitch, or both, in the
event either or both of such parties shall not rate the AMPS) advise the Fund
in writing that such adjustment, modification, alteration or change will not
adversely affect their then-current ratings on the AMPS.
Restrictions on Dividends and Other Payments. For so long as any
shares of AMPS are outstanding, the Fund will not declare, pay or set apart
for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, common stock or other stock, if any, ranking junior to shares
of AMPS as to dividends or upon liquidation) in respect of common stock or any
other stock of the Fund ranking junior to or on a parity with shares of AMPS
as to dividends or upon liquidation, or call for redemption, redeem, purchase
or otherwise acquire for consideration any shares of common stock or any
6
other such junior stock (except by conversion into or exchange for stock of the
Fund ranking junior to AMPS as to dividends and upon liquidation) or any such
parity stock (except by conversion into or exchange for stock of the Fund
ranking junior to or on a parity with AMPS as to dividends and upon
liquidation), unless (A) immediately after such transaction, the Fund would
have Fitch Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount,
and the 1940 Act AMPS Asset Coverage (see "Asset Maintenance" and "Redemption"
below) would be satisfied, (B) full cumulative dividends on shares of AMPS due
on or prior to the date of the transaction have been declared and paid or
shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent, and (C) the Fund has redeemed the full
number of shares of AMPS required to be redeemed by any provision for
mandatory redemption contained in the Articles Supplementary.
Asset Maintenance
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities which are
stock, including the shares of AMPS (or such other asset coverage as in the
future may be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are stock of a closed-end investment company as a
condition of paying dividends on its common stock) ("1940 Act AMPS Asset
Coverage"). If the Fund fails to maintain 1940 Act AMPS Asset Coverage and
such failure is not cured as of the last Business Day of the following month
(the "1940 Act Cure Date"), the Fund will be required under certain
circumstances to redeem certain of the shares of AMPS. See "Redemption" in the
prospectus and below.
AMPS Basic Maintenance Amount. So long as shares of AMPS are
outstanding, the Fund will be required under the Articles Supplementary to
maintain as of the last Business Day of each week (a "Valuation Date") Fitch
Eligible Assets and Moody's Eligible Assets each having in the aggregate a
Discounted Value at least equal to the AMPS Basic Maintenance Amount. If the
Fund fails to meet such requirement as of any Valuation Date and such failure
is not cured on or before the tenth Business Day after such Valuation Date
(the "AMPS Basic Maintenance Cure Date"), the Fund will be required under
certain circumstances to redeem certain of the shares of AMPS. Upon any
failure to maintain the required Discounted Value, the Fund will use its best
efforts to alter the composition of its portfolio to reattain a Discounted
Value at least equal to the AMPS Basic Maintenance Amount on or prior to the
AMPS Basic Maintenance Cure Date. See "Redemption" in the prospectus and
below.
The AMPS Basic Maintenance Amount as of any Valuation Date is defined
as the dollar amount equal to (i) the sum of (A) the product of the number of
shares of AMPS of each series outstanding on such Valuation Date multiplied by
the sum of $25,000 and any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash
dividends that will have accumulated at the Applicable Rate (whether or not
earned or declared) that will have accumulated for each share of AMPS
outstanding to (but not including) the end of the current Dividend Period for
each series of AMPS that follows such Valuation Date in the event the
then-current Dividend Period for each series of AMPS will end within 49
calendar days of such Valuation Date or through the 49th day after such
Valuation Date in the event the then-current Dividend Period for the AMPS will
not end within 49 calendar days of such Valuation Date; (C) in the event the
then-current Dividend Period will end within 49 calendar days of such
Valuation Date, the aggregate amount of cash dividends that would accumulate
at the Maximum Applicable Rate applicable to a Dividend Period of 28 or fewer
days on any shares of AMPS outstanding from the end of such Dividend Period
through the 49th day after such Valuation Date (except that if such Valuation
Date occurs during a Non-Payment Period, the cash dividend for purposes of
calculation would accumulate at the then-current Non-Payment Period Rate); (D)
the amount of anticipated Fund expenses for the 90 days subsequent to such
Valuation Date; (E) the amount of current outstanding balances of any
indebtedness which is senior to the AMPS plus interest actually accrued
together with 30 days additional interest on the current outstanding balances
calculated at the current rate; and (F) any current liabilities as of such
Valuation Date to the extent not reflected in any of (i) (A) through (i) (E)
(including, without limitation, and immediately upon determination, any
amounts due and payable by the Fund for portfolio securities purchased as of
such Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less (ii) either (A) the Discounted Value of any Fund
assets, or (B) the face value of any of the Fund's assets if such assets
mature prior to or on the date of redemption of AMPS or payment of a liability
and are either securities issued or guaranteed by the United
7
States Government or Deposit Securities, in both cases irrevocably deposited by
the Fund for the payment of the amount needed to redeem shares of AMPS subject
to redemption or to satisfy any of (i)(B) through (i)(F).
The Discount Factors and guidelines for determining the market value
of the Fund's portfolio holdings have been based on criteria established in
connection with rating the AMPS. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of
a debt obligation, the higher the related discount factor) and the frequency
with which the relevant asset is marked to market. In no event shall the
Discounted Value of any asset of the Fund exceed its unpaid principal balance
or face amount as of the date of calculation. The Discount Factor relating to
any asset of the Fund and the AMPS Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Fund, without shareholder
approval, but only in the event the Fund receives written confirmation from
Fitch, Moody's and any Substitute Rating Agency that any such changes would
not impair the ratings then assigned to the shares of AMPS by Fitch or Moody's
or any Substitute Rating Agency.
On or before the seventh Business Day after a Valuation Date on which
the Fund fails to maintain Fitch Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount, the Fund is required to deliver to the Auction
Agent, Moody's and Fitch a report with respect to the calculation of the AMPS
Basic Maintenance Amount and the value of its portfolio holdings as of the
date of such failure (an "AMPS Basic Maintenance Report"). The Fund also will
deliver an AMPS Basic Maintenance Report as of the last Valuation Date of each
month on or before the seventh Business Day after such day. Within ten
Business Days after delivery of such report relating to the last Valuation
Date of the last month of each fiscal quarter of the Fund, the Fund will
deliver a letter prepared by the Fund's independent accountants regarding the
accuracy of the calculations made by the Fund in its most recent AMPS Basic
Maintenance Report. [The Fund will also provide Moody's with an AMPS Basic
Maintenance Report as of each Valuation Date on or before the seventh Business
Day after such date when the Discounted Value of Moody's Eligible Assets
exceeds the AMPS Basic Maintenance Amount by 30% or less.] Also, on or before
5:00 p.m., Eastern time, on the first Business Day after shares of common
stock are repurchased by the Fund, the Fund will complete and deliver to Fitch
and Moody's an AMPS Basic Maintenance Report as of the close of business on
such date that common stock is repurchased. If any such letter prepared by the
Fund's independent accountants shows that an error was made in the most recent
AMPS Basic Maintenance Report, the calculation or determination made by the
Fund's independent accountants will be conclusive and binding on the Fund.
Redemption
Mandatory Redemption. The number of shares of AMPS to be redeemed
will be equal to the lesser of (a) the minimum number of shares of AMPS the
redemption of which, if deemed to have occurred immediately prior to the
opening of business on the Cure Date, together with all other shares of the
preferred stock subject to redemption or retirement, would result in the Fund
having Fitch Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as the case may
be, on such Cure Date (provided that, if there is no such minimum number of
shares the redemption of which would have such result, all shares of AMPS then
outstanding will be redeemed), and (b) the maximum number of shares of AMPS,
together with all other shares of preferred stock subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor on such redemption date. In determining the number of shares of AMPS
required to be redeemed in accordance with the foregoing, the Fund shall
allocate the number required to be redeemed which would result in the Fund
having Fitch Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as the case may
be, pro rata among shares of AMPS and other preferred stock subject to
redemption pursuant to provisions similar to those set forth below; provided
that, shares of AMPS which may not be redeemed at the option of the Fund due
to the designation of a Non-Call Period applicable to such shares (A) will be
subject to mandatory redemption only to the extent that other shares are not
available to satisfy the number of shares required to be redeemed and (B) will
be selected for redemption in an ascending order of outstanding number of days
in the Non-Call Period (with shares with the lowest number of days to be
redeemed first) and by lot in the event of shares having an equal number of
days in such Non-Call Period. The Fund is required to effect such a mandatory
redemption not later than 24 days
8
after such Cure Date, except that if the Fund does not have funds legally
available for the redemption of all of the required number of shares of AMPS
which are subject to mandatory redemption or the Fund otherwise is unable to
effect such redemption on or prior to 24 days after such Cure Date, the Fund
will redeem those shares of AMPS which it was unable to redeem on the earliest
practicable date on which it is able to effect such redemption.
Notice of Redemption. If shares of AMPS of any series are to be
redeemed, a notice of redemption will be mailed to each record holder of such
series of AMPS (initially Cede as nominee of the Securities Depository) and to
the Auction Agent not less than 17 nor more than 60 days prior to the date
fixed for the redemption thereof. Each notice of redemption will include a
statement setting forth: (i) the redemption date, (ii) the aggregate number of
shares of AMPS of such series to be redeemed, (iii) the redemption price, (iv)
the place or places where shares of AMPS of such series are to be surrendered
for payment of the redemption price, (v) a statement that dividends on the
shares to be redeemed will cease to accumulate on such redemption date and
(vi) the provision of the Articles Supplementary pursuant to which such shares
are being redeemed. The notice also will be published in The Wall Street
Journal. No defect in the notice of redemption or in the mailing or
publication thereof will affect the validity of the redemption proceedings,
except as required by applicable law.
In the event that less than all of the outstanding shares of AMPS are
to be redeemed, the shares to be redeemed will be selected by lot or such
other method as the Fund shall deem fair and equitable, and the results
thereof will be communicated to the Auction Agent. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder
of all shares of AMPS, and the Securities Depository will determine the number
of shares to be redeemed from the account of the Agent Member of each Existing
Holder. Each Agent Member will determine the number of shares to be redeemed
from the account of each Existing Holder for which it acts as agent. An Agent
Member may select for redemption shares from the accounts of some Existing
Holders without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares of such
series, the particular shares to be redeemed shall be selected by the Fund by
lot or by such other method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or
thereafter deposits in trust with the Auction Agent, or segregates in an
account at the Fund's custodian bank for the benefit of the Auction Agent,
Deposit Securities (with a right of substitution) having an aggregate
Discounted Value equal to the redemption payment for the shares of AMPS as to
which notice of redemption has been given, with irrevocable instructions and
authority to pay the redemption price to the record holders thereof, then upon
the date of such deposit or, if no such deposit is made, upon such date fixed
for redemption (unless the Fund shall default in making payment of the
redemption price), all rights of the holders of such shares called for
redemption will cease and terminate, except the right of such holders to
receive the redemption notice thereof, but without interest, and such shares
no longer will be deemed to be outstanding. The Fund will be entitled to
receive, from time to time, the interest, if any, earned on such Deposit
Securities deposited with the Auction Agent, and the holders of any shares so
redeemed will have no claim to any such interest. Any funds so deposited which
are unclaimed at the end of one year from such redemption date will be repaid,
upon demand, to the Fund, after which the holders of the shares of AMPS of
such series so called for redemption may look only to the Fund for payment
thereof.
So long as any shares of AMPS are held of record by the nominee of
the Securities Depository (initially Cede), the redemption price for such
shares will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it
to distribute the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for whom they are
acting as agent.
Notwithstanding the provisions for redemption described above, no
shares of AMPS shall be subject to optional redemption (i) unless all
dividends in arrears on the outstanding shares of AMPS, and all capital stock
of the Fund ranking on a parity with the AMPS with respect to the payment of
dividends or upon liquidation, have been or are being contemporaneously paid
or declared and set aside for payment and (ii) if redemption thereof would
result in the Fund's failure to maintain Moody's Eligible Assets or Fitch
Eligible Assets with an aggregate Discounted Value equal to or greater than
the AMPS Basic Maintenance Amount.
9
Voting Rights
In connection with the election of the Fund's directors, holders of
shares of AMPS and any other preferred stock, voting as a separate class,
shall be entitled at all times to elect two of the Fund's directors, and the
remaining directors will be elected by holders of shares of common stock and
shares of AMPS and any other preferred stock, voting together as a single
class. In addition, if at any time dividends on outstanding shares of AMPS
shall be unpaid in an amount equal to at least two full years' dividends
thereon or if at any time holders of any shares of preferred stock are
entitled, together with the holders of AMPS, to elect a majority of the
directors of the Fund under the 1940 Act, then the number of directors
constituting the Board of Directors automatically shall be increased by the
smallest number that, when added to the two directors elected exclusively by
the holders of shares of AMPS and any other preferred stock as described
above, would constitute a majority of the Board of Directors as so increased
by such smallest number, and at a special meeting of shareholders which will
be called and held as soon as practicable, and at all subsequent meetings at
which directors are to be elected, the holders of shares of AMPS and any other
preferred stock, voting as a separate class, will be entitled to elect the
smallest number of additional directors that, together with the two directors
which such holders in any event will be entitled to elect, constitutes a
majority of the total number of directors of the Fund as so increased. The
terms of office of the persons who are directors at the time of that election
will continue. If the Fund thereafter shall pay, or declare and set apart for
payment in full, all dividends payable on all outstanding shares of AMPS and
any other preferred stock for all past Dividend Periods, the additional voting
rights of the holders of shares of AMPS and any other preferred stock as
described above shall cease, and the terms of office of all of the additional
directors elected by the holders of shares of AMPS and any other preferred
stock (but not of the directors with respect to whose election the holders of
common stock were entitled to vote or the two directors the holders of shares
of AMPS and any other preferred stock have the right to elect in any event)
will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast
by holders of outstanding shares of AMPS and any other preferred stock, voting
as a separate class, will be required to (i) authorize, create or issue any
class or series of stock ranking prior to the AMPS or any other series of
preferred stock with respect to the payment of dividends or the distribution
of assets on liquidation, or (ii) amend, alter or repeal the provisions of the
Articles of Incorporation, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Articles of Incorporation of holders of shares of AMPS or any other preferred
stock. To the extent permitted under the 1940 Act, in the event shares of more
than one series of AMPS are outstanding, the Fund shall not approve any of the
actions set forth in clause (i) or (ii) which adversely affects the contract
rights expressly set forth in the Charter of a holder of shares of a series of
AMPS differently than those of a holder of shares of any other series of AMPS
without the affirmative vote of at least a majority of votes entitled to be
cast by holders of the shares of AMPS of each series adversely affected and
outstanding at such time (each such adversely affected series voting
separately as a class). The Board of Directors, however, without shareholder
approval, may amend, alter or repeal any or all of the various rating agency
guidelines described herein in the event the Fund receives confirmation from
the rating agencies that any such amendment, alteration or repeal would not
impair the ratings then assigned to shares of AMPS. Unless a higher percentage
is provided for under "Description of Capital Stock -- Certain Provisions of
the Charter and By-Laws" in the prospectus, the affirmative vote of the
holders of a majority of the outstanding shares of preferred stock (as defined
under "Investment Restrictions"), including AMPS, entitled to be cast, voting
as a separate class, will be required to approve any plan of reorganization
(including bankruptcy proceedings) adversely affecting such shares or any
action requiring a vote of security holders under Section 13(a) of the 1940
Act including, among other things, changes in the Fund's investment objectives
or changes in the investment restrictions described as fundamental policies
under "Investment Restrictions." The class vote of holders of shares of AMPS
and any other preferred stock described above in each case will be in addition
to a separate vote of the requisite percentage of shares of common stock and
shares of AMPS and any other preferred stock, voting together as a single
class, necessary to authorize the action in question. An increase in the
number of authorized shares of preferred stock pursuant to the Charter or the
issuance of additional shares of any series of preferred stock (including
AMPS) pursuant to the Charter shall not in and of itself be considered to
adversely affect the contract rights of the holders of the AMPS.
Notwithstanding the foregoing, and except as otherwise required by
the 1940 Act, (i) holders of outstanding shares of the AMPS will be entitled
as a series, to the exclusion of the holders of all other securities,
including other preferred stock, common stock and other classes of capital
stock of the Fund, to vote on matters affecting the AMPS that do not
materially adversely affect any of the contract rights of holders of such
other securities, including other
10
preferred stock, common stock and other classes of capital stock, as expressly
set forth in the Charter, and (ii) holders of outstanding shares of AMPS will
not be entitled to vote on matters affecting any other preferred stock that do
not materially adversely affect any of the contract rights of holders of the
AMPS, as expressly set forth in the Charter.
The foregoing voting provisions will not apply to any shares of AMPS
if, at or prior to the time when the act with respect to which such vote
otherwise would be required shall be effected, such shares shall have been (i)
redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
THE AUCTION
Auction Agent Agreement
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the
Auction Agent Agreement, and will not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in
ascertaining the pertinent facts. Pursuant to the Auction Agent Agreement, the
Fund is required to indemnify the Auction Agent for certain losses and
liabilities incurred by the Auction Agent without negligence or bad faith on
its part in connection with the performance of its duties under such
agreement.
The Auction Agent may terminate the Auction Agent Agreement upon
notice to the Fund, which termination may be no earlier than 60 days following
delivery of such notice. If the Auction Agent resigns, the Fund will use its
best efforts to enter into an agreement with a successor Auction Agent
containing substantially the same terms and conditions as the Auction Agent
Agreement. The Fund may terminate the Auction Agent Agreement, provided that
prior to such termination the Fund shall have entered into such an agreement
with respect thereto with a successor Auction Agent.
Broker-Dealer Agreements
The Auctions require the participation of one or more broker-dealers.
A Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with Merrill Lynch may not be terminated without the
prior written consent of the Fund, which consent may not be unreasonably
withheld.
Auction Procedures
The Auction Procedures are set forth in Appendix C to this statement
of additional information. The Settlement Procedures to be used with respect
to Auctions are set forth in Appendix B to this statement of additional
information.
RATING AGENCY GUIDELINES
Fitch AAA Rating Guidelines
The Discounted Value of the Fund's Fitch Eligible Assets is
calculated on each Valuation Date. See "Description of AMPS -- Asset
Maintenance." Fitch Eligible Assets that are eligible for consideration under
such guidelines include cash, receivables for Fitch Eligible Assets, Short
Term Money Market Instruments, U.S. Government Securities, U.S. Treasury
Strips, Debt Securities (defined below), preferred securities, Rule 144A
Securities, interest rate swaps and common stock. The Fitch Exposure Period is
the period commencing on (and including) a given Valuation Date and ending 49
days thereafter. For purposes of calculating the Discounted Value of the
Fund's portfolio securities under the current Fitch guidelines, the Market
Value of portfolio securities eligible
11
for consideration under such guidelines must be discounted by the applicable
Fitch Discount Factor. The Fitch Discount Factor used to discount a particular
Fitch Eligible Assets will be determined by reference to the percentages set
forth below, provided however, that for unhedged foreign investments a
discount factor of 105% shall be applied to the Market Value thereof in
addition to the Discount Factor as determined in accordance with the
procedures below, provided further that, if the foreign issuer of such
unhedged foreign investment is from a country whose sovereign debt rating in a
non-local currency is not assigned a rating of AA or better by Fitch, a
discount factor of 117% shall be applied to the Market Value thereof in
addition to the Discount Factor as determined in accordance with the
procedures below:
(i) Preferred securities: the percentage determined by
references to the rating of a preferred security in accordance with
the table set forth as follows:
Preferred Security Rating(1) Discount Factor
---------------------------- ---------------
AAA Taxable Preferred(2).................................................... 130.58%
AA Taxable Preferred........................................................ 133.19%
A Taxable Preferred......................................................... 135.91%
BBB Taxable Preferred....................................................... 138.73%
BB Taxable Preferred........................................................ 153.23%
Not rated or below BB Taxable Preferred..................................... 161.08%
Investment Grade DRD Preferred(3)........................................... 163.40%
Not rated or below Investment Grade DRD Preferred........................... 201.21%
------------
(1) If a security is not rated by Fitch but is rated by two other
nationally recognized statistical ratings organizations
("NRSROs"), then the lower of the ratings on the security from
the two other NRSROs will be used to determine the Fitch
Discount Factor (e.g., where the S&P rating is A- and the
Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If
a security is not rated by Fitch but is rated by only one other
NRSRO, then the rating on the security from the other NRSRO will
be used to determine the Fitch Discount Factor (e.g., where the
only rating on a security is an S&P rating of AAA, a Fitch
rating of AAA will be used, and where the only rating on a
security is a Moody's rating of Ba3, a Fitch rating of BB- will
be used). If a security is not rated by any NRSRO, the Fund will
use the percentage set forth under "not rated" in this table.
(2) Taxable preferred securities do not qualify for the dividends
received deduction ("DRD") pursuant to Section 243 of the Code.
(3) DRD preferred securities qualify for the DRD pursuant to Section
243 of the Code that generally allows a corporation to deduct
70% of dividends received from their income.
(ii) Corporate Debt Securities (defined below): the
percentage determined by reference to the rating of a corporate Debt
Security in accordance with the table set forth below:
Not
Rated
Fitch Rating or
Term to Maturity of ------------------------------------------------- Below
Corporate Debt Security(1) AAA AA A BBB BB BB
-------------------------------------------- ------- -------- -------- ------ ------ -------
% % % % % %
3 years or less (but longer than 1 year).... 106.38 108.11 109.89 111.73 129.87 151.52
5 years or less (but longer than 3 years)... 111.11 112.99 114.94 116.96 134.24 151.52
7 years or less (but longer than 5 years)... 113.64 115.61 117.65 119.76 135.66 151.52
10 years or less (but longer than 7 years).. 115.61 117.65 119.76 121.95 136.74 151.52
15 years or less (but longer than 10 years). 119.76 121.95 124.22 126.58 139.05 151.52
More than 15 years......................... 124.22 126.58 129.03 131.58 144.55 151.52
----------------
(1) If a security is not rated by Fitch but is rated by two other
NRSROs, then the lower of the ratings on the security from the
two other NRSROs will be used to determine the Fitch Discount
Factor (e.g., where the S&P rating is A- and the Moody's rating
is Baa1, a Fitch rating of BBB+ will be used). If a security is
not rated by Fitch but is rated by only one other NRSRO, then
the rating on the security from the other NRSRO will be used to
determine the Fitch Discount Factor (e.g., where the only rating
on a security is an S&P rating of AAA, a Fitch rating of AAA
will be used, and where the only rating on a security is a
Moody's rating of Ba3, a Fitch rating of BB- will be used). If a
security is not rated by any NRSRO, the Fund will use the
percentage set forth under "not rated" in this table.
12
[The Fitch Discount Factors presented in the immediately
preceding table apply to corporate Debt Securities that are
Performing and have a Market Value determined by a Pricing Service or
an Approved Price. The Fitch Discount Factor noted in the table above
for a Debt Security rated B or CCC by Fitch shall apply to any
non-Performing Debt Security with a price equal to or greater than
$0.20.] If a Debt Security does not have a Market Value determined by
a Pricing Service or an Approved Price, a rating two rating
categories below the actual rating on the Debt Security will be used
(e.g., where the actual rating is A-, the rating for Debt Securities
rated BB- will be used). The Fitch Discount Factor for a Debt
Security issued by a limited partnership that is not a Rule 144A
Security shall be the Discount Factor determined in accordance with
the table set forth above multiplied by 105%.
The Fitch Discount Factors presented in the immediately
preceding table will also apply to interest rate swaps and caps,
whereby the rating of the counterparty to the swap or cap will be the
rating used to determine the Fitch Discount Factor in the table. The
Fitch Discount Factors presented in the immediately preceding table
also apply to corporate obligations backed by a guaranty, a letter of
credit or insurance issued by a third party. If the third-party
credit rating is the basis for the rating on the obligation, then the
rating on the third party will be used to determine the Fitch
Discount Factor in the table.
(iii) Convertible securities: the Fitch Discount Factor
applied to convertible securities is (A) 200% for investment grade
convertibles and (B) 222% for below investment grade convertibles so
long as such convertible debt securities have neither (x) conversion
premium greater than 100% nor (y) have a yield to maturity or yield
to worst of greater than 15.00% above the relevant United States
Treasury yield curve. The Fitch Discount Factor applied to
convertible securities which have conversion premiums of greater than
100% is (A) 152% for investment grade convertibles and (B) 179% for
below investment grade convertibles so long as such convertible
securities do not have a yield to maturity or yield to worst of
greater than 15.00% above the relevant United States Treasury yield
curve. The Fitch Discount Factor applied to convertible securities
which have a yield to maturity or yield to worse of greater than
15.00% above the relevant United States Treasury yield curve is 370%.
If a security is not rated by Fitch but is rated by two other
NRSROs, then the lower of the ratings on the security from the two
other NRSROs will be used to determine the Fitch Discount Factor
(e.g., where the S&P rating is A- and the Moody's rating is Baa1, a
Fitch rating of BBB+ will be used). If a security is not rated by
Fitch but is rated by only one other NRSRO, then the rating on the
security from the other NRSRO will be used to determine the Fitch
Discount Factor (e.g., where the only rating on a security is an S&P
rating of AAA, a Fitch rating of AAA will be used, and where the only
rating on a security is a Moody's rating of Ba3, a Fitch rating of
BB- will be used). If a security is not rated by any NRSRO, the Fund
will treat the security as if it were below investment grade.
(iv) U.S. Government Securities and U.S. Treasury Strips: the
percentage determined by reference to the time remaining to maturity
of U.S. Government Securities and U.S. Treasury Strips in accordance
with the table set forth below:
Time Remaining To Maturity Discount Factor
-------------------------- ---------------
1 year or less.......................................... 101.5%
2 years or less (but longer than 1 year)................ 103%
3 years or less (but longer than 2 years)............... 105%
4 years or less (but longer than 3 years)............... 107%
5 years or less (but longer than 4 years)............... 109%
7 years or less (but longer than 5 years)............... 112%
10 years or less (but longer than 7 years).............. 114%
Greater than 10 years................................... 122%
(v) Short term investments and cash: The Fitch Discount Factor
applied to short-term portfolio securities, including without
limitation Debt Securities, Short Term Money Market Instruments and
municipal debt obligations, will be (A) 100%, so long as such
portfolio securities mature or have a demand feature at par
exercisable within the Fitch Exposure Period; (B) 115%, so long as
such portfolio
13
securities mature or have a demand feature at par not exercisable
within the Fitch Exposure Period; and (C) 125%, so long as such
portfolio securities neither mature nor have a demand feature
at par exercisable within the Fitch Exposure Period. A Fitch Discount
Factor of 100% will be applied to cash. Rule 2a-7 money market funds
rated by Fitch or another NRSRO will also have a discount factor of
100%, [and unrated Rule 2a-7 money market funds will have a discount
factor of 115%].
(vi) Rule 144A Securities: The Fitch Discount Factor applied
to Rule 144A Securities will be 110% of the Fitch Discount Factor
which would apply were the securities registered under the Securities
Act;
(vii) Foreign Bonds (defined below): The Fitch Discount
Factor (A) for a Foreign Bond the principal of which (if not
denominated in U.S. dollars) is subject to a currency hedging
transaction will be the Fitch Discount Factor that would otherwise
apply to such Foreign Bonds in accordance with this definition and
(B) for (1) a Foreign Bond the principal of which (if not denominated
in U.S. dollars) is not subject to a currency hedging transaction and
(2) a bond issued in a currency other than U.S. dollars by a
corporation, limited liability company or limited partnership
domiciled in, or the government or any agency, instrumentality or
political subdivision of, a nation other than an Approved Foreign
Nation (defined below), will be 370%; and
(viii) Common stock: The Fitch Discount Factor applied to
common stock and illiquid debt will be 370%.
The Fitch Discount Factor for any Fitch Eligible Asset other than the
securities set forth above will be the percentage provided in writing by
Fitch.
For the purpose of qualifying as a Fitch Eligible Asset as of any
Valuation Date, portfolio securities are subject to the following eligibility
requirements:
(i) Cash (including interest and dividends due on assets
rated (A) BBB or higher by Fitch or the equivalent by another NRSRO
if the payment date is within five Business Days of the Valuation
Date, (B) A or higher by Fitch or the equivalent by another NRSRO if
the payment date is within thirty days of the Valuation Date, and (C)
A+ or higher by Fitch or the equivalent by another NRSRO if the
payment date is within the Fitch Exposure Period) and receivables for
Fitch Eligible Assets sold if the receivable is due within five
Business Days of the Valuation Date, and if the trades which
generated such receivables are settled within five business days;
(ii) Short Term Money Market Instruments so long as (a) such
securities are rated at least F1+ by Fitch or the equivalent by
another NRSRO, (B) in the case of demand deposits, time deposits and
overnight funds, the supporting entity is rated at least A by Fitch
or the equivalent by another NRSRO, or (C) in all other cases, the
supporting entity (1) is rated at least A by Fitch or the equivalent
by another NRSRO and the security matures within one month, (2) is
rated at least A by Fitch or the equivalent by another NRSRO and the
security matures within three months or (3) is rated at least AA by
Fitch or the equivalent by another NRSRO and the security matures
within six months. In addition, Rule 2a-7 money market funds are
Fitch Eligible Assets;
(iii) Debt Securities if such securities have been
registered under the Securities Act or are restricted as to resale
under U.S. federal securities laws but are eligible for resale
pursuant to Rule 144A under the Securities Act; and such securities
are issued by (1) a U.S. corporation, limited liability company or
limited partnership, (2) a corporation, limited liability company or
limited partnership domiciled in Argentina, Australia, Brazil, Chile,
France, Germany, Hong Kong, Italy, Japan, Korea, Mexico, New Zealand,
Singapore, Spain, the United Kingdom and European Union countries
whose currencies are denominated in euros (collectively along with
any other countries agreed upon by Fitch and the Corporation, the
"Approved Foreign Nations"), (3) the government of any Approved
Foreign Nation or any of its agencies, instrumentalities or political
subdivisions (the debt securities of Approved Foreign Nation issuers
being referred to collectively as "Foreign Bonds"), (4) a
corporation, limited liability company or limited partnership
domiciled in Canada or (5) the Canadian government or any of its
agencies,
14
instrumentalities or political subdivisions (the debt securities
of Canadian issuers being referred to collectively as
"Canadian Bonds"). Foreign Bonds held by the Fund will qualify as
Fitch Eligible Assets only up to a maximum of 20% of the aggregate
Market Value of all assets constituting Fitch Eligible Assets.
Similarly, Canadian Bonds held by the Fund will qualify as Fitch
Eligible Assets only up to a maximum of 20% of the aggregate Market
Value of all assets constituting Fitch Eligible Assets.
Notwithstanding the limitations in the two preceding sentences,
Foreign Bonds and Canadian Bonds held by the Fund will qualify as
Fitch Eligible Assets only up to a maximum of 30% of the aggregate
Market Value of all assets constituting Fitch Eligible Assets. In
addition, bonds which are issued in connection with a reorganization
under U.S. federal bankruptcy law ("Reorganization Bonds") will be
considered debt securities constituting Fitch Eligible Assets if (a)
they provide for periodic payment of interest in cash in U.S. dollars
or in euros; (b) they do not provide for conversion or exchange into
equity capital at any time over their lives; (c) they have been
registered under the Securities Act or are restricted as to resale
under federal securities laws but are eligible for trading under Rule
144A Fund promulgated pursuant to the Securities Act; (d) they were
issued by a U.S. corporation, limited liability company or limited
partnership; and (e) at the time of purchase at least one year had
elapsed since the issuer's reorganization. Reorganization Bonds may
also be considered debt securities constituting Fitch Eligible Assets
if they have been approved by Fitch, which approval shall not be
unreasonably withheld. All debt securities satisfying the foregoing
requirements and restrictions of this paragraph (iii) are herein
referred to as "Debt Securities;"
(iv) Preferred securities if (1) dividends on such preferred
securities are cumulative, (2) such securities provide for the
periodic payment of dividends thereon in cash in U.S. dollars or
euros and do not provide for conversion or exchange into, or have
warrants attached entitling the holder to receive equity capital at
any time over the respective lives of such securities, (3) the issuer
of such a preferred security has common stock listed on either the
New York Stock Exchange, the American Stock Exchange or NASDAQ, (4)
the issuer of such a preferred security has a senior debt rating or
preferred security rating from Fitch of BBB- or higher or the
equivalent rating by another Rating Agency. In addition, the
preferred securities issue must be at least $50 million;
(v) Interest rate swaps entered into according to
International Swap Dealers Association ("ISDA") standards if (1) the
counterparty to the swap transaction has a short-term rating of not
less than F1 by Fitch or the equivalent by another, NRSRO, or, if the
swap counterparty does not have a short-term rating, the
counterparty's senior unsecured long-term debt rating is AA or higher
by Fitch or the equivalent by another NRSRO and (2) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not greater than the liquidation preference of the
AMPS originally issued; and
(vi) Common stocks (1) (A) which are traded on the New York
Stock Exchange, the American Stock Exchange or NASDAQ, (B) which, if
cash dividend paying, pay cash dividends in U.S. dollars, and (C)
which may be sold without restriction by the Fund; provided, however,
that (x) common stock which, while a Fitch Eligible Asset owned by
the Fund, ceases paying any regular cash dividend will no longer be
considered a Fitch Eligible Asset until 60 calendar days after the
date of the announcement of such cessation, unless the issuer of the
common stock has senior debt securities rated at least A- by Fitch
(or rated at an equivalent level by either Moody's or S&P, if rated
by only one of them, or by the lower of Moody's or S&P if rated by
both) and (y) the aggregate Market Value of the Fund's holdings of
the common stock of any single U.S. issuer in excess of 5% of
aggregate Market Value of the Fund's assets shall not be a Fitch
Eligible Asset; (2) denominated in any currency other than the U.S.
dollar and of issuers formed under the laws of jurisdictions other
than the United States, its states and the District of Columbia for
which there are dollar-denominated ADRs which are traded in the
United States on exchanges or over-the-counter and are issued by
banks formed under the laws of the United States, its states or the
District of Columbia; provided, however, that the aggregate Market
Value of the Fund's holdings of (A) securities of any single issuer
formed under the laws of an Approved Foreign Nation or Canada
denominated in currencies other than the U.S. dollar and ADRs of any
single issuer in excess of 3% of the aggregate Market Value of the
Fund's assets, or (B) securities in excess of 10% of the aggregate
Market Value of the Fund's Fitch Eligible Assets with respect to
issuers formed under the laws of non-U.S. jurisdictions other than
Approved Foreign Nations or Canada, shall not be Fitch Eligible
Assets.
15
Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for as a Fitch Eligible
Asset may be included in Fitch Eligible Assets, but, with respect to any
financial contract, only upon receipt by the Fund of a writing from Fitch
specifying any conditions on including such financial contract in Fitch
Eligible Assets and assuring the Fund that including such financial contract
in the manner so specified would not affect the credit rating assigned by
Fitch to the AMPS.
Where the Fund sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Fitch
Eligible Asset and the amount the Fund is required to pay upon repurchase of
such asset will count as a liability for the purposes of the AMPS Basic
Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to
a third party in the future, cash receivable by the Fund thereby will
constitute a Fitch Eligible Asset if the long-term debt of such other party is
rated at least A- by Fitch or the equivalent by another NRSRO and such
agreement has a term of 30 days or less; otherwise the Discounted Value of
such purchased asset will constitute a Fitch Eligible Asset. Notwithstanding
the foregoing, an asset will not be considered a Fitch Eligible Asset to the
extent that it has been irrevocably deposited for the payment of (i)(A)
through (i)(F) under the definition of AMPS Basic Maintenance Amount or to the
extent it is subject to any Liens, except for (i) Liens which are being
contested in good faith by appropriate proceedings and which Fitch has
indicated to the Fund will not affect the status of such assets as a Fitch
Eligible Asset, (ii) Liens for taxes that are not then due and payable or that
can be paid thereafter without penalty, (iii) Liens to secure payment for
services rendered or cash advanced to the Fund by the Investment Adviser,
custodian, transfer agent or registrar or the Auction Agent and (iv) Liens
arising by virtue of any repurchase agreement.
The Fitch guidelines require certain industry diversification
requirements and impose other requirements for purposes of determining Fitch
Eligible Assets.
"Fitch Diversification Limitations" means that that portfolio
securities as described below must be within the following issuer and issue
size requirements in order to be included in Fitch Eligible Assets; provided,
however, that if the investment is defined under clauses (i) or (ii) above the
issuer diversification limitation shall not apply.
Security Rated At Maximum Single Minimum Issue Size
Least Issuer(1) ($ in million)(2)
--------------------- ------------------- -------------------
% $
AAA 20 100
AA- 20 100
A- 10 100
BBB- 6 100
BB- 4 50
B- 3 50
CCC 2 50
-------------------
(1) Percentages represent a portion of the aggregate Market Value of
corporate Debt Securities.
(2) Preferred securities have a minimum issue size of $50 million.
"Fitch Industry Classifications" means, for the purposes of
determining Fitch Eligible Assets, each of the following industry
classifications:
Aerospace and Defense
Automobiles
Banking, Finance and Real Estate
Broadcasting and Media, Building and Materials
Cable
Chemicals
Computers and Electronics
Consumer Products
Energy
Environmental Services
Farming and Agriculture
16
Food, Beverage and Tobacco
Gaming, Lodging and Restaurants
Healthcare and Pharmaceuticals
Industrial/Manufacturing
Insurance
Leisure and Entertainment
Metals and Mining
Miscellaneous
Paper and Forest Products
Retail
Sovereign
Supermarkets and Drugstores
Telecommunications
Textiles and Furniture
Transportation
Utilities
Structured Finance Obligations
Packaging and Containers
Business Services
The Fund shall use its discretion in determining which industry
classification is applicable to a particular investment.
As discussed in the prospectus, the Fund may engage in options and
futures transactions. For so long as any shares of AMPS are rated by Fitch,
the Fund will not purchase or sell exchange-traded futures contracts, or
write, purchase or sell exchange traded put options on such futures contracts,
purchase or sell exchange traded put options (except covered put options) or
call options (except covered call options) on portfolio securities, unless it
receives written confirmation from Fitch that engaging in such transactions
will not impair the ratings then assigned to the shares of AMPS by Fitch,
except that the Fund may purchase or sell exchange-traded futures contracts
based on Treasury Bonds or any index approved by Fitch and write, purchase or
sell exchange-traded put options on such futures contracts, Treasury Bonds or
any index approved by Fitch and purchase, write or sell exchange-traded call
options on such contracts, Treasury Bonds or any index approved by Fitch
(collectively, "Fitch Hedging Transactions"), subject to the following
limitations:
(i) the Fund will not engage in any Fitch Hedging
Transaction based on any index approved by Fitch (other than
transactions that terminate a financial futures contract or option
held by the Fund by the Fund's taking an opposite position thereto
("Closing Transactions")), that would cause the Fund at the time of
such transaction to own or have sold such index exceeding in number
10% of the average number of daily traded financial futures contracts
based on such index in the 30 days preceding the time of effecting
such transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any Fitch Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
that would cause the Fund at the time of such transaction to own or
have sold (A) outstanding futures contracts based on Treasury Bonds
with such contracts having an aggregate Market Value exceeding 20% of
the aggregate Market Value of Fitch Eligible Assets owned by the Fund
and rated AA by Fitch (or, if not rated by Fitch, rated Aa by
Moody's; or, if not rated by Moody's, rated AAA by S&P); or (B)
outstanding futures contracts based on Treasury Bonds with such
contracts having an aggregate Market Value exceeding 40% of the
aggregate Market Value of all Fitch Eligible Assets owned by the Fund
(other than Fitch Eligible Assets already subject to a Fitch Hedging
Transaction) and rated A or BBB by Fitch (or, if not rated by Fitch,
rated Baa by Moody's; or, if not rated by Moody's, rated A or AA by
S&P) (for purposes of the foregoing clauses (i) and (ii), the Fund
shall be deemed to own futures contracts that underlie any
outstanding options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close
out any outstanding futures contract based on any index approved by
Fitch if the amount of open interest in such index as reported by The
Wall Street Journal is less than an amount to be mutually determined
by Fitch and the Fund; and
17
(iv) the Fund will not enter into an option or futures
transaction unless, after giving effect thereto, the Fund would
continue to have Fitch Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount.
Moody's Aaa Rating Guidelines
The Discounted Value of the Fund's Moody's Eligible Assets is
calculated on each Valuation Date. See "Description of AMPS -- Asset
Maintenance -- AMPS Basic Maintenance Amount" herein. Moody's Eligible Assets
that are eligible for consideration under Moody's guidelines include cash,
receivables for Moody's Eligible Assets, Short Term Money Market Instruments,
U.S. Government Securities, U.S. Treasury Strips, Rule 144A Securities,
corporate debt securities, preferred securities, common stock and financial
contracts. For purposes of calculating the Discounted Value of the Fund's
portfolio securities under current Moody's guidelines, the Market Value of
portfolio securities eligible for consideration under such guidelines must be
discounted by the applicable Moody's Discount Factor. The Moody's Discount
Factor used to discount a particular Moody's Eligible Asset will be determined
by reference to the percentage as follows.
(i) Preferred securities:
Preferred securities issued by issuers in the utilities industry.................. 152%
Preferred securities issued by real estate related issuers........................ 154%
Preferred securities issued by issuers in the
financial and industrial industries............................................ 197%
Auction rate preferred securities................................................. 350%
(ii) Corporate debt securities: The percentage determined by
reference to the rating on such asset with reference to the remaining term to
maturity of such asset, in accordance with the table set forth below.
Rating Category(1)
Terms To Maturity of ------------------------------------------------------------
Corporate Debt Security Aaa Aa A Baa Ba B Caa Unrated(2)
------------------------------------------- ------- ------- ----- ------- ------ -------- ------- -----------
1 year or less 109% 112% 115% 118% 137% 150% 205% 250%
2 years or less (but longer than 1 year) 115 118 122 125 146 160 205 250
3 years or less (but longer than 2 years) 120 123 127 131 153 168 205 250
4 years or less (but longer than 3 years) 126 129 133 138 161 176 205 250
5 years or less (but longer than 4 years) 132 135 139 144 168 185 205 250
7 years or less (but longer than 5 years) 139 143 147 152 179 197 205 250
10 years or less (but longer than 7 years) 145 150 155 160 189 208 205 250
15 years or less (but longer than 10
years) 150 155 160 165 196 216 205 250
20 years or less (but longer than 15
years) 150 155 160 165 196 228 205 250
30 years or less (but longer than 20
years) 150 155 160 165 196 229 205 250
Greater than 30 years 165 173 181 189 205 240 221 250
---------------
(1) If a corporate debt security is unrated by Moody's but is rated by S&P, a
rating two numeric ratings below the S&P rating will be used (e.g., where
the S&P rating is AAA, a Moody's rating of Aa2 will be used; where the
S&P rating is AA+, a Moody's rating of Aa3 will be used).
(2) Unrated corporate debt securities, which are corporate debt securities
rated by neither Moody's nor S&P, are limited to 10% of Moody's Eligible
Assets. If a corporate debt security is unrated by both Moody's and S&P,
the Fund will use the percentage set forth under "Unrated" in this table.
The Moody's Discount Factors presented in the immediately preceding
table will also apply to corporate debt securities that do not pay interest in
U.S. dollars or euros, provided that the Moody's Discount Factor determined
from the table shall be multiplied by a factor of 120% for purposes of
calculating the Discounted Value of such securities.
18
(iii) U.S. Government Securities and U.S. Treasury Strips:
U.S. Government Securities U.S. Treasury Strips
Remaining Term To Maturity Discount Factor Discount Factor
------------------------------------------------------------ ------------------------------- ---------------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113 115
3 years or less (but longer than 2 years) 118 121
4 years or less (but longer than 3 years) 123 128
5 years or less (but longer than 4 years) 128 135
7 years or less (but longer than 5 years) 135 147
10 years or less (but longer than 7 years) 141 163
15 years or less (but longer than 10 years) 146 191
20 years or less (but longer than 15 years) 154 218
30 years or less (but longer than 20 years) 154 244
(iv) Short term instruments and cash: The Moody's Discount Factor
applied to short-term portfolio securities, including without limitation
short-term corporate debt securities, Short Term Money Market Instruments and
short-term municipal debt obligations, will be (A) 100%, so long as such
portfolio securities mature or have a demand feature at par exercisable within
the Moody's Exposure Period; (B) 115%, so long as such portfolio securities
mature or have a demand feature at par not exercisable within the Moody's
Exposure Period; and (C) 125%, if such securities are not rated by Moody's, so
long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by
S&P and mature or have a demand feature at par exercisable within the Moody's
Exposure Period; and (D) 148%, if such securities are not rated by Moody's, so
long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by
S&P and mature or have a demand feature at par exercisable after the Moody's
Exposure Period. A Moody's Discount Factor of 100% will be applied to cash.
Rule 2a-7 money market funds rated by Moody's or by another NRSRO will also
have a discount factor of 100%[, and unrated Rule 2a-7 money market funds will
have a discount factor of 115%].
(v) Rule 144A Securities: The Moody's Discount Factor applied to Rule
144A Securities will be 130% of the Moody's Discount Factor which would apply
were the securities registered under the Securities Act.
(vi) Convertible securities: (A) convertible securities:
Rating Category(1)
-------------------------------------------------------------
Industry Category
---------------------------- Aaa Aa A Baa Ba B Unrated(2)
Utility 162% 167% 172% 188% 195% 199% 300%
Industrial 256% 261% 266% 282% 290% 293% 300%
Financial 233% 238% 243% 259% 265% 270% 300%
(1) If a convertible security is unrated by Moody's but is rated by S&P, a
rating two numeric ratings below the S&P rating will be used (e.g., where
the S&P rating is AAA, a Moody's rating of Aa2 will be used; where the
S&P rating is AA+, a Moody's rating of Aa3 will be used).
(2) Unrated convertible securities, which are rated by neither Moody's nor
S&P, are limited to 10% of Moody's Eligible Assets. If a corporate debt
security is unrated by both Moody's and S&P, the Corporation will use the
percentage set forth under "Unrated" in this table.
; and (B) upon conversion to common stock, the Discount Factor of 350% will be
applied to the common stock holdings.
(vii) Common stock:
Industry Category
-----------------------------------
Utility 170%
Industrial 264%
Financial 241%
Transportation 340%
19
The Moody's Discount Factor for any Moody's Eligible Asset other than
the securities set forth above will be the percentage provided in writing by
Moody's.
For the purpose of qualifying as a Moody's Eligible Asset as of any
Valuation Date, portfolio securities are subject to the following eligibility
requirements:
(i) cash (including interest and dividends due on assets rated (A)
Baa3 or higher by Moody's if the payment date is within five Business Days of
the Valuation Date, (B) A2 or higher if the payment date is within thirty days
of the Valuation Date, and (C) A1 or higher if the payment date is within the
Moody's Exposure Period) and receivables for Moody's Eligible Assets sold if
the receivable is due within five Business Days of the Valuation Date;
(ii) Short Term Money Market Instruments, so long as (A) such
securities are rated at least P-1, (B) in the case of demand deposits, time
deposits and overnight funds, the supporting entity is rated at least A2, or
(C) in all other cases, the supporting entity (1) is rated A2 and the security
matures within one month, (2) is rated A1 and the security matures within
three months or (3) is rated at least Aa3 and the security matures within six
months. In addition, Rule 2a-7 money market funds are Moody's Eligible Assets;
(iii) Corporate debt securities if (A) such securities are rated B3
or higher by Moody's; (B) such securities provide for the periodic payment of
interest in cash in U.S. dollars or euros, except that such securities that do
not pay interest in U.S. dollars or euros shall be considered Moody's Eligible
Assets if they are rated by Moody's or S&P; (C) for securities, which provide
for conversion or exchange at the option of the issuer into equity capital at
some time over their lives, the issuer must be rated at least B3 by Moody's;
(D) for debt securities rated Ba1 and below, no more than 10% of the original
amount of such issue may constitute Moody's Eligible Assets; (E) such
securities have been registered under the Securities Act or are restricted as
to resale under federal securities laws but are eligible for resale pursuant
to Rule 144A under the Securities Act, except that such securities that are
not subject to U.S. federal securities laws shall be considered Moody's
Eligible Assets if they are publicly traded; and (F) such securities are not
subject to extended settlement.
In order to merit consideration as Moody's Eligible Asset,
debt securities are issued by entities which have not filed for bankruptcy
within the past three years, are current on all principle and interest in
their fixed income obligations, are current on all preferred securities
dividends and possess a current, unqualified auditor's report without
qualified, explanatory language.
Corporate debt securities not rated at least B3 by Moody's
or not rated by Moody's shall be considered to be Moody's Eligible Assets only
to the extent the Market Value of such corporate debt securities does not
exceed 10% of the aggregate Market Value of all Moody's Eligible Assets.
(iv) Preferred securities if (A) dividends on such preferred security
are cumulative, (B) such securities provide for the periodic payment of
dividends thereon in cash in U.S. dollars or euros and do not provide for
conversion or exchange into, or have warrants attached entitling the holder to
receive, equity capital at any time over the respective lives of such
securities, (C) the issuer of such a preferred security has common stock
listed on either the New York Stock Exchange, the American Stock Exchange or
NASDAQ, (D) the issuer of such a preferred security has a senior debt rating
from Moody's of Baa1 or higher or a preferred stock rating from Moody's of
Baa3 or higher and (E) such preferred security has paid consistent cash
dividends in U.S. dollars or euros over the last three years or has a minimum
rating of A1 (if the issuer of such preferred stock has other preferred issues
outstanding that have been paying dividends consistently for the last three
years, then a preferred stock without such a dividend history would also be
eligible). In addition, the preferred securities must have the diversification
requirements set forth in the table below and the preferred security issue
must be greater than $50 million.
The Moody's guidelines impose certain requirements as to minimum
issue size, issuer diversification and industry concentration, as well as
other requirements for purposes of determining whether portfolio securities
constitute Moody's Eligible Assets, as set forth in the table below:
20
Minimum Maximum Maximum Maximum Single
Issue Size Single Single Industry Non- Industry
Rating(1) ($ in millions)(2) Issuer(3)(4) Utility(4)(5) Utility(4)(5)
---------- ---------------------- --------------- --------------------- ----------------
Aaa.......................... $100 100% 100% 100%
Aa........................... 100 20 60 60
A............................ 100 10 40 40
CS*, Baa..................... 100 6 20 20
Ba........................... 50(6) 4 12 12
B1-B2........................ 50(6) 3 8 8
B3 or below.................. 50(6) 2 5 5
---------------
(1) Refers to the preferred security and senior debt rating of the portfolio
holding.
(2) Except for preferred securities, which have a minimum issue size
of $50 million.
(3) Companies subject to common ownership of 25% or more are
considered as one issuer.
(4) Percentages represent a portion of the aggregate Market Value of the Fund's
total assets.
(5) Industries are determined according to Moody's Industry Classifications,
as defined herein.
(6) Portfolio holdings from issues ranging from $50 million to $100 million
are limited to 20% of the Fund's total assets.
* Common stock and diversify independently to the issuer rating.
(v) Common stock (A)(1) which are traded on the New York Stock
Exchange, the American Stock Exchange or NASDAQ, (2) which, if cash dividend
paying, (x) pay cash dividends in U.S. dollars and (y) the issue paid
consistent cash dividends for the past 36 months or must not have terminated
dividend payments within the last 12 months; provided that if there is less
than a three year operating history, the company must have a minimum senior
debt rating of A, (3) which has a market capitalization greater than $500
million; provided that, the issuer has a Moody's senior unsecured debt rating
of Baa3 or better or an S&P rating of A- or better, and does not hold shares
exceeding the average weekly trading volume during the preceding month; and
(B) which are securities denominated in any currency other than the U.S.
dollar or securities of issuers formed under the laws of jurisdictions other
than the United States, its states, commonwealths, territories and
possessions, including the District of Columbia, for which there are
dollar-denominated ADRs which are traded on the New York Stock Exchange, the
American Stock Exchange or NASDAQ and are issued by banks formed under the
laws of the United States, its states, commonwealths, territories and
possessions, including the District of Columbia.
Common Stock Diversification Table:
Maximum Single Maximum Single Maximum Single
Industry Category Issuer (%)(1) Industry (%)(1) State (%)(1)
----------------- ------------- --------------- ------------
Utility 4 50 7(2)
Other 6 20 N/A
-----------------------
(1) Percentages represent both a portion of the aggregate
Market Value and the number of outstanding shares of the
common stock portfolio.
(2) Utility companies operating in more than one state
should be diversified according to the state in which they
generate the largest part of their revenues. Publicly
available information on utility company revenues by state is
available from the Uniform Statistical Report (USR) or the
Federal Energy Regulation Commission (FERC).
(vi) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this definition
but only upon receipt by the Fund of a letter from Moody's specifying any
conditions on including such financial contract in Moody's Eligible Assets and
assuring the Fund that including such financial contract in the manner so
specified would not affect the credit rating assigned by Moody's to the AMPS.
When the Fund sells a portfolio security and agrees to repurchase it
at a future date, the Discounted Value of such security will constitute a
Moody's Eligible Asset and the amount the Fund is required to pay upon
repurchase of such security will count as a liability for purposes of
calculating the AMPS Basic Maintenance Amount. When the Fund purchases a
security and agrees to sell it at a future date to another party, cash
receivable by the Fund thereby will constitute a Moody's Eligible Asset if the
long term debt of such other party is rated at least A2 by Moody's and such
agreement has a term of 30 days or less; otherwise the Discounted Value of
such
21
security will constitute a Moody's Eligible Asset. For the purpose of
calculation of Moody's Eligible Assets, portfolio securities which have been
called for redemption by the issuer thereof shall be valued at the lower of
Market Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that it has been irrevocably deposited
for the payment of (i)(A) through (i)(F) under the definition of AMPS Basic
Maintenance Amount or to the extent it is subject to any Liens, including
assets segregated under margin account requirements in connection with the
engagement in hedging transactions, except for (A) Liens which are being
contested in good faith by appropriate proceedings and which Moody's has
indicated to the Fund will not affect the status of such assets as a Moody's
Eligible Asset, (B) Liens for taxes that are not then due and payable or that
can be paid thereafter without penalty, (C) Liens to secure payment for
services rendered or cash advanced to the Fund by the Investment Adviser, the
Fund's custodian, transfer agent or registrar or the Auction Agent and (D)
Liens arising by virtue of any repurchase agreement.
For purposes of determining Moody's Eligible Assets described above,
"Moody's Industry Classifications" means:
Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
Automobile: Automobile Equipment, Auto-Manufacturing, Auto
Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit,
Small Loan, Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines
and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill
Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products,
Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum,
Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real Estate,
Real Estate Development, REITs, Land Development
Chemicals, Plastics and Rubber: Chemicals (non-agricultural),
Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives,
Coatings, Paints, Varnish, Fabricating Containers
Packaging and Glass: Glass, Fiberglass, Containers made of:
Glass, Metal, Paper, Plastic, Wood or Fiberglass
Personal and Non-Durable Consumer Products (Manufacturing
Only): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies,
School Supplies
Diversified/Conglomerate Manufacturing
Diversified/Conglomerate Service
Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution
Ecological: Pollution Control, Waste Removal, Waste Treatment
and Waste Disposal
Electronics: Computer Hardware, Electric Equipment,
Components, Controllers, Motors, Household Appliances, Information
Service Communication Systems, Radios, TVs, Tape Machines, Speakers,
Printers, Drivers, Technology
22
Finance: Investment Brokerage, Leasing, Syndication,
Securities
Farming and Agriculture: Livestock, Grains, Produce,
Agriculture Chemicals, Agricultural Equipment, Fertilizers
Grocery: Grocery Stores, Convenience Food Stores;
Healthcare, Education and Childcare: Ethical Drugs,
Proprietary Drugs, Research, Health Care Centers, Nursing Homes,
HMOs, Hospitals, Hospital Supplies, Medical Equipment
Home and Office Furnishings, Housewares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
Hotels, Motels, Inns and Gaming
Insurance: Life, Property and Casualty, Broker, Agent, Surety
Leisure, Amusement, Motion Pictures, Entertainment: Boating,
Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment,
Records, Tapes, Sports, Outdoor Equipment (Camping), Tourism,
Resorts, Games, Toy Manufacturing, Motion Picture Production
Theaters, Motion Picture Distribution
Machinery (Non-Agricultural, Non-Construction,
Non-Electronic): Industrial, Machine Tools, Steam Generators;
Mining, Steel, Iron and Non-Precious Metals: Coal, Copper,
Lead, Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales of the foregoing
Oil and Gas: Crude Producer, Retailer, Well Supply, Service
and Drilling
Printing, Publishing, and Broadcasting: Graphic Arts, Paper,
Paper Products, Business Forms, Magazines, Books, Periodicals,
Newspapers, Textbooks, Radio, T.V., Cable Broadcasting Equipment
Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders,
Ship Builders, Containers, Container Builders, Parts, Overnight Mail,
Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo,
Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail
Order Catalog, Showroom
Telecommunications: Local, Long Distance, Independent,
Telephone, Telegraph, Satellite, Equipment, Research, Cellular
Textiles and Leather: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
Personal Transportation: Air, Bus, Rail, Car Rental
Utilities: Electric, Water, Hydro Power, Gas
Diversified Sovereigns: Semi-Sovereigns, Canadian Provinces,
Supra-National Agencies
The Fund will use its discretion in determining which industry
classification is applicable to a particular investment in consultation with
the Independent Auditors and Moody's, to the extent the Fund considers
necessary.
For so long as shares of AMPS are rated by Moody's, in managing the
Fund's portfolio, the Investment Adviser will not alter the composition of the
Fund's portfolio if, in the reasonable belief of the Investment Adviser,
23
the effect of any such alteration would be to cause the Fund to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of
such Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of
Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount by five
percent or less, the Investment Adviser will not alter the composition of the
Fund's portfolio in a manner reasonably expected to reduce the aggregate
Discounted Value of Moody's Eligible Assets unless the Fund shall have
confirmed that, after giving effect to such alteration, the aggregate
Discounted Value of Moody's Eligible Assets would exceed the AMPS Basic
Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund will
not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it
receives written confirmation from Moody's that engaging in such transactions
would not impair the ratings then assigned to the shares of AMPS by Moody's,
except that the Fund may purchase or sell exchange-traded futures contracts
based on any index approved by Moody's or Treasury Bonds, and purchase, write
or sell exchange-traded put options on such futures contracts, and purchase,
write or sell exchange-traded call options on such futures contracts, any
index approved by, Moody's or Treasury Bonds (collectively "Moody's Hedging
Transactions"), subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging
Transaction based on any index approved by Moody's (other than Closing
Transactions) that would cause the Fund at the time of such
transaction to own or have sold (A) outstanding futures contracts
based on any index approved by Moody's exceeding in number 10% of the
average number of daily traded futures contracts based on such index
in the 30 days preceding the time of effecting such transaction as
reported by The Wall Street Journal or (B) outstanding futures
contracts based on any such index having a Market Value exceeding 50%
of the Market Value of all portfolio securities of the Fund
constituting Moody's Eligible Assets owned by the Fund (other than
Moody's Eligible Assets already subject to a Moody's Hedging
Transaction);
(ii) the Fund will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
that would cause the Fund at the time of such transaction to own or
have sold (A) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 20% of the aggregate
Market Value of Moody's Eligible Assets owned by the Fund and rated
Aa by Moody's (or, if not rated by Moody's but rated by S&P, rated
AAA by S&P) or (B) outstanding futures contracts based on Treasury
Bonds having an aggregate fair Market Value exceeding 50% of the
aggregate fair market value of all portfolio securities of the Fund
constituting Moody's Eligible Assets owned by the Fund (other than
Moody's Eligible Assets already subject to a Moody's Hedging
Transaction) and rated Baa or A by Moody's (or, if not rated by
Moody's but rated by S&P, rated A or AA by S&P) (for purposes of the
foregoing clauses (i) and (ii), the Fund shall be deemed to own the
number of futures contracts that underlie any outstanding options
written by the Fund);
(iii) the Fund will engage in Closing Transactions to close
out any outstanding futures contract based on any index approved by
Moody's if the amount of open interest in such index as reported by
The Wall Street Journal is less than 5,000 or such other amount to be
mutually determined by Moody's and the Fund;
(iv) the Fund will engage in a Closing Transaction to close
out any outstanding futures contract by no later than the fifth
Business Day of the month in which such contract expires and will
engage in a Closing Transaction to close out any outstanding option
on a futures contract by no later than the first Business Day of the
month in which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions
only with respect to futures contracts or options thereon having the
next settlement date or the settlement date immediately thereafter;
(vi) the Fund (A) will not engage in options and futures
transactions for leveraging or speculative purposes, except that an
option or futures transaction so long as the combination of the
Fund's non-derivative positions, together with the relevant option or
futures transaction, produces a synthetic investment position, or the
same economic result, that could be achieved by an investment,
consistent with
24
the Fund's investment objectives and policies, in a security
that is not an option or futures transaction, and (B) will not
write any call options or sell any futures contracts for the
purpose of hedging the anticipated purchase of an asset prior to
completion of such purchase; and
(vii) the Fund will not enter into an option or futures
transaction unless, after giving effect thereto, the Fund would
continue to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund will
not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions), except that the Fund may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its
custodian cash, cash equivalents or short term, fixed-income
securities rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior
to the date of the Forward Commitment with a fair market value that
equals or exceeds the amount of the Fund's obligations under any
Forward Commitments to which it is from time to time a party or
long-term, fixed income securities with a Discounted Value that
equals or exceeds the amount of the Fund's obligations under any
Forward Commitment to which it is from time to time a party, and
(ii) the Fund will not enter into a Forward Commitment
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to
or greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund
pursuant to such Forward Commitments shall be zero.
For so long as shares of AMPS are rated by Moody's, the Fund, unless
it has received written confirmation from Moody's that such action would not
impair the rating then assigned to the AMPS by Moody's engage in interest rate
swaps, caps and floors, except that the Fund may engage in interest rate
swaps, caps and floors, if; (i) the unsecured senior debt or claims paying
ability of the counterparty to the swap, cap or floor is rated Aa3 or better
by Moody's or A/A-1 or better by S&P and; (ii) the swap, cap or floor is
marked-to-market daily by the counterparty; (iii) a swap, cap or floor that is
"in the money" is valued at 95% of the accrued net excess of the cap
entitlements over its obligations for purposes of calculating the 1940 Act
AMPS Asset Coverage; (iv) 100% of any accrued net excess of the cap
obligations over its entitlements with respect to a swap, cap or floor that has
not been defeased through the segregation of liquid assets on the Fund's books
and records is included as a liability of the Fund for the purposes of
calculating the AMPS Basic Maintenance Amount; (v) the swap, cap or floor
notional amount does not exceed the liquidation preference of the outstanding
AMPS and (vi) the Fund intends to terminate the swap, cap or floor if the Fund
fails to maintain the 1940 Act AMPS Asset Coverage on the last Business Day of
any two consecutive months.
-------------------------
For so long as AMPS are rated by Fitch or Moody's, the Fund will not,
unless it has received written confirmation from Fitch and/or Moody's, as the
case may be, that such action would not impair the ratings then assigned to
AMPS by Fitch and/or Moody's, as the case may be, (i) borrow money except for
the purpose of clearing transactions in portfolio securities (which borrowings
shall under any circumstances be limited to the lesser of $10 million and an
amount equal to 5% of the Market Value of the Fund's assets at the time of
such borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and Fitch Eligible Assets to be less than the AMPS
Basic Maintenance Amount), (ii) engage in short sales of securities, (iii)
lend any portfolio securities, (iv) issue any class or series of shares
ranking prior to or on a parity with the AMPS with respect to the payment of
dividends or the
25
distribution of assets upon dissolution, liquidation or winding up of the
Fund, (v) reissue any AMPS previously purchased or redeemed by the Fund or
(vi) merge or consolidate into or with any other corporation or entity.
DIRECTORS AND OFFICERS
The Directors of the Fund consist of seven individuals, six of whom
are not "interested persons" of the Fund as defined in the 1940 Act (the
"non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the 1940 Act.
Each non-interested Director is a member of the Fund's Audit and
Nominating Committee (the "Committee"). The principal responsibilities of the
Committee are the appointment, compensation and oversight of the Fund's
independent auditors, including resolution of disagreements regarding
financial reporting between Fund management and such auditors. The Board of
the Fund has adopted a written charter for the Committee. The Committee also
reviews and nominates candidates to serve as non-interested Directors. The
Committee has retained independent legal counsel to assist them in connection
with these duties. The Committee has not held any meetings since the Fund was
incorporated on January 23, 2003.
Biographical Information
Certain biographical and other information relating to the
non-interested Directors of the Fund is set forth below, including their ages,
their principal occupations for at least the last five years, the length of
time served, the total number of portfolios overseen in the complex of funds
advised by the Investment Adviser and its affiliate, Merrill Lynch Investment
Managers, L.P. ("MLIM") ("FAM/MLIM-advised funds") and other public
directorships.
Number of
Term of FAM/MLIM-
Position(s) Office** and Advised Funds
Held with Length of Principal Occupation(s) and Portfolios Public
Name, Address* and Age the Fund Time Served During Past Five Years Overseen Directorships
----------------------- ------------- ---------------- -------------------------- --------------- --------------
David O. Beim (62) Director Director since Professor of Finance and 7 registered None
2003 Economics at the Columbia investment
University Graduate School companies
of Business since 1991; consisting of
Chairman of Outward Bound 14 portfolios
U.S.A. since 1997; Chairman
of Wave Hill, Inc. since
1980
James T. Flynn (63) Director Director since Chief Financial Officer of 7 registered None
2003 J.P. Morgan & Co. Inc. from investment
1990 to 1995 and an companies
employee of J.P. Morgan in consisting of
various capacities from 14 portfolios
1967 to 1995.
Todd Goodwin (71) Director Director since General Partner of Gibbons, 7 registered None
2003 Goodwin, van Amerongen investment
(investment firm) since companies
1984; Director of Johns consisting of
Manville Corporation 14 portfolios
(building materials) from
1991 to 2000.
George W. Holbrook, Jr. Director Director since Managing Partner of Bradley 7 registered Thoratec
(71) 2003 Resources Company (private investment Corporation
investment company) companies
and associated with consisting of
that firm and its 14 portfolios
predecessors since
1953; Director of
Thoratec Laboratories
Corporation (medical device
26
Number of
Term of FAM/MLIM-
Position(s) Office** and Advised Funds
Held with Length of Principal Occupation(s) and Portfolios Public
Name, Address* and Age the Fund Time Served During Past Five Years Overseen Directorships
----------------------- ------------- ---------------- -------------------------- --------------- --------------
manufacturers) since 1995.
W. Carl Kester (51) Director Director since Industrial Bank of Japan 7 registered None
2003 Professor of Finance, investment
Senior Associate Dean and companies
Chairman of the MBA Program consisting of
of Harvard University 14 portfolios
Graduate School of Business
Administration since 1999;
James R. Williston
Professor of Business
Administration of Harvard
University Graduate School
of Business from 1997 to
1999; MBA Class of 1958
Professor of Business
Administration of Harvard
University Graduate School
of Business Administration
from 1981 to 1997;
Independent Consultant
since 1978.
Karen P. Robards (53) Director Director since President of Robards & 7 registered None
2003 Company (financial advisory investment
firm) since 1987; Director companies
of Enable Medical Corp. consisting of
(medical devices) since 14 portfolios
1996; Director of AtriCure,
Inc. (medical devices)
since 2000; Director of
CineMuse, Inc.
(entertainment) from 1996
to 2000; Co-founder/
Director of the Cooke
Center for Learning and
Development, a not for
profit organization, since
1987.
-------------
* The address of each non-interested Director is P.O. Box 9095, Princeton, New Jersey 08543-9095.
** Each Director serves until his or her successor is elected and qualified or until his or her
death, resignation, or removal as provided in the Fund's By-laws, Charter or by statute.
Certain biographical and other information relating to the Director
who is an "interested person" of the Fund as defined in the 1940 Act (the
"interested Director") and to the other officers of the Fund is set forth
below, including their ages, their principal occupations for at least the last
five years, the length of time served, the total number of portfolios overseen
in FAM/MLIM-advised funds and public directorships held.
Number of
Term of FAM/MLIM-
Position(s) Office* and Advised Funds
Held with Length of Principal Occupation(s) and Portfolios Public
Name, Address* and Age the Fund Time Served During Past Five Years Overseen Directorships
----------------------- ------------- ---------------- -------------------------- --------------- --------------
Terry K. Glenn* (62) President** President and Chairman of the 120 None
and Director of FAM/MLIM-advised funds; registered
Director*** the Fund since Chairman (Americas Region) investment
2003 of the Investment Adviser companies
from 2000 to 2002; consisting of
Executive Vice President of 162 portfolios
the Investment Adviser and
MLIM (which terms as used
herein include their
corporate predecessors)
from 1983 to 2002;
President of FAM
Distributors, Inc. ("FAMD")
from 1986 to 2002 and
Director thereof from 1991
to 2002; Executive Vice
27
Number of
Term of FAM/MLIM-
Position(s) Office* and Advised Funds
Held with Length of Principal Occupation(s) and Portfolios Public
Name, Address* and Age the Fund Time Served During Past Five Years Overseen Directorships
----------------------- ------------- ---------------- -------------------------- --------------- --------------
President and Director of
Princeton Services, Inc.
("Princeton Services") from
1993 to 2002; President of
Princeton Administrators,
L.P. from 1988 to 2002;
Director of Financial Data
Services, Inc. from 1985 to
2002.
Donald C. Burke (42) Vice Vice President First Vice President of the 119 None
President and Treasurer Investment Adviser and MLIM registered
and of the Fund since 1997 and Treasurer investment
Treasurer since 2003** thereof since 1999; Senior companies
Vice President and consisting of
Treasurer of Princeton 161 portfolios
Services since 1999; Vice
President of FAMD since
1999; Vice President of the
Investment Adviser and MLIM
from 1990 to 1997; Director
of Taxation of MLIM since
1990.
Bradley J. Lucido (37) Secretary Secretary of Director of the Investment 30 registered None
the Fund since Adviser since 2002; Vice investment
2003** President of the Investment companies
Adviser from 1999 consisting
to 2002; of 61 portfolios
attorney with the
Investment Adviser
since 1995;
attorney in private
practice from 1991
to 1995.
Robert Peterson (50) Vice Vice President Managing Director of MLIM 2 registered None
President and Co- since 2000; First Vice investment
and Portfolio President of MLIM from 1997 companies
Co-Portfolio Manager since to 2000. Mr. Peterson consisting of
Manager 2003** joined Merrill Lynch in 2 portfolios
1989 and has led
MLIM's Strategic
Corporate
Investment Group, a
group of
investment
professionals
specializing in
products focusing
on income
generation, since
1992. He has
experience in a
wide range of fixed
income products
including corporate
bonds, high yield
bonds, preferred
stocks, asset
backed and mortgage
backed securities.
Mr. Peterson earned
a bachelor's degree
and an MBA in
finance from the
University of South
Carolina. He is a
CFA Charterholder.
John Burger (40) Vice Vice President Director (Global Fixed 1 registered None
President and Co- Income) of MLIM since 1998; investment
and Portfolio Vice President of MLIM from company
Co-Portfolio Manager since 1993 to 1998. Mr. Burger consisting of
Manager 2003** joined Merrill Lynch in 1 portfolio
1986 and has been
with MLIM since
1992. He has 15
years of experience
as a multi-sector
portfolio manager
with a core
expertise in credit
investing and 10
years of experience
investing in the
investment grade,
emerging market and
high yield
corporate debt
areas. Mr. Burger
received a
bachelor's degree
from Cornell
University and is a
CFA Charterholder.
Thomas Musmanno (33) Vice Vice President Vice President of MLIM 3 registered None
President and Co- since 1997. Mr. Musmanno investment
and Portfolio joined
Co-
28
Number of
Term of FAM/MLIM-
Position(s) Office* and Advised Funds
Held with Length of Principal Occupation(s) and Portfolios Public
Name, Address* and Age the Fund Time Served During Past Five Years Overseen Directorships
----------------------- ------------- ---------------- -------------------------- --------------- --------------
Portfolio Manager since Merrill Lynch in 1991 and has companies
Manager 2003** been with MLIM since 1996. consisting of 3
Mr. Musmanno has expertise in portfolios
asset-backed securities,
commercial mortgage-backed
securities and residential
mortgages. He serves as the
hedging and derivatives
specialist for MLIM's
taxable fixed income funds
and will be the hedging
specialist for the Fund's
portfolio management team.
Mr. Musmanno received a
bachelor's degree from
Siena College and an MBA in
Finance from St. John's
University.
-------------
+ The address of Mr. Glenn and each officer listed is P.O. Box 9011, Princeton, New Jersey 08543-9011.
* Mr. Glenn is a director, trustee or member of an advisory board of certain other FAM/MLIM-advised funds.
Mr. Glenn is an "interested person," as defined in the 1940 Act, of the Fund based on his former positions
with FAM, MLIM, FAMD, Princeton Services and Princeton Administrators, L.P.
** Elected by and serves at the pleasure of the Board of Directors of the Fund.
*** As Director, Mr. Glenn serves until his successor is elected and qualified or until his death or
resignation, or removal as provided in the Fund's By-laws or Charter
or by statute, or until December 31 of the year in which he turns 72.
In connection with the election of the Fund's Directors, holders of
shares of AMPS and other preferred stock, voting as a separate class, will be
entitled to elect two of the Fund's Directors, and the remaining Directors
will be elected by all holders of capital stock, voting as a single class.
Messrs. Glenn and Kester have been designated as the Directors to be elected
by holders of preferred stock. See "Description of Capital Stock" in the
prospectus.
Share Ownership
Information relating to each Director's share ownership in the Fund
and in all registered funds in the Merrill Lynch family of funds that are
overseen by the respective Director ("Supervised Merrill Lynch Funds") as of
December 31, 2002 is set forth in the chart below.
Aggregate Dollar Range
Aggregate Dollar Range of Securities in Supervised
Name of Equity in the Fund Merrill Lynch Funds*
------------------------------------- ------------------------------------------ ----------------------------
Interested Director:
Terry K. Glenn None Over $100,000
Non-Interested Directors:
David O. Beim None None
James T. Flynn None Over $100,000
Todd Goodwin None None
George W. Holbrook, Jr. None None
W. Carl Kester None $10,001 - $50,000
Karen P. Robards None $50,001 - $100,000
-------------
* For the number of FAM/MLIM-advised funds from which each Director receives
compensation, see the table above under "Directors and Officers'
Biographical Information."
As of the date of this statement of additional information, none of
the Directors and officers of the Fund owned any outstanding shares of common
stock or AMPS of the Fund. As of the date of this prospectus, none of the
non-interested Directors of the Fund nor any of their immediate family members
owned beneficially or of record any securities in ML & Co.
29
Compensation of Directors
Pursuant to its investment advisory agreement with the Fund (the
"Investment Advisory Agreement"), the Investment Adviser pays all compensation
of officers and employees of the Fund as well as the fees of all Directors of
the Fund who are affiliated persons of ML & Co. or its subsidiaries as well as
such Directors' actual out-of-pocket expenses relating to attendance at
meetings.
Each non-interested Director receives an aggregate annual retainer of
$80,000 for his or her services to FAM/MLIM-advised funds, including the Fund.
The portion of the annual retainer allocated to each FAM/MLIM-advised fund is
determined quarterly based on the relative net assets of each such fund. In
addition, each non-interested Director receives a fee per in-person Board
meeting attended and per in-person Committee meeting attended. The aggregate
annual per meeting fees paid to each non-interested Director total $30,000 for
all FAM/MLIM-advised funds for which that Director serves and are allocated
equally among those funds.
The following table sets forth the estimated compensation to be paid
by the Fund to the non-interested Directors projected through the end of the
Fund's first full fiscal year and the aggregate compensation paid to them from
all registered FAM/MLIM-advised funds for the calendar year ended December 31,
2002.
Pension or Aggregate
Retirement Compensation
Estimated Benefits Estimated from Fund and
Aggregate Accrued as Annual other
Position Compensation Part of Fund Benefits upon FAM/MLIM-
Name with Fund from Fund Expense Retirement Advised Funds
----------------------------------- ------------- ----------------- --------------- --------------- ---------------
David O. Beim Director $11,000 None None $48,500
James T. Flynn Director $11,000 None None $79,500
Todd Goodwin Director $11,000 None None $56,500
George W. Holbrook, Jr. Director $11,000 None None $56,500
W. Carl Kester Director $11,000 None None $83,500
Karen P. Robards Director $11,000 None None $48,500
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 administrative services. 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 February 2003, the Investment Adviser and its
affiliates, including MLIM, had a total of approximately $439 billion in
investment company and other portfolio assets under management, including
approximately $260 billion in fixed income assets. This amount includes assets
managed by certain affiliates of the Investment Adviser. The Investment
Adviser is a limited partnership, the partners of which are ML & Co. and
Princeton Services, Inc. The principal business address of the Investment
Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the
direction of the 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 Fund's portfolio managers will consider analyses from various
sources, make the necessary investment decisions, and place orders for
transactions accordingly. The Investment Adviser will also be responsible for
the performance of certain management services for the Fund. The Fund will be
managed by a team of investment professionals from the Investment Adviser. The
co-portfolio managers primarily responsible for the Fund's day-to-day
management are John Burger, Robert Peterson and Thomas Musmanno.
For its services, the Fund pays the Investment Adviser a monthly fee
at the annual rate of 0.60% of the Fund's average weekly net assets, plus the
proceeds of any outstanding borrowings used for leverage ("average weekly net
assets" means the average weekly value of the total assets of the Fund,
including the amount obtained
30
from leverage and any proceeds from the issuance of preferred stock, minus the
sum of (i) accrued liabilities of the Fund, (ii) any accrued and unpaid
interest on outstanding borrowings and (iii) accumulated dividends on shares
of preferred stock). 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
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, 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. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting 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
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940
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 stockholders of the Fund.
In connection with the Board of Director's consideration of the
Investment Advisory Agreement, the Board reviewed information derived from a
number of sources and covering a range of issues relating to, among other
things, alternatives to the Investment Advisory Agreement. The Board of
Directors considered the services to be provided to the Fund by the Investment
Adviser under the Investment Advisory Agreement, as well as other services to
be provided by the Investment Adviser and its affiliates under other
agreements, and the personnel who will provide these services. In addition to
investment advisory services to be provided to the Fund, the Investment
Adviser and its affiliates will provide administrative services, stockholder
services, oversight of fund accounting, marketing services, assistance in
meeting legal and regulatory requirements, and other services necessary for
the operation of the Fund. The Fund's Board of Directors also considered the
Investment Adviser's costs of providing such services, and the direct and
indirect benefits to the Investment Adviser from its relationship with the
Fund. The benefits considered by the Board included not only the Investment
Adviser's compensation for investment advisory services, but also compensation
paid to the Investment Adviser or its affiliates for other, non-advisory,
services provided to the Fund. The Board of Directors concluded that the
advisory fee was reasonable in relation to the services provided by the
Investment Adviser to the Fund as well as the costs and benefits of the
Investment Adviser in providing such services. In reaching its conclusion, the
Board focused on the experience, resources and strengths of the Investment
Adviser and its affiliates in managing investment companies that invest in
investment grade fixed income securities, including preferred securities, as
well as investment companies that utilize leverage. The Directors, based on
their experience as directors of other investment companies managed by the
Investment Adviser and its affiliates, also focused on the quality of the
compliance and administrative staff at the Investment Adviser. In connection
with its consideration of the Investment Advisory Agreement, the Board of
Directors placed significant emphasis on the Fund's advisory fee rate and
anticipated expense ratios as compared to those of comparable leveraged,
closed-end funds ("comparable funds") investing in preferred securities and
similar instruments as provided by Lipper Inc. The Board noted that the Fund's
advisory fee rate is lower than the advisory fee rate of most of the
comparable funds and higher than the advisory fee rate of some of the other
comparable funds (in some cases after giving effect to such funds' fee waivers
and/or expense reimbursements). In particular, the Board of Directors reviewed
the advisory fee rate of three comparable closed-end funds with substantially
similar investment objectives and policies that are managed by other
investment advisers. These funds were the most recent comparable funds to
commence a public offering of each of the fund's common stock. One fund
charges an advisory fee of 0.90%, the
31
second fund charges an advisory fee of 0.73% and the third fund charges an
advisory fee of 0.75%, before giving effect to any applicable fee waiver. The
Board of Directors noted that the fee payable by the Fund is lower than the
fee charged to these three comparable funds, before giving effect to any fee
waivers. Based in part on this fee comparison, and taking into account the
quality of the various services to be provided to the Fund by the Investment
Adviser and its affiliates, the Investment Adviser's experience in managing
investment grade fixed income portfolios, each as described above, and the
Directors' experience with the nature and quality of portfolio management,
administrative and compliance services provided by the Investment Adviser to
other investment companies, the Fund's Board of Directors concluded that the
advisory fee rate was reasonable. The Board considered whether there should be
changes in the advisory fee rate or structure in order to enable the Fund to
participate in any economies of scale that the Investment Adviser may
experience as a result of growth in the Fund's assets. The Fund's Board of
Directors also reviewed materials supplied by counsel that were prepared for
use by the Board in fulfilling its duties under the 1940 Act.
Based on the information reviewed and the discussions, the Board of
Directors, including a majority of the non-interested Directors, concluded
that it was satisfied with the nature and quality of the services to be
provided by the Investment Adviser to the Fund and that the advisory fee rate
was reasonable in relation to such services. The non-interested Directors were
represented by independent counsel who assisted them in their deliberations.
Code of Ethics
The Fund's Board of Directors approved a Code of Ethics under Rule
17j-1 of the 1940 Act that covers the Fund and the Investment Adviser. The
Code of Ethics establishes procedures for personal investing and restricts
certain transactions. Employees subject to the Code of Ethics may invest in
securities for their personal investment accounts, including securities that
may be purchased or held by the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. The Fund has no
obligation to deal with any dealer or group of dealers in the execution of
transactions in portfolio securities of the Fund. Where possible, the Fund
deals directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. It is the policy of the Fund to obtain the best results in
conducting portfolio transactions for the Fund, taking into account such
factors as price (including the applicable dealer spread or commission), the
size, type and difficulty of the transaction involved, the firm's general
execution and operations facilities and the firm's risk in positioning the
securities involved. The cost of portfolio securities transactions of the Fund
primarily consists of dealer or underwriter spreads and brokerage commissions.
While reasonable competitive spreads or commissions are sought, the Fund will
not necessarily be paying the lowest spread or commission available.
Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as quantitative and modeling
information assessments and statistical data and provide other similar
services) to the Investment Adviser may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the
Investment Advisory Agreement and the expense of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information. Supplemental investment research obtained from such dealers 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.
Under the 1940 Act, persons affiliated with the Fund and persons who
are affiliated with such persons are prohibited from dealing with the Fund as
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission. Since transactions
in the over-the-counter market usually involve transactions with dealers
acting as principal for their own accounts, affiliated persons of the Fund,
including Merrill Lynch and any of its affiliates, will not serve as the
Fund's dealer in such transactions. However, affiliated persons of the Fund
may serve as its broker in listed or over-the-counter transactions conducted
on an agency basis provided that, among other things, the fee or commission
received by such affiliated broker is
32
reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable transactions. In
addition, the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures adopted by the Board of Directors of the Fund
that either comply with rules adopted by the Commission or with
interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to
which investment companies should seek exemptions under the 1940 Act in order
to seek to recapture underwriting and dealer spreads from affiliated entities.
The Directors have considered all factors deemed relevant and have made a
determination not to seek such recapture at this time. The Directors will
reconsider this matter from time to time.
Section 11(a) of the Securities Exchange Act of 1934 generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts that
they manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually furnishes
the account with a statement setting forth the aggregate compensation received
by the member in effecting such transactions, and (iii) complies with any
rules the Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch
acting as a broker for the Fund in any of its portfolio transactions executed
on any such securities exchange of which it is a member, appropriate consents
have been obtained from the Fund and annual statements as to aggregate
compensation will be provided to the Fund.
The Fund has received an exemptive order from the Commission
permitting it to lend portfolio securities to Merrill Lynch or its affiliates.
Pursuant to that order, the Fund also has retained an affiliated entity of the
Investment Adviser as the securities lending agent for a fee, including a fee
based on a share of the returns on investment of cash collateral. That entity
may, on behalf of the Fund, invest cash collateral received by the Fund for
such loans, among other things, in a private investment company managed by
that entity or in registered money market funds advised by the Investment
Adviser or its affiliates.
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 1940 Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases from
or sales to Merrill Lynch of securities in transactions in which it acts as
principal.
Securities may be held by, or be appropriate investments for, the
Fund as well as other funds or investment advisory clients of the Investment
Adviser or its affiliates. Because of different objectives or other factors, a
particular security may be bought for one or more clients of the Investment
Adviser or an affiliate when one or more clients of the Investment Adviser or
an affiliate are selling the same security. If purchases or sales of
securities arise for consideration at or about the same time that would
involve the Fund or other clients or funds for which the Investment Adviser or
an affiliate act as investment adviser, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more
than one client of the Investment Adviser or an affiliate during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
Portfolio Turnover
Generally, the Fund does not purchase securities for short term
trading profits. However, the Fund may dispose of securities without regard to
the time they have been held when such actions, for defensive or other
reasons, appear advisable to the Investment Adviser. While it is not possible
to predict turnover rates with any certainty, at present it is anticipated
that the Fund's annual portfolio turnover rate, under normal circumstances,
should be less than 100%. (The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Fund during the particular fiscal year. For purposes
of determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.) A high portfolio turnover rate
results in greater transaction costs, which are borne directly by the Fund and
also has certain tax consequences for stockholders.
33
TAXES
The Fund intends to elect and to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). As long as it so qualifies, in
any taxable year in which it distributes at least 90% of its income, the Fund
(but not its stockholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Fund intends to distribute substantially all of such income. If, in
any taxable year, the Fund fails to qualify as a RIC under the Code, it would
be taxed in the same manner as an ordinary corporation and all distributions
from earnings and profits to its stockholders would be taxable as ordinary
income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year-end, plus certain
undistributed amounts from previous years. While the Fund intends to
distribute its income and capital gains in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In such event, the Fund will be
liable for the tax only on the amount by which it does not meet the foregoing
distribution requirements.
The Internal Revenue Service (the "IRS"), in a revenue ruling, held
that certain auction rate preferred stock would be treated as stock for
Federal income tax purposes. The terms of the AMPS are substantially similar,
but not identical, to the auction rate preferred stock discussed in the
revenue ruling, and in the opinion of Sidley Austin Brown & Wood LLP, counsel
to the Fund, the shares of AMPS will constitute stock of the Fund and
distributions with respect to shares of AMPS (other than distributions in
redemption of shares of AMPS subject to Section 302(b) of the Code) will
constitute dividends to the extent of the Fund's current and accumulated
earnings and profits as calculated for Federal income tax purposes.
Nevertheless, it is possible that the IRS might take a contrary position,
asserting, for example, that the shares of AMPS constitute debt of the Fund.
If this position were upheld, the discussion of the treatment of distributions
below would not apply. Instead, distributions by the Fund to holders of shares
of AMPS would constitute taxable interest income, whether or not they exceeded
the earnings and profits of the Fund. In such an event, the designations of
particular types of income, such as capital gains, income eligible for the
Dividends Received Deduction and income eligible for the foreign tax credit,
as described below, would not be effective.
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
stockholders as ordinary income. Distributions made from an excess of net long
term capital gains over net short term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to stockholders as long term capital gains, regardless
of the length of time the stockholder 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 stockholder with respect to those shares. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Generally not later than 60 days after the close of its
taxable year, the Fund will provide its stockholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends, as well as dividends eligible for the Dividends Received Deduction,
if any.
If the Fund pays a dividend in January which was declared in the
previous October, November or December to stockholders of record on a
specified date in one of such months, then such dividend will be treated for
tax purposes as being paid by the Fund and received by its stockholders on
December 31 of the year in which the dividend was declared.
A portion of the Fund's ordinary income dividends may be eligible for
the Dividends Received Deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate any
dividends eligible for the Dividends Received Deduction between the holders of
common stock and the AMPS in proportion to the total dividends paid to each
class during the taxable year, or otherwise as required by applicable law. A
holder of shares of AMPS (a) that is taxed as a corporation for Federal income
tax purposes, (b) meets applicable holding period and taxable income
requirements of section 246 of the Code, (c) is not subject to the
34
"debt-financed portfolio stock" rules of section 246A of the Code with respect
to its investment in common stock and (d) is otherwise entitled to the
Dividends Received Deduction can claim a deduction in an amount equal to 70%
of the dividends received on shares of AMPS which are designated by the Fund
as qualifying for the Dividends Received Deduction. However, the Fund expects
its portfolio to consist primarily of "hybrid" or taxable preferred stock.
Consequently, most of the Fund's distributions generally will not qualify for
the Dividends Received Deduction. In addition, most dividends from the Fund
are not expected to be excludable from an individual's taxable income under
certain proposals currently under discussion by federal government officials.
Because discussion of these proposals is ongoing, the impact of the proposals
on the Fund and its stockholders cannot be predicted.
The IRS has taken the position in a revenue ruling that if a RIC has
two or more classes of shares, it may designate distributions made to each
class in any year as consisting of no more than such class's proportionate
share of particular types of income, including net long-term capital gains and
any dividends eligible for the Dividends Received Deduction. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the RIC during such year that was
paid to such class. Thus, the Fund is required to allocate its net capital
gains, ordinary income and any income eligible for the Dividends Received
Deduction proportionately among the common stock and the shares of AMPS of
each series.
In the opinion of Sidley Austin Brown and Wood LLP, counsel to the
Fund, under current law the manner in which the Fund intends to allocate items
of net capital gains, ordinary income and dividends eligible for the Dividends
Received Deduction among shares of common stock and shares of AMPS of each
series will be respected for Federal income tax purposes. However, there is
currently no direct guidance from the IRS or other sources specifically
addressing whether the Fund's method for allocating items of different types
of income among shares of common stock and shares of the series of AMPS will
be respected for Federal income tax purposes, and it is possible that the IRS
could disagree with counsel's opinion and attempt to reallocate the Fund's net
capital gains or items of income. Such a reallocation may cause the Fund to be
liable for income tax and excise tax on any reallocated taxable income. Sidley
Austin Brown & Wood LLP has advised the Fund that, in its opinion, if the IRS
were to challenge in court the Fund's allocations of income and gain, the IRS
would be unlikely to prevail. A holder should be aware, however, that the
opinion of Sidley Austin Brown & Wood LLP represents only its best legal
judgment and is not binding on the IRS or the courts.
If at any time when shares of AMPS are outstanding the Fund does not
meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Description of AMPS -- Dividends -- Restrictions on
Dividends and Other Payments." This may prevent the Fund from distributing at
least 90% of its net income, and may, therefore, jeopardize the Fund's
qualification for taxation as a RIC. If the Fund were to fail to qualify as a
RIC, the Fund's income would be taxable at the entity level as well as the
shareholder level. Upon any failure to meet the asset coverage requirements of
the 1940 Act, the Fund, in its sole discretion, may, and under certain
circumstances will be required to, redeem shares of AMPS in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to qualify as a RIC. See "Description
of AMPS -- Redemption." There can be no assurance, however, that any such
action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its
net investment income. A distribution will only be counted for this purpose if
it qualifies for the dividends paid deduction under the Code. Some types of
preferred stock that the Fund has the authority to issue may raise an issue as
to whether distributions on such preferred stock are "preferential" under the
Code and therefore not eligible for the dividends paid deduction. The Fund
intends to issue preferred stock that counsel advises will not result in the
payment of a preferential dividend. If the Fund ultimately relies on a legal
opinion in the event it issues such preferred stock, there is no assurance
that the IRS would agree that dividends on the preferred stock are not
preferential. If the IRS successfully disallowed the dividends paid deduction
for dividends on the preferred stock, the Fund could lose the benefit of the
special treatment afforded RICs under the Code.
Upon the sale or exchange of Fund shares held as a capital asset, a
stockholder may realize a capital gain or loss which will be long-term or
short-term depending on the stockholder's holding period for the shares.
Generally, gain or loss will be long-term if the shares have been held for
more than one year. 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
35
days after the date that the shares are disposed of. In such case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident
aliens or foreign entities will be subject to a 30% United States withholding
tax under existing provisions of the Code applicable to foreign individuals
and entities unless a reduced rate of withholding or a withholding exemption
is provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the US
withholding tax.
Under certain Code provisions, some stockholders may be subject to a
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, stockholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Stockholders may be able to claim U.S. foreign tax credits with respect
to such taxes, subject to certain conditions and limitations contained in the
Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. In addition, a
foreign tax credit may be claimed with respect to withholding tax on a
dividend only if the stockholder meets certain holding period requirements.
The Fund also must meet these holding period requirements, and if the Fund
fails to do so, it will not be able to "pass through" to stockholders the
ability to claim a credit or a deduction for the related foreign taxes paid by
the Fund. If the Fund satisfies the holding period requirements and more than
50% in value of its total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible, and intends, to
file an election with the IRS pursuant to which stockholders of the Fund will
be required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct their proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits
against their U.S. income taxes. No deductions for foreign taxes, moreover,
may be claimed by noncorporate stockholders who do not itemize deductions. A
stockholder that is a nonresident alien individual or a foreign corporation
may be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such stockholder. The Fund will report annually to its stockholders
the amount per share of such withholding taxes and other information needed to
claim the foreign tax credit. For this purpose, the Fund will allocate foreign
taxes and foreign source income among the common stock and the series of
preferred stock, according to a method similar to that described above for the
allocation of capital gains and other types of income.
The Fund may invest in debt instruments rated in the lower rating
categories of NRSROs and in unrated securities, including high yield bonds
(commonly referred to as "junk" bonds). Some of these junk bonds may be
purchased at a discount and may therefore cause the Fund to accrue and
distribute income before amounts due under the obligations are paid. In
addition, a portion of the interest payments on such junk bonds may be treated
as dividends for Federal income tax purposes; in such case, if the issuer of
the junk bonds is a domestic corporation, such amounts will be eligible for
the dividends received deduction to the extent of the deemed dividend portion
of such interest payments.
The Fund may invest up to 10% of its total assets in securities of
other investment companies. If the Fund purchases shares of an investment
company (or similar entity having significant passive income or assets)
organized under foreign law, the Fund will be treated as owning shares in a
passive foreign investment company ("PFIC") for U.S. Federal income tax
purposes. The Fund may be subject to U.S. Federal income tax, and an
additional tax in the nature of interest (the "interest charge"), on a portion
of the distributions from such a company and on gain from the disposition of
the shares of such a company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its stockholders. The Fund may be eligible to make an election
with respect to certain PFICs in which it owns shares that will allow it to
avoid the taxes on excess distributions. However, such election may cause the
Fund to recognize income in a particular year in excess of the distributions
36
received from such PFICs. Alternatively, the Fund could elect to "mark to
market" at the end of each taxable year all shares that it holds in PFICs. If
it made this election, the Fund would recognize as ordinary income any
increase in the value of such shares over their adjusted basis and as ordinary
loss any decrease in such value to the extent it did not exceed prior
increases. By making the mark-to-market election, the Fund could avoid
imposition of the interest charge with respect to excess distributions from
PFICs, but in any particular year might be required to recognize income in
excess of the distributions it received from PFICs.
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. The Fund does not anticipate that its
activity in this regard will affect its qualification as a RIC.
The Code provides that every shareholder required to file a tax
return must include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Fund)
during the taxable year.
Certain of the Fund's transactions will be subject to special
provisions of the Code that, among other things, may affect the character
(ordinary versus capital) of gains and losses by the Fund, may accelerate
recognition of income to the Fund and may defer Fund losses. These rules
could, therefore, affect the character, amount and timing of distributions to
stockholders.
The Fund may write (i.e., sell) call and put options on 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
election is available to the Fund or an exception applies, such options and
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 futures contract will be treated as sold for its fair market
value on the last day of the taxable year) and gain or loss from 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 stockholders. 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 or currency exchange rate 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 swaps,
options and futures. 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 swaps, options and futures.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends also may 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.
Stockholders are urged to consult their own tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Fund.
37
NET ASSET VALUE
Net asset value per share of common stock is determined as of the
close of business on the New York Stock Exchange (the "NYSE") (generally, the
NYSE closes at 4:00 p.m., Eastern time), on the last business day in each
week. For purposes of determining the net asset value of a share of common
stock, the value of the securities held by the Fund plus any cash or other
assets (including interest accrued but not yet received) minus all liabilities
(including accrued expenses) and the aggregate liquidation value of any
outstanding shares of preferred stock is divided by the total number of shares
of common stock outstanding at such time. Expenses, including the fees payable
to the Investment Adviser, are accrued daily.
The Fund determines and makes available for publication the net asset
value of its shares of common stock 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.
Generally, portfolio securities are valued at the last sale price on
the national securities 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. Certain portfolio securities may be
valued on the basis of prices furnished by one or more pricing services which
determine prices for normal, institutional-size trading units of such
securities using market information, transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders.
The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation. Positions in options are valued at the last sale price on the
market where any such option is principally traded. Positions in futures
contracts are valued at closing prices for such contracts established by the
exchange on which they are traded. Obligations with remaining maturities of 60
days or less are valued at amortized cost unless this method no longer
produces fair valuations. Repurchase agreements are valued at cost plus
accrued interest. Rights or warrants to acquire stock, or stock acquired
pursuant to the exercise of a right or warrant, may be valued taking into
account various factors such as original cost to the Fund, earnings and net
worth of the issuer, market prices for securities of similar issuers,
assessment of the issuer's future prosperity, liquidation value or third party
transactions involving the issuer's securities. Securities for which there
exist no price quotations or valuations and all other assets are valued at
fair value as determined in good faith by or on behalf of the Board of
Directors of the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act and in accordance therewith
is required to file reports, proxy statements and other information with the
Commission.
Any such reports and other information, including the Fund's Code of
Ethics, 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: 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 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 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
38
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the
Commission upon the payment of certain fees prescribed by the Commission.
39
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder,
Preferred Income Strategies Fund, Inc.
We have audited the accompanying statement of assets and liabilities
of Preferred Income Strategies Fund, Inc. (the "Fund"), as of March 12, 2003.
This statement of assets and liabilities is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets and liabilities based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
statement of assets and liabilities is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement of assets and liabilities. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall statement of assets and
liabilities presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial position of the
Preferred Income Strategies Fund, Inc., as of March 12, 2003, in conformity
with accounting principles generally accepted in the United States.
MetroPark, New Jersey
March , 2003
40
PREFERRED INCOME STRATEGIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
March 12, 2003
ASSETS:
Cash................................................................................ $ 100,012
Prepaid registration fees and Offering Costs (Note 1)............................... 551,110
---------------
Total assets.................................................................... 651,122
===============
LIABILITIES:
Liabilities and accrued expenses (Note 1)........................................... 551,110
---------------
NET ASSETS:........................................................................... $ 100,012
===============
NET ASSETS CONSIST OF:
Common Stock, par value $.10 per share; 200,000,000 shares
authorized; 4,189 shares issued and outstanding (Note 1)......................... $ 419
Paid-in Capital in excess of par................................................. $ 99,953
---------------
Net Assets-Equivalent to $23.875 net asset value per share based
on 4,189 shares of capital stock outstanding (Note 1)............................ $ 100,012
===============
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
Note 1. Organization
The Fund was incorporated under the laws of the State of Maryland on
January 23, 2003, and is registered under the Investment Company Act of 1940,
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 4,189 shares for $100,012 on March 12, 2003. The
General Partner of the Investment Adviser is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. Certain officers and/or directors of
the Fund are officers of the Investment Adviser.
The Investment Adviser, on behalf of the Fund, will incur
organization costs estimated at $56,500. 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. Investment Advisory Arrangements
The Fund has engaged the Investment Adviser to provide investment
advisory and management services to the Fund. The Investment Adviser will
receive a monthly fee for advisory and management services at an annual rate
equal to 0.60% of the Fund's average weekly net assets, plus the proceeds of
any outstanding borrowings used for leverage.
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 stockholders.
41
PREFERRED INCOME STRATEGIES FUND, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
, 2003
(IN THOUSANDS)
[To Be Provided by Amendment.]
42
PREFERRED INCOME STRATEGIES FUND, INC.
Financial Statements
AS OF , 2003 (Unaudited)
[To Be Provided by Amendment.]
43
PREFERRED INCOME STRATEGIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
[To Be Provided by Amendment.]
44
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc.'s ("Moody's") Long Term Ratings
Aaa Bonds and preferred stock 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 and preferred stock 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 risk appear somewhat larger than in
Aaa securities.
A Bonds and preferred stock 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 and preferred stock which are rated Baa are considered as
medium grade obligations (i.e., they are neither highly protected
nor poorly secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds and preferred stock which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds and preferred stock which are rated B generally lack
characteristics of the desirable investment. Assurance of interest
and principal payment or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds and preferred stock which are rated Caa are of poor standing.
Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca Bonds and preferred stock which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds and preferred stock which are rated C are the lowest rated
class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Moody's bond ratings, where specified, are applicable to preferred stock,
financial contracts, senior bank obligations and insurance company senior
policyholder and claims obligations with an original maturity in excess of one
year. Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated. Obligations of a
branch of a bank are considered to be domiciled in the country in which the
branch is located.
A-1
Unless noted as an exception, Moody's rating on a bank's ability to repay
senior obligations extends only to branches located in countries which carry a
Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated
at the lower of the bank's rating or Moody's Sovereign Rating for the Bank
Deposits for the country in which the branch is located. When the currency in
which an obligation is denominated is not the same as the currency of the
country in which the obligation is domiciled, Moody's ratings do not
incorporate an opinion as to whether payment of the obligation will be
affected by the actions of the government controlling the currency of
denomination. In addition, risk associated with bilateral conflicts between an
investor's home country and either the issuer's home country or the country
where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance
company obligations are exempt from registration under the Securities Act of
1933, as amended, or issued in conformity with any other applicable law or
regulation. Moody's makes no representation that any specific bank or
insurance company obligation is a legally enforceable or a valid senior
obligation of a rated issuer.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through Caa. 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.
Description of Standard & Poor's ("Standard & Poor's") Long Term Issue Credit
Ratings
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes
into account the currency in which the obligation is denominated. 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
obligors 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.
Issue credit ratings can be either long term or short term. Short term
ratings are generally assigned to those obligations considered short term in
the relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper. Short
term ratings are also used to indicate the creditworthiness of an obligor with
respect to put features on long term obligations. The result is a dual rating,
in which the short term rating addresses the put feature, in addition to the
usual long term rating. Medium term notes are assigned long term 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.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower
A-2
priority in bankruptcy, as noted above. (Such differentiation applies when an
entity has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
Accordingly, in the case of junior debt, the rating may not conform exactly
with the category definition.
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 obligations
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. However, 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.
BB Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as
B having significant speculative characteristics. "BB" indicates the
CCC least degree of speculation and "C" the highest. While such B
CC obligations will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions
which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity
to meet its financial commitment on the obligation. Adverse
business, financial, or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment
on the obligation.
CCC An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet
its financial commitment on the obligation.
CC An obligation rated "CC" is currently highly vulnerable to
nonpayment.
C The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
D An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during
such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized. Such rating will also be
used upon the completion of a tender or exchange offer, whereby some
or all of an issue is either repurchased for an amount of cash or
replaced by other securities having a total value that is clearly
less than par; or in the case of preferred stock or deferrable
payment securities, upon non-payment of the dividend or deferral of
the interest payments.
A-3
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An insurer's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the
same issuer.
Description of Fitch, Inc.'s ("Fitch") Long Term Credit Ratings
Investment Grade
AAA Highest credit quality. "AAA" ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
AA Very high credit quality. "AA" ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more
vulnerable to changes in circumstances or in economic conditions
than is the case for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently
a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse
economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be
met. Securities rated in this category are not investment grade.
B Highly speculative. "B" ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and
economic environment.
CCC, High default risk. Default is a real possibility. Capacity for
CC, meeting financial commitments is solely reliant upon sustained,
C favorable business or economic developments. A "CC" rating indicates
that default of some kind appears probable. "C" ratings signal
imminent default.
DDD, The ratings of obligations in this category are based on their
DD, and prospects for achieving partial or full recovery in a reorganization
D Default or liquidation of the obligor. While expected recovery values are
highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding
amounts and accrued interest. "DD" indicates potential recoveries
in the range of 50%-90%, and "D" the lowest recovery potential,
i.e., below 50%. Entities rated in this category have defaulted on
some or
A-4
all of their obligations. Entities rated "DDD" have the highest
prospect for resumption of performance or continued operation with
or without a formal reorganization process. Entities rated "DD"
and "D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities
rated "D" have a poor prospect for repaying all obligations.
Notes to Long term ratings:
Plus "(+)" or Minus "(-)" may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not added to the
"AAA" Long-term rating category, to categories below "CCC", or to Short-term
ratings other than "F1".
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. Rating Watch is typically resolved over a
relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over
a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are "stable" could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch may be unable to identify the
fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
A-5
APPENDIX B
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix B constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this prospectus or this Appendix B hereto, as the
case may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend
Period;
(ii) whether Sufficient Clearing Bids existed for the determination
of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a
Bid or a Sell Order on behalf of a Beneficial Owner, the number of shares, if
any, of AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a
Bid on behalf of a Potential Beneficial Owner, the number of shares, if any,
of AMPS to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell
Order exceeds the aggregate number of shares of AMPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid, the name or names of one or more Buyer's Broker-Dealers (and the name of
the Agent Member, if any, of each such Buyer's Broker-Dealer) acting for one
or more purchasers of such excess number of shares of AMPS and the number of
such shares to be purchased from one or more Beneficial Owners on whose behalf
such Broker-Dealer acted by one or more Potential Beneficial Owners on whose
behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of shares of AMPS to be purchased by
all Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid exceeds the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell
Order, the name or names of one or more Seller's Broker-Dealers (and the name
of the Agent Member, if any, of each such Seller's Broker-Dealer) acting for
one or more sellers of such excess number of shares of AMPS and the number of
such shares to be sold to one or more Potential Beneficial Owners on whose
behalf such Broker-Dealer acted by one or more Beneficial Owners on whose
behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect
to the AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or its
Agent Member) through the Securities Depository the amount necessary to
purchase the number of shares of AMPS to be purchased pursuant to such Bid
against receipt of such shares and advise such Potential Beneficial Owner of
the Applicable Rate for the next succeeding Dividend Period;
B-1
(ii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Sell Order that was accepted, in whole or in part,
or a Bid that was accepted, in whole or in part, to instruct such Beneficial
Owner's Agent Member to deliver to such Broker-Dealer (or its Agent Member)
through the Securities Depository the number of shares of AMPS to be sold
pursuant to such Order against payment therefor and advise any such Beneficial
Owner that will continue to hold shares of AMPS of the Applicable Rate for the
next succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Hold Order of the Applicable Rate for the next
succeeding Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of AMPS received
by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids that were accepted or
Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instruct its Agent Member as provided in (b)(i) or (ii) above, as the case may
be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Beneficial Owner delivering
shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to
purchase such shares against receipt of such shares, and (B) deliver such
shares through the Securities Depository to a Buyer's Broker-Dealer (or its
Agent Member) identified to such Seller's Broker-Dealer pursuant to (a)(v)
above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a)(vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b)(i) above against receipt of such
shares, and (B) deliver such shares through the Securities Depository to the
Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described in
(b)(i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(iii)
above, and the Securities Depository shall execute such transactions.
B-2
(f) If a Beneficial Owner selling shares of AMPS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of AMPS that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner.
In such event, the number of shares of AMPS to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall
represent any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
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APPENDIX C
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Articles
Supplementary relating to the AMPS, and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. The terms not
defined below are defined in the prospectus. Nothing contained in this
Appendix C constitutes a representation by the Fund that in each Auction each
party referred to herein actually will perform the procedures described herein
to be performed by such party.
Paragraph 10(a) Certain Definitions.
As used in this Paragraph 10, the following terms shall have the
following meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned pursuant to
this Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i)
below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vi) "Hold Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on the lower of the credit rating or ratings assigned on such
date to such shares by Moody's and Fitch (or if Moody's or Fitch or both shall
not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) as
follows:
CREDIT RATINGS
---------------------------------------------- Applicable Percentage
Moody's Fitch of Reference Rate
------------------------- ------------------- ---------------------
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 225%
Below Baa3 Below BBB- 275%
The Applicable Percentage as so determined may be further subject to
upward but not downward adjustment in the discretion of the Board of Directors
of the Fund after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance with
the AMPS Basic Maintenance Amount. Subject to the provisions of paragraph 12
of the Articles Supplementary entitled "Termination of Rating Agency
Provisions," the Fund shall take all reasonable action necessary to enable
Fitch and Moody's to provide a rating for the AMPS. If either Fitch or Moody's
shall not make such a rating available, subject to the provisions of paragraph
12 of the Articles Supplementary entitled "Termination of Rating Agency
Provisions," or if neither Fitch nor Moody's shall make such a rating
available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after obtaining the Fund's approval, shall select a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating
Agency or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph
10(b)(i) below.
C-1
(ix) "Sell Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(x) "Submission Deadline" shall mean 1:00 p.m., New York City time,
on any Auction Date or such other time on any Auction Date as may be specified
by the Auction Agent from time to time as the time by which each Broker-Dealer
must submit to the Auction Agent in writing all Orders obtained by it for the
Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in Paragraph
10(d)(i) below.
(xii) "Submitted Hold Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in
Paragraph 10(d)(i) below.
Paragraph 10(b) Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders And Potential Holders.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners
and as Potential Holders in respect of shares subject to Orders submitted to
them by Potential Beneficial Owners. A Broker-Dealer may also hold shares of
AMPS in its own account as a Beneficial Owner. A Broker-Dealer may thus submit
Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial
Owner and therefore participate in an Auction as an Existing Holder or
Potential Holder on behalf of both itself and its customers. On or prior to
the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for the next succeeding Dividend Period;
(2) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next succeeding Dividend Period
shall not be less than the rate per annum specified by such Beneficial Owner,
and/or
(3) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard to
the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the number
of outstanding shares, if any, of AMPS which each such Potential Beneficial
Owner offers to purchase, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum specified
by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of
C-2
information referred to in clause (A) or (B) of this Paragraph 10(b)(i) is
hereinafter referred to as an "Order" and each Beneficial Owner and each
Potential Beneficial Owner placing an Order, including a Broker-Dealer acting
in such capacity for its own account, is hereinafter referred to as a
"Bidder"; an Order containing the information referred to in clause (A)(1) of
this Paragraph 10(b)(i) is hereinafter referred to as a "Hold Order"; an Order
containing the information referred to in clause (A)(2) or (B) of this
Paragraph 10(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this Paragraph
10(b)(i) is hereinafter referred to as a "Sell Order." Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding shares of AMPS specified in
such Bid if the Applicable Rate determined on such Auction Date shall be
less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares
of AMPS to be determined as set forth in Paragraph 10(e)(i)(D) if the
Applicable Rate determined on such Auction Date shall be equal to the
rate per annum specified therein; or
(3) a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(ii)(C) if such specified rate
per annum shall be higher than the Maximum Applicable Rate and Sufficient
Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of outstanding shares of AMPS specified in
such Sell Order, or
(2) such number or a lesser number of outstanding shares
of AMPS to be determined as set forth in Paragraph 10(e)(ii)(C) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of outstanding shares of AMPS specified in
such Bid if the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares
of AMPS to be determined as set forth in Paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to the
rate per annum specified therein.
Paragraph 10(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding shares of AMPS that are the
subject of such Order;
C-3
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding shares, if any, of AMPS
subject to any Hold Order placed by such Existing Holder;
(2) the number of outstanding shares, if any, of AMPS
subject to any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of outstanding shares, if any, of AMPS
subject to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares of
AMPS held by an Existing Holder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period which is not a Special
Dividend Period of more than 28 days) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period of more than 28 days) to have
been submitted on behalf of such Existing Holder covering the number of
outstanding shares of AMPS held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in
the aggregate more than the number of outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing
Holder shall be considered valid up to and including the number of
outstanding shares of AMPS held by such Existing Holder; provided that if
more than one Hold Order is submitted on behalf of such Existing Holder
and the number of shares of AMPS subject to such Hold Orders exceeds the
number of outstanding shares of AMPS held by such Existing Holder, the
number of shares of AMPS subject to each of such Hold Orders shall be
reduced pro rata so that such Hold Orders, in the aggregate, cover
exactly the number of outstanding shares of AMPS held by such Existing
Holder;
(B) any Bids submitted on behalf of such Existing Holder
shall be considered valid, in the ascending order of their respective
rates per annum if more than one Bid is submitted on behalf of such
Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the number
of shares of AMPS subject to any Hold Order referred to in Paragraph
10(c)(iv)(A) above (and if more than one Bid submitted on behalf of such
Existing Holder specifies the same rate per annum and together they cover
more than the remaining number of shares that can be the subject of valid
Bids after application of Paragraph 10(c)(iv)(A) above and of the
foregoing portion of this Paragraph 10(c)(iv)(B) to any Bid or Bids
specifying a lower rate or rates per annum, the number of shares subject
to each of such Bids shall be reduced pro rata so that such Bids, in the
aggregate, cover exactly such remaining number of shares); and the number
of shares, if any, subject to Bids not valid under this Paragraph
10(c)(iv)(B) shall be treated as the subject of a Bid by a Potential
Holder; and
(C) any Sell Order shall be considered valid up to and
including the excess of the number of outstanding shares of AMPS held by
such Existing Holder over the number of shares of AMPS subject to Hold
Orders referred to in Paragraph 10(c)(iv)(A) and Bids referred to in
Paragraph 10(c)(iv)(B); provided that if more than one Sell Order is
submitted on behalf of any Existing Holder and the number of shares of
AMPS subject to such Sell Orders is greater than such excess, the number
of shares of AMPS subject to each of such Sell Orders shall be reduced
pro rata so that such Sell Orders, in the aggregate, cover exactly the
number of shares of AMPS equal to such excess.
C-4
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number
of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.
Paragraph 10(d) Determination of Sufficient Clearing Bids, Winning Bid Rate
and Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares
of AMPS over the number of outstanding shares of AMPS that are the
subject of Submitted Hold Orders (such excess being hereinafter referred
to as the "Available AMPS");
(B) from the Submitted Orders whether the number of
outstanding shares of AMPS that are the subject of Submitted Bids by
Potential Holders specifying one or more rates per annum equal to or
lower than the Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of outstanding shares of AMPS that are
the subject of Submitted Bids by Existing Holders specifying one or
more rates per annum higher than the Maximum Applicable Rate, and
(2) the number of outstanding shares of AMPS that are
subject to Submitted Sell Orders (if such excess or such equality
exists (other than because the number of outstanding shares of AMPS
in clauses (1) and (2) above are each zero because all of the
outstanding shares of AMPS are the subject of Submitted Hold
Orders), such Submitted Bids by Potential Holders hereinafter being
referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per
annum specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders
specifying the Winning Bid Rate and all other submitted Bids from
Existing Holders specifying lower rates per annum were rejected,
thus entitling such Existing Holders to continue to hold the shares
of AMPS that are the subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders
specifying the Winning Bid Rate and all other Submitted Bids from
Potential Holders specifying lower rates per annum were accepted,
thus entitling the Potential Holders to purchase the shares of AMPS
that are the subject of such Submitted Bids, would result in the
number of shares subject to all Submitted Bids specifying the
Winning Bid Rate or a lower rate per annum being at least equal to
the Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the
Maximum Applicable Rate and, based on such determinations, the Applicable Rate
for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable
Rate for the next succeeding Dividend Period shall be equal to the
Winning Bid Rate;
C-5
(B) if Sufficient Clearing Bids do not exist (other than
because all of the outstanding shares of AMPS are the subject of
Submitted Hold Orders), that the Applicable Rate for the next succeeding
Dividend Period shall be equal to the Maximum Applicable Rate; or
(C) if all of the outstanding shares of AMPS are the
subject of Submitted Hold Orders, that the Dividend Period next
succeeding the Auction automatically shall be the same length as the
immediately preceding Dividend Period and the Applicable Rate for the
next succeeding Dividend Period shall be equal to 80% of the Reference
Rate on the date of the Auction.
Paragraph 10(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority
and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be
accepted and the Submitted Bid of each of the Existing Holders specifying
any rate per annum that is higher than the Winning Bid Rate shall be
accepted, thus requiring each such Existing Holder to sell the
outstanding shares of AMPS that are the subject of such Submitted Sell
Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holder
specifying any rate per annum that is lower than the Winning Bid Rate
shall be rejected, thus entitling each such Existing Holder to continue
to hold the outstanding shares of AMPS that are the subject of such
Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders
specifying any rate per annum that is lower than the Winning Bid Rate
shall be accepted;
(D) the Submitted Bid of each of the Existing Holders
specifying a rate per annum that is equal to the Winning Bid Rate shall
be rejected, thus entitling each such Existing Holder to continue to hold
the outstanding shares of AMPS that are the subject of such Submitted
Bid, unless the number of outstanding shares of AMPS subject to all such
Submitted Bids shall be greater than the number of outstanding shares of
AMPS ("Remaining Shares") equal to the excess of the Available AMPS over
the number of outstanding shares of AMPS subject to Submitted Bids
described in Paragraph 10(e)(i)(B) and Paragraph 10(e)(i)(C), in which
event the Submitted Bids of each such Existing Holder shall be accepted,
and each such Existing Holder shall be required to sell outstanding
shares of AMPS, but only in an amount equal to the difference between (1)
the number of outstanding shares of AMPS then held by such Existing
Holder subject to such Submitted Bid and (2) the number of shares of AMPS
obtained by multiplying (x) the number of Remaining Shares by (y) a
fraction the numerator of which shall be the number of outstanding shares
of AMPS held by such Existing Holder subject to such Submitted Bid and
the denominator of which shall be the sum of the numbers of outstanding
shares of AMPS subject to such Submitted Bids made by all such Existing
Holders that specified a rate per annum equal to the Winning Bid Rate;
and
(E) the Submitted Bid of each of the Potential Holders
specifying a rate per annum that is equal to the Winning Bid Rate shall
be accepted but only in an amount equal to the number of outstanding
shares of AMPS obtained by multiplying (x) the difference between the
Available AMPS and the number of outstanding shares of AMPS subject to
Submitted Bids described in Paragraph 10(e)(i)(B), Paragraph 10(e)(i)(C)
and Paragraph 10(e)(i)(D) by (y) a fraction the numerator of which shall
be the number of outstanding shares of AMPS subject to such Submitted Bid
and the denominator of which shall be the sum of the number of
outstanding shares of AMPS subject to such Submitted Bids made by all
such Potential Holders that specified rates per annum equal to the
Winning Bid Rate.
C-6
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the outstanding shares of AMPS are subject to Submitted Hold Orders),
subject to the provisions of Paragraph 10(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying
any rate per annum that is equal to or lower than the Maximum Applicable
Rate shall be rejected, thus entitling such Existing Holder to continue
to hold the outstanding shares of AMPS that are the subject of such
Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying
any rate per annum that is equal to or lower than the Maximum Applicable
Rate shall be accepted, thus requiring such Potential Holder to purchase
the outstanding shares of AMPS that are the subject of such Submitted
Bid; and
(C) the Submitted Bids of each Existing Holder specifying
any rate per annum that is higher than the Maximum Applicable Rate shall
be accepted and the Submitted Sell Orders of each Existing Holder shall
be accepted, in both cases only in an amount equal to the difference
between (1) the number of outstanding shares of AMPS then held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and
(2) the number of shares of AMPS obtained by multiplying (x) the
difference between the Available AMPS and the aggregate number of
outstanding shares of AMPS subject to Submitted Bids described in
Paragraph 10(e)(ii)(A) and Paragraph 10(e)(ii)(B) by (y) a fraction the
numerator of which shall be the number of outstanding shares of AMPS held
by such Existing Holder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which shall be the number of outstanding
shares of AMPS subject to all such Submitted Bids and Submitted Sell
Orders.
(iii) If, as a result of the procedures described in Paragraph 10(e)(i)
or Paragraph 10(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of AMPS on any Auction Date, the Auction Agent shall, in
such manner as in its sole discretion it shall determine, round up or down the
number of shares of AMPS to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that each outstanding share of AMPS
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a
whole share of AMPS on any Auction Date, the Auction Agent, in such manner as
in its sole discretion it shall determine, shall allocate shares of AMPS for
purchase among Potential Holders so that only whole shares of AMPS are
purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of the outstanding shares of AMPS to be purchased and the aggregate
number of outstanding shares of AMPS to be sold by such Potential Holders and
Existing Holders and, to the extent that such aggregate number of outstanding
shares to be purchased and such aggregate number of outstanding shares to be
sold differ, the Auction Agent shall determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or
more sellers such Broker-Dealer shall receive, as the case may be, outstanding
shares of AMPS.
Paragraph 10(f) miscellaneous.
The Fund may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change
or modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid
or Sell Order in accordance with the procedures described in this Paragraph 10
or to or through a Broker-Dealer, provided that in the case of all transfers
other than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the
C-7
shares of AMPS held by it maintained in book entry form by the Securities
Depository in the account of its Agent Member, which in turn will maintain
records of such Beneficial Owner's beneficial ownership. Neither the Fund nor
any affiliate (other than Merrill Lynch, Pierce, Fenner & Smith Incorporated)
shall submit an Order in any Auction. Any Beneficial Owner that is an
affiliate (other than Merrill Lynch, Pierce, Fenner & Smith Incorporated)
shall not sell, transfer or otherwise dispose of shares of AMPS to any person
other than the Fund. All of the outstanding shares of AMPS of a series shall
be represented by a single certificate registered in the name of the nominee
of the Securities Depository unless otherwise required by law or unless there
is no Securities Depository. If there is no Securities Depository, at the
Fund's option and upon its receipt of such documents as it deems appropriate,
any shares of AMPS may be registered in the Stock Register in the name of the
Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled
to receive certificates therefor and required to deliver certificates thereof
or upon transfer or exchange thereof.
C-8
PART C. OTHER INFORMATION
Item 24. Financial Statements And Exhibits.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets and Liabilities as of March 12, 2003
Schedule of Investments as of __________, 2003 (unaudited)
Financial Statements as of ________, 2003 (unaudited)
Exhibits Description
-------- -----------
(a)(1) Articles of Incorporation of the Registrant.(a)
(a)(2) Form of Articles Supplementary creating five series of Auction
Market Preferred Stock ("AMPS").
(b) By-laws of the Registrant.(a)
(c) Not applicable.
(d)(1) Portions of the Articles of Incorporation, By-laws and Articles
Supplementary of the Registrant defining the rights of holders of
shares of the Registrant.(b)
(d)(2) Form of specimen certificate for the AMPS of the Registrant.
(e) Form of Automatic Dividend Reinvestment Plan.(c)
(f) Not applicable.
(g)(1) Form of Investment Advisory Agreement between the Registrant and
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser").(c)
(h)(1) Form of Purchase Agreement between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
relating to the AMPS.
(h)(2) Form of Merrill Lynch Standard Dealer Agreement.(d)
(i) Not applicable.
(j) Form of Custodian Agreement between the Registrant and State Street
Bank and Trust Company ("State Street").(e)
(k)(l) Form of Registrar, Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the Registrant and
EquiServe, L.P.(f)
(k)(2) Form of Administrative Services Agreement between the Registrant
and State Street.(g)
(k)(3) Form of Additional Compensation Agreement between FAM and Merrill
Lynch.(d)
(k)(4) Form of Auction Agent Agreement between the Registrant and The Bank
of New York.
(k)(5) Form of Broker-Dealer Agreement.
(k)(6) Form of Letter of Representations.
(l) Opinion and Consent of Sidley Austin Brown & Wood LLP.*
(m) Not applicable.
(n) Consent of ________, independent auditors for the Registrant.*
(o) Not applicable.
(p) Certificate of FAM.(d)
(q) Not applicable.
(r) Code of Ethics.(h)
-------------
(a) Filed with the Securities and Exchange Commission ("Commission")
on January 24, 2003 as an exhibit to the Registrant's Registration
Statement (the "Common Stock Registration Statement") on Form N-2
(File No. 333-10212).
(b) Reference is made to Article IV (sections 2, 3, 4, 5, 6, 7 and 8),
Article V (sections 3, 6 and 7), Article VI, Article VIII, Article
IX, Article X, and Article XII of the Registrant's Articles of
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Incorporation, previously filed as Exhibit (a) to the Common Stock
Registration Statement; to Article II, Article III (sections 3.01,
3.03, 3.05 and 3.17), Article VI (section 6.2), Article VII,
Article XII, Article XIII and Article XIV of the Registrant's By-
laws, filed as Exhibit (b) to the Common Stock Registration
Statement; and to the Form of Articles Supplementary filed as
Exhibit (a)(2) to this Registration Statement.
(c) Filed on February 25, 2003 with the Commission as an exhibit to
Pre-Effective Amendment No. 1 to the Common Stock Registration
Statement.
(d) Filed on March 25, 2003 with the Commission as an exhibit to
Pre-Effective Amendment No. 3 to the Common Stock Registration
Statement.
(e) Incorporated by reference to Exhibit 7 to Post-Effective No. 10 to
the Registration Statement on Form N-1A of Merrill Lynch Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
(File No. 33-49873), filed on October 30, 2001.
(f) Incorporated by reference to Exhibit 13 to Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-14 of Corporate High
Yield Fund, Inc. (File No. 333-10193), filed on December 31, 2002.
(g) Incorporated by reference to exhibit 8(d) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A of
Merrill Lynch Focus Twenty Fund, Inc. (File No. 333-89775) filed
on March 20, 2001.
(h) Incorporated by reference to Exhibit 15 to Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A of
Merrill Lynch Multi-State Limited Maturities Municipal Series
Trust (File No. 33-50417), filed on November 22, 2000.
* To be provided by Amendment.
Item 25. Marketing Arrangements.
See Exhibits (h)(1) and (2).
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this Registration Statement:
Registration fees $*
Printing (other than stock certificates) *
Legal fees and expenses *
Rating Agency Fees *
Miscellaneous *
-------------------
Total $*
===================
-----------------------
* To be provided by amendment.
Item 27. Persons Controlled by or Under Common Control with Registrant.
The information in the prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Stock--Common Stock"
and in Note 1 to the Statement of Assets and Liabilities is incorporated
herein by reference.
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Item 28. Number of Holders of Securities.
Number of
Record Holders
At
Title of Class March 24, 2003
---------------------------------------------------------------------------------------------- ----------------
Common Stock, $.10 par value 1
Preferred Stock, $.10 par value 0
Item 29. Indemnification.
Reference is made to Section 2-418 of the General Corporation Law of the
State of Maryland, Article V of the Registrant's Articles of Incorporation,
Article VI of the Registrant's By-laws and Section 6 of the Purchase
Agreement, which provide for indemnification.
Article VI of the By-laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the Maryland General Corporation Law, except that such indemnity shall
not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his 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 Registrant 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 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 Registrant claiming indemnification
within the scope of Article VI of the By-laws shall be entitled to advances
from the Registrant 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 Registrant a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Registrant 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 Registrant for his or her undertaking; (ii) the
Registrant 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 Registrant 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 Registrant 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 officer
or director of the Registrant. The Registrant; however, may not purchase
insurance on behalf of any officer or director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
In Section 6 of the Purchase Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify Merrill Lynch and each
person, if any, who controls Merrill Lynch within the meaning of the
Securities Act of 1933 (the "1933 Act") against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
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Insofar as indemnification for liabilities arising under the 1933 Act may
be provided to directors, officers and controlling persons of the Registrant
and Merrill Lynch, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with any successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 30. Business And Other Connections Of The Investment Adviser.
FAM (the "Investment Adviser"), acts as the investment adviser for a
number of affiliated open-end and closed-end registered investment companies.
Merrill Lynch Investment Managers, L.P. ("MLIM"), acts as the investment
adviser for a number of affiliated open-end and closed-end registered
investment companies, and also acts as sub-adviser to certain other
portfolios.
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 is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
The address of the Investment Adviser, MLIM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10080. The
address of the Fund's transfer agent, Financial Data Services, Inc. ("FDS"),
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and 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 fiscal years for his, her or its own account or
in the capacity of director, officer, employee, partner or trustee. Mr. Burke
is Vice President and Treasurer of all or substantially all of the investment
companies advised by FAM or its affiliates, and Mr. Doll is an officer of one
or more such companies.
Position(s) with Other Substantial Business,
Name Investment Adviser Profession, Vocation Or Employment
----------------------------- -------------------------- ------------------------------------------------------
ML & Co. Limited Partner Financial Services Holding Company; Limited Partner of
MLIM
Princeton Services General Partner General Partner of MLIM
Robert C. Doll, Jr. President President of MLIM; Co-Head (Americas Region) of MLIM
from 2000 to 2001 and Senior Vice President thereof
from 1999 to 2000; Director of Princeton Services;
Chief Investment Officer of Oppenheimer Funds, Inc. in
1999 and Executive Vice President thereof from 1991 to
1999
Donald C. Burke First Vice President, First Vice President, Treasurer and Director of Taxation
Treasurer and Director of MLIM; Treasurer of Princeton Services; Senior Vice
of Taxation President and Treasurer of Princeton Services from 1997
to 2002; Vice President of FAMD; Senior Vice
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President of MLIM from 1999 to 2000; First Vice
President of MLIM from 1997 to 1999
Lawrence D. Haber First Vice President First Vice President of MLIM; Senior Vice President and
Treasurer of Princeton Services
Brian A. Murdock Senior Vice President Senior Vice President of MLIM and Chief Operating
and Chief Operating Officer of MLIM Americas; Chief Investment Officer of
Officer EMEA Pacific Region and Global CIO for Fixed Income and
Alternative Investments; Head of MLIM's Pacific Region
and President of MLIM Japan, Australia and Asia
Debra W. Landsman-Yaros Senior Vice President Senior Vice President of MLIM; Senior Vice President of
Princeton Services; Vice President of FAMD
Stephen M. M. Miller Senior Vice President Executive Vice President of Princeton Administrators;
Senior Vice President of Princeton Services
Item 31. Location of Account and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
promulgated thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
Item 32. Management services.
Not applicable.
Item 33. Undertakings.
(a) The Registrant undertakes to suspend the offering of the shares of
preferred 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 preferred stock declines more than 10% from its
net asset value per share of preferred stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of preferred
stock increases to an amount greater than its net proceeds as stated in the
prospectus contained herein.
(b) The Registrant undertakes that:
(1) For the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as a part of a registration statement in reliance upon
Rule 430A under the Securities Act of 1933 and contained in the form of
prospectus filed by the Registrant pursuant to Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, 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.
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(c) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, a statement of additional information.
C-6
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 11th day of April, 2003.
PREFERRED INCOME STRATEGIES FUND, INC.
(Registrant)
By: /s/ TERRY K. GLENN
----------------------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke or Bradley J. Lucido, or any of them, as
attorney-in-fact, to sign on his or her 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 dates indicated.
Signature Title Date
--------- ----- ----
/s/ TERRY K. GLENN President (Principal Executive April 11, 2003
---------------------------------------- Officer) and Director
(Terry K. Glenn)
/s/ DONALD C. BURKE Treasurer (Principal Financial and April 11, 2003
---------------------------------------- Accounting Officer)
(Donald C. Burke)
/s/ DAVID O. BEIM Director April 11, 2003
----------------------------------------
(David O. Beim)
/s/ JAMES T. FLYNN Director April 11, 2003
----------------------------------------
(James T. Flynn)
/s/ TODD GOODWIN Director April 11, 2003
----------------------------------------
(Todd Goodwin)
/s/ GEORGE W. HOLBROOK, JR. Director April 11, 2003
----------------------------------------
(George W. Holbrook, Jr.)
/s/ W. CARL KESTER Director April 11, 2003
----------------------------------------
(W. Carl Kester)
/s/ KAREN P. ROBARDS Director April 11, 2003
----------------------------------------
(Karen P. Robards)
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EXHIBIT INDEX
(a)(2) Form of Articles Supplementary creating five series of
AMPS.
(d)(2) Form of specimen certificate for the AMPS of the Registrant.
(h)(1) Form of Purchase Agreement between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
(k)(4) Form of Auction Agent Agreement between the Registrant and The Bank
of New York.
(k)(5) Form of Broker-Dealer Agreement.
(k)(6) Form of Letter of Representations.
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