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As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
11/12/04 S&P 500 Covered Call Fund Inc N-2 3:76 1193125
S&P 500 Covered Call Fund Inc
Document/Exhibit Description Pages Size
1: N-2 Registration Statement of a Closed-End Investment HTML 438K
Company
2: EX-99.(2)(A) Articles of Incorporation HTML 37K
3: EX-99.(2)(B) Bylaws HTML 94K
| Form N-2 |
As filed with the Securities and Exchange Commission on November 12, 2004
Securities Act Registration No. 333-[ ]
Investment Company Act File No. 811-[ ]
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
| x | REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
and
| x | REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |
S&P 500® Covered Call Fund Inc.
(Exact name of Registrant as Specified in Charter)
4 World Financial Center, 5th Floor, New York, NY 10080
(Address of Principal Executive Offices)
Registrant’s Telephone Number, including Area Code: (212) 449-8118
Allan J. Oster, Esq.
Vice President and Secretary
IQ Investment Advisors LLC
4 World Financial Center, 5th Floor, New York, NY 10080
(Name and address of Agent for Service)
COPY TO:
Margery K. Neale, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the Registration Statement.
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. ¨
It is proposed that this filing will become effective (if appropriate, check box)
| ¨ | when declared effective pursuant to section 8(c). |
If appropriate, check the following boxes:
| ¨ | This [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement.] |
| ¨ | This Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is . |
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
| Title of Securities Being Registered |
Amount Being Registered |
Proposed Maximum Offering Price Per Unit |
Proposed Maximum Aggregate Offering Price (1) |
Amount of Registration Fee (2) | ||||
| Common Stock ($.001 par value per share) |
1,000,000 Shares | $20.00 | $20,000,000 | $2534.00 | ||||
| (1) | Estimated solely for the purpose of calculating the registration fee. |
| (2) | Transmitted prior to filing. |
The information required to be included in this Registration Statement by Part A and Part B of Form N-2 is contained in the Prospectus that follows. The information required to be in this Registration Statement by Part C of Form N-2 follows the Prospectus.
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 DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
The information contained in this prospectus is not complete and may be changed. The Fund 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 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 , 2004
[ ] Shares
S&P 500® COVERED CALL FUND INC.
Common Stock
$20.00 per share
S&P 500® Covered Call Fund Inc. (the “Fund”) is a corporation organized under the laws of the State of Maryland and registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 as a closed-end, diversified management investment company. The Fund will conduct its investment operations and exist for a fixed term of approximately five years. The Fund’s investment objective is to seek total returns, less fees and expenses, through a covered call strategy that seeks to replicate the CBOE S&P 500 BuyWrite IndexSM (the “BXM Index”). The BXM Index is a passive, total return index that is based on buying the common stocks of all of the companies included in the Standard and Poor’s 500® Composite Stock Price Index (“S&P 500® Index”), weighted in the same proportions as the S&P 500® Index, and writing (selling) call options on the S&P 500® Index. The Fund pursues its investment objective principally by investing in all of the common stocks included in the S&P 500® Index in the same proportion as the S&P 500® Index and/or other investments that have economic characteristics similar to the securities that comprise that Index, and writing (selling) call options on the S&P 500® Index. There can be no assurance that the Fund will achieve its investment objective or be able to structure its investments as anticipated. The Fund is not intended as a complete investment program.
This Prospectus relates to the offering of securities of the Fund, which the Fund intends to apply for listing on the New York Stock Exchange (“NYSE”) under the ticker symbol [ ]. Shares of closed-end investment companies that are listed on an exchange, such as those of the Fund, frequently trade at prices that reflect a discount from their net asset values. If you purchase the Fund’s shares in its initial public offering or otherwise and sell the shares on the NYSE or otherwise, you may receive an amount that is less than: (1) the amount you paid for the shares; and/or (2) the net asset value of the Fund’s shares at the time of sale. The Fund is a newly formed entity and has no previous operating or trading history upon which you can evaluate the Fund’s performance.
INVESTING IN THE FUND’S SHARES INVOLVES CERTAIN RISKS. SEE “RISK FACTORS AND SPECIAL CONSIDERATIONS” ON PAGE [ ] OF THIS PROSPECTUS.
| Per Share |
Total (3) |
|||||||
| Public offering price |
$ | 20.00 | $ | [ | ] | |||
| Sales load (1) |
$ | [ | ] | $ | [ | ] | ||
| Proceeds, before expenses, to the Fund (2) |
$ | [ | ] | $ | [ | ] | ||
| (1) | The Fund has agreed to pay its underwriters $[.00667] per share of common stock as a partial reimbursement of expenses incurred in connection with the offering. See “Underwriting” on page [ ] of this Prospectus. |
| (2) | The Fund’s adviser has agreed to pay all of the Fund’s organizational expenses. Offering expenses to be incurred by the Fund are estimated to be [$ ]. |
| (3) | The underwriters have an option to purchase up to an additional [ ] shares of the Fund at the public offering price, less the sales load, within 45 days of the date of this Prospectus to cover any overallotments. If the underwriters exercise this option in full, the total public offering price, sales load, and estimated offering expenses and proceeds, after expenses, to the Fund will be [$ ], [$ ], [$ ], and [$ ], respectively. See “Underwriting” on page [ ] of this Prospectus. |
Neither the Securities and Exchange Commission nor any state securities commission has determined whether this Prospectus is truthful or complete, nor have they made, nor will they make, any determination as to whether anyone should purchase these securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities. Any representation to the contrary is a criminal offense.
This Prospectus provides information that you should know about the Fund before investing. Please read this Prospectus carefully and keep it for future reference. Information required to be in the Fund’s Statement of Additional Information is found in this Prospectus.
The Shares will be ready for delivery on or about [ ], 2004.
Merrill Lynch & Co.
The date of this prospectus is [ ] [ ], 2004.
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“Standard & Poor’s®”, “S&P®”, “S&P 500®”, “Standard & Poor’s 500” and “500” are trademarks of Standard & Poor’s®, a division of the McGraw-Hill Companies, Inc. “BXM” is a trademark of the Chicago Board Options Exchange, Incorporated (“CBOE”). These marks have been licensed for use by IQ Investment Advisors LLC and its affiliates. The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor’s® or the CBOE, and neither Standard & Poor’s® nor the CBOE makes any representation regarding the advisability of investing in the Fund.
You should rely only on the information contained or incorporated by reference in this Prospectus. The Fund has 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. The Fund is 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 not assume that the information provided by this Prospectus is accurate as of any date other than the date on the front of this Prospectus. The Fund’s business, financial condition and results of operations may have changed since the date of this Prospectus.
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 also is 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, 450 Fifth Street, NW, Washington, D.C. 20549-0102.
The following provides a summary of certain information contained in this Prospectus relating to the S&P 500® Covered Call Fund Inc. and its shares and does not contain all of the information that you should consider before investing in the Fund or purchasing its shares. The information is qualified in all respects by the more detailed information included elsewhere in this Prospectus and in the appropriate Registration Statements filed with the U.S. Securities and Exchange Commission.
| The Fund | S&P 500® Covered Call Fund Inc. (the “Fund”) is a corporation organized under the laws of the State of Maryland and registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940 (the “Investment Company Act”) as a closed-end, diversified management investment company. The Fund will conduct its investment operations and exist for a fixed term of approximately five years. The Fund’s termination date is on or about [ ]. In anticipation of the termination date, the Fund will liquidate its positions and satisfy any obligations and liabilities and distribute any remaining proceeds to its stockholders. The Fund will then seek to deregister with the SEC as an investment company. | |
| The Offering | The Fund is offering [ ] shares of its common stock at an initial offering price of $20.00 per share through a group of underwriters led by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”), an affiliate of Merrill Lynch & Co., Inc. (“Merrill Lynch”). An investor buying shares during the Fund’s initial public offering must purchase at least 100 shares of the Fund’s common stock. The underwriters have an option to purchase up to an additional [ ] shares of the Fund within [45] days of the date of this Prospectus to cover any overallotments. | |
| Investment Objective | The Fund’s investment objective is to seek total returns through a covered call strategy that seeks to replicate the CBOE S&P 500 BuyWrite IndexSM (the “BXM Index”). The Fund will seek total returns that approximate the performance of the BXM Index, less fees and expenses. The BXM Index is a passive, total return index that is based on buying the common stocks of all of the companies included in the S&P 500® Index, weighted in the same proportions as the S&P 500® Index (the “Stocks”), and writing (selling) call options on the S&P 500® Index. There can be no assurance that the Fund will achieve its investment objective or be able to structure its investments as anticipated. The Fund is not intended as a complete investment program. | |
| Investment Strategy | The Fund pursues its investment objective principally through a two-part strategy. First, the Fund will invest the proceeds from this offering in all of the common stocks included in the S&P 500® Index in the same proportions as the S&P 500® Index and/or other investments that have economic characteristics similar to the securities that comprise that Index. Second, each calendar month | |
1
| during the term of the Fund, the Fund will write (sell) one-month call options on the S&P 500® Index (“Written Options”). The Written Options that the Fund writes in any month will have an exercise price equal to the then prevailing level of the S&P 500® Index or at the next highest available strike price and will expire in the next calendar month. | ||
| By writing a call option on the S&P 500® Index, the Fund receives premium income from the purchaser of the option. In exchange, the Fund provides the purchaser with the right to potentially receive a cash payment from the Fund equal to the difference between the value of the S&P 500® Index on the expiration date of the Written Option and the exercise price. | ||
| While the Fund will receive premium income from the Written Options, by writing a covered call option, the Fund gives up any potential increase in value of the S&P 500® Index above the exercise price specified in the Written Option through the expiration date of the option. | ||
| Under normal circumstances, at least 80% of the value of the Fund’s net assets (including the proceeds of any borrowings) will be invested in common stocks of companies that comprise the S&P 500® Index (or other investments, such as S&P 500® Index futures contracts or swaps, that have economic characteristics similar to the securities that comprise that Index). In addition, under normal circumstances at least 80% of the Fund’s net assets (including the proceeds of any borrowings) will be subject to Written Options. These 80% policies are not fundamental policies and therefore may be changed without your approval. However, we will not change or modify these policies unless we provide you with at least 60 days’ prior notice. | ||
| There can be no assurance that the investment strategy employed by the Fund will be successful or result in the investment objective of the Fund being achieved. Please refer to the “Investment Strategy” and “Investment Restrictions” sections on pages [ ] and [ ] of this Prospectus, respectively, for more information about the Fund’s investment strategy. | ||
| Summary of Risks | General. Investing in the Fund involves certain risks and the Fund may not be able to achieve its intended results for a variety of reasons, including, among others, the possibility that the Fund may not be able to structure its investment program as anticipated. | |
| Equity Securities. A principal part of the Fund’s investment strategy involves investing in the common stocks included in the S&P 500® Index and/or other investments that have economic characteristics similar to the securities that comprise that Index. The value of these investments will fluctuate — at times dramatically — based on many factors, such as market conditions, interest rate movements, | ||
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| investors’ perceptions of the financial conditions of the companies issuing such investments, and other political and economic events. As these investments fluctuate in value, they may cause the net asset value of the Fund’s shares to vary. When the value of the S&P 500® Index is declining, the value of the Fund’s shares may be expected to decrease. | ||
| Writing Call Options. A principal part of the Fund’s investment strategy involves selling call options on the S&P 500® Index. This part of the Fund’s strategy subjects the Fund to certain additional risks. The Fund, by writing call options on the S&P 500® Index each month, will give up the opportunity to benefit from potential increases in the value of the common stocks included in the S&P 500® Index (and that are held in the Fund’s portfolio) above the exercise prices of the Written Options, but will continue to bear the risk of declines in the value of its common stock portfolio. The Fund also may not receive sufficient premium income from the Written Options to cover fully or mitigate any losses the Fund may sustain if the Written Options are exercised. | ||
| The Fund will write (sell) options that are traded on major exchanges, such as the Chicago Board Options Exchange. Exchanges may suspend trading of options or futures contracts in volatile markets. If trading is suspended, the Fund may be unable to write (sell) options at times that may be desirable or advantageous for the Fund to do so. Trading suspensions may limit the Fund’s ability to achieve its investment objective. | ||
| If the Fund is required to sell investments from its portfolio to make cash settlement on any Written Options that are exercised, such sales may occur at inopportune times, and the Fund will incur transaction costs that increase its expenses. | ||
| Strategy Risk. As the Fund’s investment objective is to seek total returns through a covered call strategy that seeks to replicate the BXM Index, the Fund will not engage in temporary defensive positions to hedge against adverse market conditions. The Fund’s investment adviser and subadviser anticipate that the Fund’s portfolio of investments will replicate the S&P 500® Index and therefore will remain the same until the S&P 500® Index is rebalanced or otherwise changed by the index sponsor, despite any adverse developments concerning a particular issuer, an industry, the economy or the stock market generally. Because the Fund will adjust its portfolio holdings only in response to changes in the S&P 500® Index, the Fund may sell investments without regard to their performance. In addition, because the Fund will purchase and sell investments to reflect the composition of the S&P 500® Index, the Fund may be required to sell certain of its better performing investments and replace them with investments that do not have similar historical price performance. | ||
3
| Because a covered call strategy limits participation in the appreciation of the underlying asset, in this case, the S&P 500® Index, an investment in the Fund is not the same as an investment linked to the performance of the S&P 500® Index or the stocks underlying the S&P 500® Index. Each Written Option limits the Fund’s participation in the appreciation of the S&P 500® Index above the exercise price of that call option. Consequently, the Fund will not participate as fully in the appreciation of the S&P 500® Index as would an investment linked directly to the S&P 500® Index or a direct investment in the stocks underlying the S&P 500® Index. In general, if the value of the S&P 500® Index increases above the exercise price of a Written Option by an amount that exceeds the premium received from the sale of the option, the value of a stockholder’s investment in the Fund will be less than the value of a direct investment in the S&P 500® Index. While the exercise price of a Written Option will operate to limit the Fund’s participation in any increase in the value of the S&P 500® Index, the Fund’s exposure to any decline in the value of the S&P 500® Index will not be limited. | ||
| At certain times, the Fund may be unable to purchase or hold all of the common stocks that comprise the S&P 500® Index or hold the common stock in the same proportions as the S&P 500® Index, such as when the S&P 500® Index is rebalanced, or when the Fund needs to sell securities in order to pay its fees and expenses, to make distributions to its shareholders, or for other fund management purposes. In such instances, the Fund may (but is not required to) use derivatives, such as S&P 500® Index futures contracts or swaps, in strategies intended to simulate full investment in the S&P 500® Index stocks. If these alternative strategies are used, the Fund may not receive the dividends (if any) from the companies in the S&P 500® Index. | ||
4
| Index Tracking Errors. A principal part of the Fund’s investment strategy involves making investments in a manner that seeks to track the performance of the S&P 500® Index. The Fund may not be able to acquire the common stocks of all the companies in the S&P 500® Index, hold these securities in the correct weightings or, with respect to its common stock holdings, be able to track the performance of the S&P 500® Index. | ||
| The other principal part of the Fund’s investment strategy involves writing (selling) one-month call options on the S&P 500® Index in a manner that seeks to track the performance of the BXM Index. The Fund may be unable to write (sell) these call options at the times or prices at which options on the S&P 500® Index are assumed to have been written (sold) pursuant to the covered call strategy on which the BXM Index is based. | ||
| In addition, the Fund will incur certain fees and expenses that are not applicable to (and not reflected in the performance of) the BXM Index, such as, among others, the costs of managing the Fund and the costs associated with its portfolio transactions. As a result of these costs and the possibility that the Fund will be unable to purchase common stock in the S&P 500® Index or write (sell) call options on the S&P 500® Index in the manner described herein, the Fund’s performance may be lower than the actual performance of the BXM Index. | ||
| Inadequate Return. No assurance can be given that the returns on the Fund’s investments will be commensurate with the risk of investment in the Fund. Investors should not commit money to the Fund unless they have the resources to sustain the loss of their entire investment in the Fund. | ||
| No Operating History. The Fund is a newly formed entity and has no previous operating or trading history upon which a potential investor can evaluate the Fund’s performance. | ||
| Closed-End Structure; Market Discount from Net Asset Value. Shares of closed-end investment companies that trade in a secondary market frequently trade at market prices that are lower than their net asset values. This is commonly referred to as “trading at a discount.” This risk may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. As a result, the Fund is designed primarily for long-term investors. The Fund’s total assets will be reduced following this offering by the amount of offering and related expenses to be paid by the Fund. | ||
| Monthly Distribution Policy. The Fund intends to provide a monthly distribution to each stockholder at the end of each calendar month (referred to as the “Monthly Distribution”) of at least approximately 0.67% of the initial public offering price of the Fund’s shares (for a total of at least 8% of the initial public offering price for any given | ||
5
| calendar year) — subject to the discretion of the Fund’s Board of Directors and out of assets legally available for these distributions. There can be no assurance that the Fund’s performance will be positive for any period of time, that the Fund will declare and provide its investors with a Monthly Distribution of any amount during any year, or that, for any calendar year, stockholders will receive aggregate Monthly Distributions of at least 8% of the initial public offering price of the Fund’s shares. | ||
| In seeking to maintain Monthly Distributions that are at least approximately 0.67% of the initial public offering price of the Fund’s shares, the Fund’s distributions to its stockholders will consist, in the hands of its stockholders, wholly or partially, of ordinary income, long-term capital gains, and/or returns of capital, for U.S. federal income tax purposes. To the extent the Fund’s distributions for any taxable year (including the Monthly Distributions) exceed the Fund’s current and accumulated earnings and profits, such excess generally will be treated as a return of capital for U.S. federal income tax purposes (up to the amount of the stockholder’s tax basis in his or her shares). | ||
| To the extent that any distribution by the Fund to its stockholders is treated as a return of capital, such amount will reduce a stockholder’s adjusted tax basis in his or her shares and, correspondingly, increase the stockholder’s potential gain or reduce his or her potential loss on the sale of the Fund’s shares. Returns of capital also have the effect of reducing the net assets of the Fund. A Monthly Distribution by the Fund may result in an investor buying Fund shares (which may include a sales load) only to receive a portion of the purchase price back in the form of a Monthly Distribution. Please refer to the “U.S. Federal Income Tax Considerations” section on page [ ] of this Prospectus for more information about the U.S. federal income tax treatment of the Fund’s distributions. | ||
| It also is possible that the Fund will not have sufficient income from dividends and other sources to make a Monthly Distribution of at least approximately 0.67% of the initial public offering price of the Fund’s shares, or to provide stockholders with, for any given calendar year, distributions of at least 8% of the initial public offering price of the Fund’s shares. In such events, the Fund intends to make up any shortfall by selling its portfolio securities. The Fund’s sales of its portfolio securities may be effected at inopportune times. In selling its portfolio securities, the Fund will increase its transaction costs. | ||
| Under the Investment Company Act of 1940 (the “1940 Act”) the Fund may not generally make more than one long-term capital gains distribution a year without first receiving an exemptive order from the Securities and Exchange Commission (“SEC”). In order to make Monthly Distributions, the Fund may be required to distribute capital | ||
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| gains more frequently than once a year. The Fund has applied for an exemptive order from the SEC to facilitate the Monthly Distributions. There can be no assurance that the SEC will grant this order. Until such an order is received by the Fund, the Fund may not generate enough income other than capital gains to make Monthly Distributions. | ||
| As with any security, complete loss of investment is possible. See “Risk Factors and Special Considerations” on page [ ] of this Prospectus. | ||
| Listing of Shares | The Fund intends to list on the NYSE under the ticker symbol [ ] and will be required to meet the NYSE’s initial and continued listing requirements. | |
| Repurchase of Shares | The Fund is not expected to repurchase any of its shares. | |
| Board of Directors | The business and affairs of the Fund are managed under the direction of the Board of Directors. The Fund’s Board of Directors has overall responsibility for monitoring and overseeing the Fund’s investment process, and its management and operations. Any vacancy on the Board of Directors may be filled only by a majority of the remaining directors, except to the extent that the Investment Company Act requires the election of directors by stockholders. At least seventy-five percent of the directors will not be “interested persons” (as defined by the Investment Company Act) of the Fund or its investment adviser or subadviser. | |
| Adviser and Management Fee | IQ Investment Advisors LLC, a limited liability company organized under the laws of the State of Delaware, serves as the investment adviser to the Fund (the “Adviser”) and is registered as such with the SEC under the Investment Advisers Act of 1940 (the “Advisers Act”). The Adviser provides investment advisory, management and administrative services to the Fund pursuant to a management agreement (the “Management Agreement”). The Adviser has designed the investment strategy for the Fund and has oversight responsibility for the implementation of the strategy by the subadviser (as described below under “Subadviser”). In consideration of the investment advisory, management and administrative services provided by the Adviser to the Fund, the Fund pays the Adviser a management fee equal to an annual rate of [ ]% of the Fund’s average daily net assets (the “Management Fee”). In performing its obligations as the Fund’s investment adviser, the Adviser has access to, and intends to draw upon, the infrastructure, resources and personnel of its affiliates, including MLPFS and Merrill Lynch Investment Managers, L.P. (“MLIM”). In this regard, the Adviser may utilize the office space, equipment and facilities of its affiliates and will have access to the investment research and expertise of their personnel in structuring the investment program of the Fund and monitoring its portfolio. As | |
7
| compensation for access to and use of these facilities and services, the Adviser pays a portion of the Management Fee it receives from the Fund to MLPFS and MLIM. In addition, the Adviser will compensate the Subadviser. The Adviser is newly formed and has a limited operating history. | ||
| The Adviser is an indirect subsidiary of Merrill Lynch. Merrill Lynch is one of the world’s leading financial management and advisory companies, with offices in 35 countries and private client assets of approximately $1.5 trillion. As an investment bank, it is a leading global underwriter of debt and equity securities and a strategic advisor to corporations, governments, institutions and individuals worldwide. Through its subsidiaries, Merrill Lynch is one of the world’s largest managers of financial assets. | ||
| Subadviser | The Adviser has entered into a subadvisory agreement (the “Subadvisory Agreement”) with [ ] (the “Subadviser” and, together with the Adviser, the “Advisers”), pursuant to which the Adviser has delegated certain of its investment advisory responsibilities to the Subadviser. The Subadviser will be responsible for implementing the Fund’s investment strategy. The Subadviser, a organized under the laws of the State of , is registered as an investment adviser with the SEC under the Advisers Act. Under the terms of the Subadvisory Agreement, the Adviser compensates the Subadviser from the Management Fee at an annual rate of % of the Fund’s average daily net assets. | |
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| Distributions | In order to allow the Fund’s common stockholders to realize a predictable, but not guaranteed, level of cash flow and some periodic liquidity on their investment without having to sell their shares, the Fund has adopted a policy of paying Monthly Distributions on its shares of common stock (the “Managed Distribution Policy”). Pursuant to the Managed Distribution Policy, the Fund intends to pay a Monthly Distribution of at least approximately 0.67% of the initial public offering price of the Fund’s shares (for a total of at least 8% of the initial public offering price for any given calendar year). The Fund will make a Monthly Distribution only if authorized by the Fund’s Board of Directors and declared by the Fund out of assets legally available for these distributions. The Fund does not expect to rely on the use of leverage in generating proceeds for its Monthly Distributions. Because the Fund expects to commence its investment operations on or about [February 15,] 2005, the aggregate Monthly Distributions made during the Fund’s first calendar year of operations are not expected to be at least 8% of the initial public offering price of the Fund’s shares and will not include long-term capital gains. In addition, the Fund will make an additional distribution at the end of the year, if necessary, to satisfy its distribution requirements for U.S. federal income tax purposes. | |
| The Fund, along with other closed-end registered investment companies advised by the Adviser and its affiliates, has applied for an exemption from Section 19(b) of the 1940 Act and Rule 19b-1 thereunder. If granted, the order would permit the Fund to make distributions of long-term capital gains more than once a year, provided that any distribution policy of the Fund calls for periodic (e.g., monthly or semi-annually, but in no event more frequently than monthly) distributions in an amount equal to a minimum fixed percentage per year of the net asset value, market price, or initial public offering price per share of the Fund’s common stock, or a minimum fixed dollar amount per year per share of the Fund’s common stock. The Fund’s current policy is to make monthly distributions to holders of its common stock based on a minimum fixed percentage per year of the initial public offering price per share of the Fund’s common stock, as described herein. The implementation of the Managed Distribution Policy is subject to receipt of the exemption described above, which cannot be assured. | ||
| The Fund is not required to maintain the Managed Distribution Policy and such policy may be modified or terminated by the Fund’s Board of Directors at any time without notice. | ||
| Tax Aspects | The Fund intends to elect to be treated as a regulated investment company (a “RIC”) for U.S. federal income tax purposes. To satisfy the distribution requirements applicable to RICs, the Fund intends to distribute all or substantially all of its net investment income and net realized capital gains, if any, to its stockholders at least annually. As described under “Distributions” above, the Fund intends to provide each of its stockholders with a Monthly Distribution of at least | |
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| approximately 0.67% of the initial public offering price of the Fund’s shares (for a total of at least 8% of the initial public offering price for any given calendar year), subject to the discretion of the Fund’s Board of Directors and out of assets legally available for these distributions. In addition, the Fund will make an additional distribution at the end of the year, if necessary, to satisfy its distribution requirements for U.S. federal income tax purposes. | ||
| Although it is not entirely clear, it is expected that the Fund’s ownership of common stocks comprising the S&P 500® Index and/or other investments that have economic characteristics similar to the securities that comprise that Index (collectively “Stocks”) and the Fund’s sale of the Written Options will constitute a “straddle” for U.S. federal income tax purposes. The Fund intends to elect to identify its ownership of the Stocks and its sale of the Written Options as positions in an “identified mixed straddle” under section 1092(b)(2) of the Internal Revenue Code of 1986, as amended and, thereby, net the capital gain or loss attributable to the offsetting positions. The net capital gain or loss is treated as 60% long-term and 40% short-term capital gain or loss if attributable to the Written Options, and all short-term capital gain or loss if attributable to the Stocks. Distributions that are paid by the Fund from its ordinary income or from any excess of net short-term capital gains over net long-term capital losses, to the extent of the Fund’s current and accumulated earnings and profits, generally will be taxable to the stockholders as ordinary income distributions. Distributions made from an excess of net long-term capital gains over net short-term capital losses will be taxable to the stockholders as capital gains dividends. | ||
| Because of the Fund’s sale of the Written Options, it is expected that the Fund will not satisfy the holding period requirements for qualified dividend treatment regardless of the period of its actual ownership of the Stocks. Accordingly, distributions in respect of dividends, if any, received by the Fund with respect to the Stocks generally will be taxable to the stockholders as ordinary income distributions and will not constitute qualified dividend income. | ||
| Please refer to the “U.S. Federal Income Tax Considerations” section on page [ ] of this Prospectus for additional information on the potential U.S. federal income tax effects of an investment in the Fund. You should consult your own tax advisors on any potential state or local income tax effects of an investment in the Fund. | ||
| Anti-takeover Provisions | The Fund’s charter and Bylaws 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 may discourage outside parties from acquiring control of the Fund, which could result in stockholders not having the opportunity to realize a price greater than the current market price | |
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| for their shares at some time in the future. See “Description of Securities” on page [ ] of this Prospectus. | ||
| Automatic Dividend Reinvestment Plan |
Pursuant to the Fund’s Automatic Dividend Reinvestment Plan, unless a stockholder is ineligible or elects otherwise, dividends and distributions to the Fund’s stockholders will be used to purchase additional common stock of the Fund. Fund stockholders, may, however, elect to receive such dividends and distributions in cash. Stockholders whose shares of common stock are held in the name of a broker or nominee should contact that broker or nominee to determine whether the broker or nominee will permit participation in the Fund’s Automatic Dividend Reinvestment Plan. See “Automatic Dividend Reinvestment Plan” on page [ ] of this Prospectus. | |
| Conflicts of Interest | The investment activities of the Advisers and their affiliates for their own accounts and other accounts or funds they manage may give rise to conflicts of interest that may disadvantage the Fund. None of the Adviser, MLPFS and their affiliates have established any formal procedures for resolving any conflicts of interest. Merrill Lynch, as a diversified global financial services firm involved with a broad spectrum of financial services and asset management activities, may, for example, engage in the ordinary course of business in activities in which its interests or the interests of its affiliates or clients may conflict with those of the Fund and its stockholders. See “Conflicts of Interest” on page [ ] of this Prospectus. | |
| Transfer Agent and Custodian | The Fund has entered into a transfer agency agreement with The Bank of New York (the “Transfer Agent”) under which the Transfer Agent will provide the Fund transfer agency services. The Fund has entered into a custody agreement with State Street Bank and Trust Company (the “Custodian”) under which the Custodian will provide the custodian services to the Fund. | |
The following Fee Table illustrates the fees and expenses that the Fund expects to incur and that stockholders can expect to bear directly or indirectly.
| Stockholder Transaction Expenses: |
|||
| Maximum Sales Load (as a percentage of offering price) |
4.50 | % | |
| Offering Expenses Borne by the Fund (as a percentage of offering price)(1) |
0.20 | % | |
| Dividend Reinvestment Plan Fees |
none | ||
| Annual Fund Expenses (as a percentage of net assets attributable to common shares): |
|||
| Management Fee(2) |
0. | % | |
| Other Expenses(3) |
0. | % | |
| Total Annual Expenses |
% |
| (1) | The Fund’s Adviser has agreed to pay all of the Fund’s organizational expenses. Offering costs will be paid by the Fund up to $[0.04] per share ([.20]% of the offering price). The Adviser has agreed to pay the amount by which the offering costs (subject to the next sentence) exceed $[0.04] per share of common stock ([.20]% of the offering price). In determining the costs to be paid by the Adviser, the sales load is excluded, but the $[.00667] per share partial reimbursement of expenses to the underwriters is included. The offering costs to be paid by the Fund are not included in the Total Annual Expenses amount shown in the table. Offering costs borne by the Fund’s stockholders will result in a reduction of capital of the Fund attributable to Fund shares. |
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| (2) | The Fund pays the Adviser the Management Fee in consideration of the investment advisory, management and administrative services that the Adviser provides to the Fund. From this Management Fee, the Adviser compensates the Subadviser as well as intends to provide a portion of this fee to MLPFS and MLIM. See the “Investment Advisory and Management Arrangements” and “Underwriting” sections on pages [ ] and [ ], respectively, of this Prospectus. |
| (3) | Other Expenses have been estimated based on estimated asset levels and expenses for the current fiscal year. |
EXAMPLE:
An investor would pay the following expenses (including the sales load of $45 and estimated offering expenses of this offering of $2.00 on a $1,000 investment, assuming total annual expenses of %) and a 5% annual return throughout the periods.
| 1 year |
3 years |
5 years |
10 years* | |||
| $[__] | $[__] | $[__] | $[__] |
| * | The Fund has a termination date of [ ], and accordingly, it is not expected to be in existence for ten years. |
The Fee Table is intended to assist investors in understanding the costs and expenses that a stockholder in the Fund will bear directly or indirectly. The expenses set out under “Other Expenses” are based on estimated amounts through the end of the Fund’s first fiscal year and assume that the Fund issues approximately [ ] shares of common stock. If the Fund issues fewer shares of common stock, all other things being equal, these expenses would increase. The Example set out above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by SEC regulations. The Example should not be considered a representation of future expenses or annual rates of return, and actual expenses or annual rates of return may be more or less than those assumed for purposes of the Example.
S&P 500® Covered Call Fund Inc. (the “Fund”) is a corporation organized under the laws of the State of Maryland and registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940 (the “Investment Company Act”) as a closed-end diversified management investment company. The Fund will conduct its investment operations and exist for a fixed term of approximately five years. The Fund’s termination date is on or about [ ]. In anticipation of the termination date, the Fund will liquidate its positions and satisfy any obligations and liabilities and distribute any remaining proceeds to its stockholders. The Fund will then seek to deregister
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with the SEC as an investment company and terminate in an orderly fashion. The Fund expects to commence its investment operations on or after [ ], 2004. The Fund’s principal office, including its office for service for process, is located at 4 World Financial Center, 5th Floor, New York, NY 10080.
The Fund is offering [ ] shares of its common stock at an initial offering price of $20.00 per share, [which price includes an underwriting discount of 4.5% per share]. These shares have been registered for sale with the SEC under the Securities Act of 1933 (the “Securities Act”) and will be offered through a group of underwriters led by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”), an affiliate of Merrill Lynch & Co., Inc. (“Merrill Lynch”) and of IQ Investment Advisors LLC, the Fund’s investment adviser (the “Adviser”). An investor buying shares during the Fund’s initial public offering must purchase at least 100 shares of the Fund’s common stock. The underwriters have an option to purchase up to an additional [ ] shares of the Fund within 45 days of the date of this Prospectus to cover any overallotments.
The net proceeds of this offering will be approximately [$ ] (or approximately [$ ] assuming the underwriters exercise an overallotment option in full) after payment of offering costs estimated to be [$ ] and the deduction of the underwriting discount. The Adviser has agreed to pay the amount by which the offering costs (other than the underwriting discount, but including the [$ ] per share partial reimbursement of expenses to the underwriters) exceed $[.04] per share of common stock. The Adviser has agreed to pay all of the Fund’s organizational expenses.
Under normal conditions, the Fund expects that it will take less than three months to invest all or substantially all of the proceeds from the offering in accordance with the Fund’s investment objective. 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. A relatively long initial investment period may have a negative impact on the Fund’s performance and its return to stockholders.
The Fund’s investment objective is to seek total returns through a covered call strategy that seeks to replicate the CBOE S&P 500 BuyWrite IndexSM (the “BXM Index”). The Fund will seek total returns that approximate the performance of the BXM Index, less fees and expenses. The BXM Index is a passive, total return index that is based on buying the common stocks of all of the companies included in the S&P 500® Index, weighted in the same proportions as the S&P 500® Index (the “Stocks”), and writing (selling) call options on the S&P 500® Index. There can be no assurance that the Fund will achieve its investment objective or be able to structure its investments as anticipated. The Fund is not intended as a complete investment program.
The Fund pursues its investment objective principally through a two-part strategy. First, the Fund will invest the proceeds from this offering in all of the common stocks included in the S&P 500® Index
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in the same proportions as the S&P 500® Index and/or other investments that have economic characteristics similar to the securities that comprise that Index. Second, each calendar month during the term of the Fund, the Fund will write (sell) call options on the S&P 500® Index (“Written Options”). The Written Options written in any month will have an exercise price equal to the then prevailing level of the S&P 500® Index or at the next highest available strike price and will expire in the next calendar month.
By writing a call option on the S&P 500® Index, the Fund receives premium income from the purchaser of the option. In exchange, the Fund provides the purchaser with the right to potentially receive a cash payment from the Fund equal to the difference between the value of the S&P 500® Index on the expiration date of the call option and the exercise price of the option.
While the Fund will receive premium income from the Written Options, by writing a covered call option, the Fund gives up any potential increase in value of the S&P 500® Index above the exercise price specified in the Written Option through the expiration date of the option.
Under normal circumstances, at least 80% of the value of the Fund