<PAGE>
This Term Sheet, taken together with the Preliminary Prospectus dated May
23, 1997 (the "Preliminary Prospectus"), pursuant to Rule 434 under the
Securities Act of 1933, as amended, shall be deemed to constitute the final
prospectus for purposes of Section 10(a) of such Act with respect to the
shares of AMPS of MuniHoldings Fund, Inc. offered hereby. Capitalized terms in
this Term Sheet which are not defined herein will have the meaning defined in
the Preliminary Prospectus.
TERM SHEET
USED PURSUANT TO RULE 434 UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(SUPPLEMENT TO PRELIMINARY PROSPECTUS DATED MAY 23, 1997)
$110,000,000
MUNIHOLDINGS FUND, INC.
AUCTION MARKET PREFERRED STOCK ["AMPS(R)"]
2,200 SHARES, SERIES A
2,200 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
----------------
TERMS OF THE OFFERING
The information appearing on the cover page of the Preliminary Prospectus is
supplemented and restated as follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
PUBLIC(1) SALES LOAD(2) FUND(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $25,000 $250 $24,750
- --------------------------------------------------------------------------------
Total.................................. $110,000,000 $1,100,000 $108,900,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1)Plus accumulated dividends, if any, from the Date of Original Issue.
(2)The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3)Offering expenses payable by the Fund, estimated at $225,000, will be
reimbursed by the Underwriter. See "Underwriting."
----------------
The shares of AMPS are offered by the Underwriter, subject to prior sale,
when, as and if issued by the Fund and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected
that one certificate for each series of the AMPS will be delivered to the
nominee of The Depository Trust Company on or about June 5, 1997.
----------------
The information appearing in the first two paragraphs on page 2 of the
Preliminary Prospectus is supplemented and restated as follows:
Dividends on the shares of Auction Market Preferred Stock(R) ("AMPS(R)"),
Series A ("Series A AMPS(R)") and Series B ("Series B AMPS(R)") of the Fund
offered hereby will be cumulative from the Date of Original Issue and payable
commencing on June 18, 1997 in the case of Series A AMPS and June 13, 1997 in
the case of Series B AMPS (each, as applicable, an "Initial Dividend Payment
Date") and, generally, on each succeeding Wednesday in the case of Series A
AMPS and each succeeding Friday in the case of Series B AMPS, subject to
certain exceptions.
The cash dividend rate (the "Applicable Rate") on the shares of Series A
AMPS for the Initial Dividend Period ending June 17, 1997 will be 3.70% per
annum and the Applicable Rate on the shares of Series B AMPS for the Initial
Dividend Period ending June 12, 1997 will be 3.70% per annum. The Applicable
Rate on the shares of AMPS of each series for each Subsequent Dividend Period
will be determined pursuant to periodic auctions conducted in accordance with
the procedures described in Appendix C hereto (an "Auction"). Except as
otherwise provided herein, each Subsequent Dividend Period for each series of
AMPS will be a 7-Day Dividend Period; provided, however, that prior to any
Auction, the Fund may elect, subject to certain limitations described herein,
with respect to each series of AMPS, upon giving notice to holders thereof, a
Special Dividend Period. See "Description of AMPS--Dividends."
- --------
(R) Registered trademark of Merrill Lynch & Co., Inc.
----------------
MERRILL LYNCH & CO.
----------------
The date of this Term Sheet is June 2, 1997.
<PAGE>
UNDERWRITING
The text of the second paragraph under "Underwriting" on page 60 of the
Preliminary Prospectus is supplemented and restated as follows:
The Underwriter has advised the Fund that it proposes initially to offer the
shares of AMPS to the public at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $137.50 per share. The Underwriter may allow, and
such dealers may reallow, a discount not in excess of $31.25 per share to
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed. The sales load of $250 per share is
equal to 1.0% of the initial public offering price. Investors must pay for any
AMPS purchased in the initial public offering on or before June 5, 1997.
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 23, 1997
PROSPECTUS
$110,000,000
MUNIHOLDINGS FUND, INC.
AUCTION MARKET PREFERRED STOCK ["AMPS(R)"]
2,200 SHARES, SERIES A
2,200 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------
MuniHoldings Fund, Inc. (the "Fund") is a recently organized, non-
diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal income taxes. The Fund
seeks to achieve its investment objective by investing primarily in a portfolio
of long-term, investment grade municipal obligations the interest on which, in
the opinion of bond counsel to the issuer, is exempt from Federal income taxes.
The Fund intends to maintain at least 75% of its total assets in municipal
obligations that are rated investment grade or, if unrated, are considered by
Fund Asset Management, L.P. (the "Investment Adviser") to be of comparable
quality. THE FUND MAY INVEST UP TO 25% OF ITS TOTAL ASSETS IN MUNICIPAL
OBLIGATIONS THAT ARE RATED BELOW INVESTMENT GRADE OR, IF UNRATED, ARE
CONSIDERED BY THE INVESTMENT ADVISER TO BE OF COMPARABLE QUALITY. Investors are
advised to read this Prospectus carefully and retain it for future reference.
(Continued on next page)
-----------
The Broker-Dealers (as defined herein) 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.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
PUBLIC SALES LOAD(1)(2) FUND(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................ $25,000 $ $
- --------------------------------------------------------------------------------
Total................................ $110,000,000 $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) Offering expenses payable by the Fund, estimated at $225,000, will be
reimbursed by the Underwriter. See "Underwriting."
-----------
The shares of AMPS are offered by the Underwriter, subject to prior sale,
when, as and if issued by the Fund and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
one certificate for each series of the AMPS will be delivered to the nominee of
The Depository Trust Company on or about June , 1997.
- -----
(R)Registered trademark of Merrill Lynch & Co., Inc.
-----------
MERRILL LYNCH & CO.
-----------
The date of this Prospectus is June , 1997.
<PAGE>
(Continued from previous page)
Dividends on the shares of Auction Market Preferred Stock(R) ("AMPS(R)"),
Series A ("Series A AMPS(R)") and Series B ("Series B AMPS(R)") of the Fund
offered hereby will be cumulative from the Date of Original Issue and payable
commencing on June , 1997 in the case of Series A AMPS and June , 1997 in
the case of Series B AMPS (each, as applicable, an "Initial Dividend Payment
Date") and, generally, on each succeeding Wednesday in the case of Series A
AMPS and each succeeding Friday in the case of Series B AMPS, subject to
certain exceptions.
The cash dividend rate (the "Applicable Rate") on the shares of Series A AMPS
for the Initial Dividend Period ending June , 1997 will be % per annum and
the cash dividend rate on the shares of Series B AMPS for the Initial Dividend
Period ending June , 1997 will be % per annum. The Applicable Rate on the
shares of AMPS of each series for each Subsequent Dividend Period will be
determined pursuant to periodic auctions conducted in accordance with the
procedures described in Appendix C hereto (an "Auction"). Except as otherwise
provided herein, each Subsequent Dividend Period for each series of AMPS will
be a 7-Day Dividend Period; provided, however, that prior to any Auction, the
Fund may elect, subject to certain limitations described herein, with respect
to each series of AMPS, upon giving notice to holders thereof, a Special
Dividend Period. See "Description of AMPS--Dividends."
The Applicable Rate on the shares of AMPS of each series for each Subsequent
Dividend Period will be reset on the basis of Bids, Hold Orders and Sell Orders
placed by Existing Holders and Potential Holders in the Auction conducted on
the Business Day next preceding the commencement of such Dividend Period. The
Applicable Rate that results from an Auction for any Dividend Period will not
be greater than the Maximum Applicable Rate (as defined herein). See
"Description of AMPS--The Auction--Orders by Beneficial Owners, Potential
Beneficial Owners, Existing Holders and Potential Holders."
The Fund currently is required to allocate net capital gains and other
taxable income, if any, proportionately between shares of Common Stock and
shares of AMPS. The Fund will give notice of the amount of any taxable income
to be included in a dividend on shares of AMPS in the related Auction, as
described herein, or, in limited circumstances, include such income in a
dividend on shares of AMPS without giving advance notice thereof if it
increases the dividend by an additional amount to offset substantially the tax
effect thereof. The amount of taxable income allocable to shares of AMPS will
depend upon the amount of such income realized by the Fund and other factors
but generally is not expected to be significant. See "Taxes."
Each prospective purchaser should review carefully the detailed information
regarding the Auction Procedures which appears in this Prospectus, including
the Appendices, and should note that (i) an Order constitutes an irrevocable
commitment to hold, purchase or sell AMPS based upon the results of the related
Auction, (ii) the Auctions will be conducted through telephone communications,
(iii) settlement for purchases and sales will be on the Business Day following
the Auction and (iv) ownership of AMPS will be maintained in book-entry form by
or through the Securities Depository. Under certain circumstances, holders of
AMPS may be unable to sell their shares of AMPS in an Auction and thus may lack
liquidity of investment. Shares of AMPS only may be transferred pursuant to a
Bid or a Sell Order placed in an Auction through a Broker-Dealer to the Auction
Agent or in the secondary market, if any.
The shares of AMPS are redeemable, in whole or in part, at the option of the
Fund, on any Dividend Payment Date (except during the Initial Dividend Period
or a Non-Call Period) at the Optional Redemption Price per share and will be
subject to mandatory redemption on dates fixed by the Board of Directors, under
certain circumstances, at the Mandatory Redemption Price per share.
If the Fund fails to pay on any Dividend Payment Date (or within the
applicable grace period) the full amount of any dividend or the redemption
price of shares of AMPS called for redemption, the Applicable Rate will not be
based on the results of an Auction but instead will be equal to the Non-Payment
Period Rate until such failure to pay is cured. See "Description of AMPS--
Dividends--Non-Payment Period; Late Charge."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus. Certain of the
capitalized terms used herein are defined in the Glossary that appears at the
end of this Prospectus.
THE FUND MuniHoldings Fund, Inc. (the "Fund") is a recently organized,
non-diversified, closed-end management investment company. See
"The Fund."
INVESTMENT The investment objective of the Fund is to provide shareholders
OBJECTIVE with current income exempt from Federal income taxes. The Fund
AND will seek to achieve its investment objective by investing
POLICIES primarily in a portfolio of long-term, investment grade municipal
obligations the interest on which, in the opinion of bond counsel
to the issuer, is exempt from Federal income taxes. The Fund
intends to maintain at least 75% of its total assets in municipal
obligations that are rated investment grade or, if unrated, are
considered by the Investment Adviser to be of comparable quality.
The Fund may invest up to 25% of its total assets in municipal
obligations that are rated below investment grade or, if unrated,
are considered by the Investment Adviser to be of comparable
quality. Such lower quality municipal obligations (also commonly
referred to as "junk bonds") are frequently traded only in
markets where the number of potential purchasers and sellers, if
any, is very limited. See "Investment Objective and Policies."
INVESTMENT Fund Asset Management, L.P. is the Fund's investment adviser (the
ADVISER "Investment Adviser") and is responsible for the management of
the Fund's investment portfolio and for providing administrative
services to the Fund. For its services, the Fund pays the
Investment Adviser a monthly fee at the annual rate of 0.55 of 1%
of the Fund's average weekly net assets. The Investment Adviser
is an affiliate of Merrill Lynch Asset Management, L.P. ("MLAM")
which is owned and controlled by Merrill Lynch & Co., Inc. ("ML &
Co."). The Investment Adviser or MLAM acts as the investment
adviser for over 130 other registered management investment
companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and
institutions. As of March 31, 1997, the Investment Adviser and
MLAM had a total of approximately $247.2 billion in investment
company and other portfolio assets under management
(approximately $31.8 billion of which was invested in municipal
securities), including accounts of certain affiliates of the
Investment Adviser. See "Investment Advisory and Management
Arrangements."
THE
OFFERING The Fund is offering an aggregate of 2,200 shares of Series A
AMPS and 2,200 shares of Series B AMPS, each at a purchase price
of $25,000 per share plus accumulated dividends, if any, from the
Date of Original Issue. The shares of AMPS are being offered by
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch" or the "Underwriter"). See "Underwriting."
The AMPS of each series will be shares of Preferred Stock of the
Fund that entitle their holders to receive cash dividends at a
rate per annum that may vary for the successive Dividend Periods
for each such series. In general, except as described below, each
Dividend Period for each series of AMPS subsequent to the Initial
Dividend Period will be seven days in length. The Applicable Rate
for a particular Dividend Period will be determined by an Auction
conducted on the Business Day next preceding the start of such
Dividend Period.
Through their Broker-Dealers, Beneficial Owners and Potential
Beneficial Owners of shares of AMPS of each series may
participate in Auctions therefor, although, except in the case of
a Special Dividend Period, Beneficial Owners desiring to continue
to hold all of their
3
<PAGE>
shares of AMPS regardless of the Applicable Rate resulting from
Auctions need not participate. For an explanation of Auctions and
the method of determining the Applicable Rate, see "Description
of AMPS--The Auction."
Except as described herein, investors in AMPS will not receive
certificates representing ownership of their shares. Ownership of
AMPS will be maintained in book-entry form by the Securities
Depository or its nominee for the account of the investor's Agent
Member. The investor's Agent Member, in turn, will maintain
records of such investor's beneficial ownership of AMPS.
Accordingly, references herein to an investor's investment in or
purchase, sale or ownership of AMPS are to purchases, sales or
ownership of those shares by Beneficial Owners.
DIVIDENDS
AND After the Initial Dividend Period, each Subsequent Dividend
DIVIDEND Period for each series of AMPS will generally consist of seven
PERIODS days (a "7-Day Dividend Period"); provided, however, that prior
to any Auction, the Fund may elect, subject to certain
limitations described herein, with respect to each series of
AMPS, upon giving notice to holders thereof, a Special Dividend
Period. A Special Dividend Period is a Dividend Period consisting
of a specified number of days (other than seven), evenly
divisible by seven and not fewer than seven nor more than 364 (a
"Short Term Dividend Period") or a Dividend Period consisting of
a specified period of one whole year or more but not greater than
five years (a "Long Term Dividend Period"). Dividends on the AMPS
offered hereby are cumulative from the Date of Original Issue and
are payable when, as and if declared by the Board of Directors of
the Fund, out of funds legally available therefor, commencing on
the Initial Dividend Payment Date and, in the case of Dividend
Periods that are not Special Dividend Periods, dividends will be
payable generally on each succeeding Wednesday in the case of
Series A AMPS and each succeeding Friday in the case of the
Series B AMPS, subject to certain exceptions.
Dividends for each series of AMPS will be paid through the
Securities Depository (The Depository Trust Company or a
successor securities depository) on each Dividend Payment Date
for such series. The Securities Depository's normal procedures
provide for it to distribute dividends in same-day funds to Agent
Members, who are in turn expected to distribute such dividends to
the person for whom they are acting as agent in accordance with
the instructions of such person. See "Description of AMPS--
Dividends."
For each Subsequent Dividend Period, the cash dividend rate on
the shares of each series of AMPS will be the Applicable Rate for
such series that the Auction Agent (IBJ Schroder Bank & Trust
Company or any successor) advises the Fund has resulted from an
Auction relating to such series. See "Description of AMPS--
Dividends." The first Auction for each series of AMPS is
scheduled to be held on the ending date for the Initial Dividend
Period for such series of AMPS as set forth above.
The Articles Supplementary provide that until the Fund gives a
Request for Special Dividend Period and the related Notice of
Special Dividend Period with respect to a series of AMPS, only 7-
Day Dividend Periods will be applicable to each series of AMPS.
While the Fund does not currently intend to give a Request for
Special Dividend Period with respect to the AMPS, it may so elect
in the future subject to, and on, the conditions discussed under
"Description of the AMPS--Dividends--Notification of Dividend
Period."
A Special Dividend Period will not be effective for a series of
the AMPS unless Sufficient Clearing Bids exist at the Auction in
respect of such Special Dividend Period. If Sufficient Clearing
Bids do not exist at such Auction for a series of the AMPS, the
Dividend Period
4
<PAGE>
commencing on the Business Day succeeding such Auction will be a
7-Day Dividend Period, and the holders of the AMPS of such series
outstanding prior to such Auction will be required to continue to
hold such shares for such Dividend Period. In addition, the Fund
may not give a Notice of Special Dividend Period with respect to
a series of AMPS, or if the Fund has given a Notice of Special
Dividend Period for a series of AMPS, the Fund will be required
to give a Notice of Revocation in respect thereof if (i) either
the 1940 Act AMPS Asset Coverage is not satisfied or the Fund
fails to maintain S&P Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value at least equal to the
AMPS Basic Maintenance Amount, in each case on each of the two
Valuation Dates immediately preceding the Business Day prior to
the related Auction Date for the AMPS, (ii) sufficient funds for
the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with
the Auction Agent by the close of business on the third Business
Day preceding the related Auction Date, or (iii) the Broker-
Dealers have given the Fund notice that it is not advisable to
hold an Auction in respect of a Special Dividend Period. In such
event, the next succeeding Dividend Period will be a 7-Day
Dividend Period.
ADVANCE Dividends paid by the Fund, to the extent paid from tax-exempt
NOTICE OF income earned on municipal obligations, will be exempt from
ALLOCATION Federal income taxes, subject to the possible application of the
OF TAXABLE alternative minimum tax. However, the Fund is required to
INCOME; allocate net capital gains and other income subject to regular
INCLUSION Federal income taxes, if any, proportionately between shares of
OF TAXABLE Common Stock and shares of AMPS in accordance with the current
INCOME IN position of the Internal Revenue Service (the "IRS") described
DIVIDENDS herein. The Fund will notify the Auction Agent of the amount of
any net capital gains or other taxable income to be included in
any dividend on shares of AMPS prior to the Auction establishing
the Applicable Rate for such dividend. The Auction Agent in turn
will notify each Broker-Dealer whenever it receives any such
notice from the Fund, and each Broker-Dealer will notify its
Beneficial Owners and Potential Beneficial Owners, as provided in
its Broker-Dealer Agreement. In limited circumstances, the Fund
also may include such income in a dividend on shares of AMPS
without giving advance notice thereof if it increases the
dividend by an additional amount to offset the tax effect
thereof. The amount of taxable income allocable to shares of AMPS
will depend upon the amount of such income realized by the Fund
and other factors, but generally is not expected to be
significant. See "Taxes" and "Description of AMPS--The Auction--
Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends."
ADDITIONAL If the Fund retroactively allocates any net capital gains or
DIVIDENDS other income subject to regular Federal income taxes to shares of
AMPS without having given advance notice thereof as described
above, which may only happen when such allocation is made as a
result of the redemption of all or a portion of the outstanding
shares of AMPS or the liquidation of the Fund, the Fund will make
certain payments to holders of shares of AMPS to which such
allocation was made to offset substantially the tax effect
thereof. In no other instances will the Fund be required to make
payments to holders of shares of AMPS to offset the tax effect of
any reallocation of net capital gains or other taxable income.
See "Description of AMPS--Dividends--Additional Dividends" and
"Taxes."
DETERMINATION Except during a Non-Payment Period, the Applicable Rate for any
OF MAXIMUM Dividend Period for shares of AMPS of each series will not be
APPLICABLE more than the Maximum Applicable Rate applicable to such shares.
RATES The Maximum Applicable Rate for shares of AMPS will depend on the
credit rating assigned to such shares and on the duration of the
Dividend Period. The
5
<PAGE>
Maximum Applicable Rate will be the Applicable Percentage of the
Reference Rate. The Reference Rate is (i) with respect to any
Dividend Period or any Short Term Dividend Period having 28 or
fewer days, the higher of the applicable "AA" Composite
Commercial Paper Rate and the Taxable Equivalent of the Short-
Term Municipal Bond Rate, (ii) with respect to any Short Term
Dividend Period having more than 28 but fewer than 183 days, the
applicable "AA" Composite Commercial Paper Rate, (iii) with
respect to any Short Term Dividend Period having 183 or more but
fewer than 364 days, the applicable U.S. Treasury Bill Rate and
(iv) with respect to any Long Term Dividend Period, the
applicable U.S. Treasury Note Rate. The Applicable Percentage
will be determined based on (i) the lower of the credit rating or
ratings assigned on such date to the AMPS by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Services
("S&P") (or, if Moody's or S&P or both shall not make such rating
available, the equivalent of either or both of such ratings by a
Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such
rating) and (ii) whether the Fund has provided notification to
the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other
taxable income will be included in such dividend on shares of
AMPS as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
CREDIT RATINGS PERCENTAGE PERCENTAGE
------------------------------ OF REFERENCE RATE OF REFERENCE RATE
MOODY'S S&P --NO NOTIFICATION --NOTIFICATION
---------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend
Period.
The Applicable Rate for any Dividend Period commencing during any
Non-Payment Period, and the rate used to calculate the late
charge described under "Description of AMPS--Dividends--Non-
Payment Period; Late Charge," initially will be 200% of the
Reference Rate (or 275% of such rate if the Fund has provided
notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net
capital gains or other taxable income will be included in such
dividend on shares of AMPS).
AUCTION Separate Auctions will be conducted for each series of AMPS. As
PROCEDURES used in the following description of the Auction Procedures,
unless the context otherwise requires, "AMPS" means the series of
AMPS subject to the related Auction, and "Beneficial Owners,"
"Potential Beneficial Owners," "Existing Holders" and "Potential
Holders" means Beneficial Owners of such series, Potential
Beneficial Owners of such series, Existing Holders of such series
and Potential Holders of such series, respectively.
Unless otherwise permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners of AMPS may only participate in
Auctions through their Broker-Dealers. Broker-Dealers will submit
the Orders of their respective customers who are Beneficial
Owners and Potential Beneficial Owners to the Auction Agent,
designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of shares
subject to Orders submitted to them by Potential Beneficial
Owners. On or prior to each Auction Date for each series of AMPS
(the Business Day next preceding the first day of each Dividend
Period), each Beneficial Owner may submit Orders to its Broker-
Dealer as follows:
6
<PAGE>
-- Hold Order--indicating its desire to hold shares of AMPS
without regard to the Applicable Rate for the next Dividend
Period for such shares.
-- Bid--indicating its desire to hold shares of AMPS, provided
that the Applicable Rate for the next Dividend Period for such
shares is not less than the rate per annum specified in such
Bid.
-- Sell Order--indicating its desire to sell shares of AMPS
without regard to the Applicable Rate for the next Dividend
Period for such shares.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of AMPS then held by such
Beneficial Owner, provided that the total number of shares of
AMPS covered by such Orders does not exceed the number of shares
of AMPS held by such Beneficial Owner. If, however, a Beneficial
Owner offers through its Broker-Dealer to purchase additional
shares of AMPS in such Auction, such Beneficial Owner, for
purposes of such offer to purchase additional shares, will be
treated as a Potential Beneficial Owner as described below. Bids
by Beneficial Owners through their Broker-Dealers with rates per
annum higher than the Maximum Applicable Rate will be treated as
Sell Orders. A Hold Order (in the case of an Auction relating to
a Dividend Period which is not a Special Dividend Period) and a
Sell Order (in the case of an Auction relating to a Special
Dividend Period) shall be deemed to have been submitted on behalf
of a Beneficial Owner if an Order with respect to shares of AMPS
then held by such Beneficial Owner is not submitted on behalf of
such Beneficial Owner for any reason, including the failure of a
Broker-Dealer to submit such Beneficial Owner's Order to the
Auction Agent.
Potential Beneficial Owners of shares of AMPS may submit Bids
through their Broker-Dealers in which they offer to purchase
shares of AMPS, provided that the Applicable Rate for the next
Dividend Period for such shares is not less than the rate per
annum specified in such Bid. A Bid by a Potential Beneficial
Owner with a rate per annum higher than the Maximum Applicable
Rate will not be considered.
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with any of the foregoing.
A Broker-Dealer also may hold AMPS for its own account as a
Beneficial Owner. A Broker-Dealer thus may submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial
Owner and therefore participate in an Auction as an Existing
Holder or Potential Holder on behalf of both itself and its
customers. An Order placed with the Auction Agent by a Broker-
Dealer as an Existing Holder or a Potential Holder as or on
behalf of a Beneficial Owner or a Potential Beneficial Owner, as
the case may be, will be treated in the same manner as an Order
placed with a Broker-Dealer by a Beneficial Owner or a Potential
Beneficial Owner. Similarly, any failure by a Broker-Dealer to
submit to the Auction Agent an Order in respect of any AMPS held
by it or its customers who are Beneficial Owners will be treated
in the same manner as a Beneficial Owner's failure to submit to
its Broker-Dealer an Order in respect of AMPS held by it, as
described above. Inasmuch as a Broker-Dealer participates in an
Auction as an Existing Holder or a Potential Holder only to
represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be a customer 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.
7
<PAGE>
If Sufficient Clearing Bids exist in an Auction (that is, in
general, the number of shares of AMPS subject to Bids by
Potential Holders with rates equal to or lower than the Maximum
Applicable Rate is at least equal to the number of shares of AMPS
subject to Sell Orders by Existing Holders), the Applicable Rate
will be the lowest rate per annum specified in the Submitted Bids
which, taking into account such rate per annum and all lower
rates per annum bid by Existing Holders and Potential Holders,
would result in Existing Holders and Potential Holders owning all
of the shares of AMPS available for purchase in the Auction. If
Sufficient Clearing Bids do not exist, the Dividend Period next
following the Auction automatically will be a 7-Day Dividend
Period and the Applicable Rate will be the Maximum Applicable
Rate, and in such event, Existing Holders that have submitted
Sell Orders will not be able to sell in the Auction all, and may
not be able to sell any, shares of AMPS subject to such Sell
Orders. Thus, under certain circumstances, Existing Holders and,
thus, the Beneficial Owners they represent may not have liquidity
of investment. If all Existing Holders submit (or are deemed to
have submitted) Hold Orders in an Auction, the Dividend Period
next following the Auction automatically shall be the same length
as the immediately preceding Dividend Period, and the Applicable
Rate will be 40% of the Reference Rate (as defined under
"Determination of Maximum Applicable Rates" above) in effect on
the date of the Auction (or 60% of such rate if the Fund has
provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net
capital gains or other taxable income will be included in such
dividend on shares of AMPS).
The Auction Procedures include a pro rata allocation of shares
for purchase and sale, which may result in an Existing Holder
selling or holding, or a Potential Holder purchasing, a number of
shares of AMPS that is less than the number of shares of AMPS
specified in its Order. To the extent the allocation has this
result, a Broker-Dealer will be required to make appropriate pro
rata allocations among its customers and itself.
A Sell Order by an Existing Holder will constitute an irrevocable
offer to sell the shares of AMPS subject thereto, and a Bid
placed by an Existing Holder also will constitute an irrevocable
offer to sell the shares of AMPS subject thereto if the rate per
annum specified in the Bid is higher than the Applicable Rate
determined in the Auction, in each case at a price per share
equal to $25,000. A Bid placed by a Potential Holder will
constitute an irrevocable offer to purchase the shares of AMPS
subject thereto if the rate per annum specified in such Bid is
less than or equal to the Applicable Rate determined in the
Auction. Settlement of purchases and sales will be made on the
next Business Day (also a Dividend Payment Date) after the
Auction Date through the Securities Depository. Purchasers will
make payment through their Agent Members in same-day funds to the
Securities Depository against delivery by book-entry to their
Agent Members. The Securities Depository will make payment to the
sellers' Agent Members in accordance with the Securities
Depository's normal procedures, which now provide for payment in
same-day funds. See "Description of AMPS--The Auction."
ASSET Under the Articles Supplementary, the Fund must maintain (i) S&P
MAINTENANCE Eligible Assets and Moody's Eligible Assets each having in the
aggregate a Discounted Value at least equal to the AMPS Basic
Maintenance Amount and (ii) 1940 Act AMPS Asset Coverage of at
least 200%. See "Description of AMPS--Asset Maintenance."
The Fund estimates that, based on the composition of its
portfolio at May 15, 1997, 1940 Act AMPS Asset Coverage with
respect to shares of AMPS would be approximately 286% immediately
after the issuance of the shares of AMPS offered hereby in an
amount representing approximately 35% of the Fund's capital.
8
<PAGE>
The Discount Factors and guidelines for calculating the
Discounted Value of the Fund's portfolio for purposes of
determining whether the AMPS Basic Maintenance Amount has been
satisfied have been established by Moody's and S&P in connection
with the Fund's receipt of ratings on the shares of AMPS on their
Date of Original Issue of "aaa" from Moody's and AAA from S&P.
See "Investment Objective and Policies--Rating Agency
Guidelines."
MANDATORY If the AMPS Basic Maintenance Amount or the 1940 Act AMPS Asset
REDEMPTION Coverage is not maintained or restored as specified herein,
shares of AMPS will be subject to mandatory redemption, out of
funds legally available therefor, at the Mandatory Redemption
Price of $25,000 per share plus an amount equal to dividends
thereon (whether or not earned or declared) accumulated but
unpaid to the date fixed for redemption. In addition, holders of
AMPS may be entitled to receive Additional Dividends in the event
of redemption of such AMPS to the extent provided herein. See
"Description of AMPS--Dividends--Additional Dividends." Any such
redemption will be limited to the minimum number of shares of
AMPS necessary to restore the AMPS Basic Maintenance Amount or
the 1940 Act AMPS Asset Coverage, as the case may be. The Fund's
ability to make such a mandatory redemption may be restricted by
the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act"). See "Description of AMPS--Redemption--Mandatory
Redemption."
OPTIONAL The shares of AMPS of each series are redeemable at the option of
REDEMPTION the Fund, as a whole or in part, on any Dividend Payment Date
(except during the Initial Dividend Period or a Non-Call Period)
at the Optional Redemption Price of $25,000 per share, plus an
amount equal to dividends thereon (whether or not earned or
declared) accumulated but unpaid to the date fixed for redemption
plus the premium, if any, resulting from the designation of a
Premium Call Period. See "Description of AMPS--Redemption--
Optional Redemption." In addition, holders of shares of AMPS may
be entitled to receive Additional Dividends in the event of
redemption of such shares of AMPS to the extent provided herein.
See "Description of AMPS--Dividends--Additional Dividends."
LIQUIDATION The liquidation preference of each share of AMPS will be $25,000,
PREFERENCE plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared). See "Description of AMPS--Liquidation
Rights." In addition, holders of AMPS may be entitled to receive
Additional Dividends in the event of the liquidation of the Fund
as provided herein. See "Description of AMPS--Dividends--
Additional Dividends."
RATINGS
It is a condition to their issuance that the AMPS be issued with
a rating of "aaa" from Moody's and AAA from S&P. See "Investment
Objective and Policies--Rating Agency Guidelines."
VOTING The 1940 Act requires that the holders of AMPS and any other
RIGHTS Preferred Stock, voting as a separate class, have the right to
elect at least two directors at all times and to elect a majority
of the directors at any time when two years' dividends on the
AMPS or any other Preferred Stock are unpaid. The holders of AMPS
and any other Preferred Stock will vote as a separate class on
certain other matters as required under the Fund's Charter and
the 1940 Act. See "Description of AMPS--Voting Rights" and
"Description of Capital Stock--Certain Provisions of the
Charter."
9
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund has registered as a "non-diversified" investment company so that it
will be able to invest more than 5% of its total assets in the obligations of
any single issuer, subject to the diversification requirements of Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"), applicable to
the Fund. Since the Fund may invest a relatively high percentage of its assets
in the obligations of a limited number of issuers, the Fund may be more
susceptible than a more widely diversified fund to any single economic,
political or regulatory occurrence.
The Fund intends to invest at least 75% of its total assets in municipal
obligations that are rated in the investment-grade rating categories by S&P,
Moody's or Fitch Investors Service, Inc. ("Fitch") or, if not rated, are
considered to be of comparable quality by the Investment Adviser. Obligations
rated in the lowest investment-grade category have certain speculative
characteristics. Additionally, the Fund may invest up to 25% of its total
assets in municipal obligations that are rated below investment grade or, if
not rated, are considered by the Investment Adviser to be of comparable
quality. These securities are regarded as predominantly speculative and
investments therein entail certain risks. See "Investment Objective and
Policies." The Fund may invest in certain tax-exempt securities classified as
"private activity bonds" that may subject certain investors in the Fund to the
alternative minimum tax. See "Taxes--General."
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments that may be characterized as
derivatives. These investments include various types of options transactions
and futures and options thereon. Such investments also may consist of non-
municipal tax-exempt securities and securities the potential investment return
on which is based on the change in particular measurements of value or interest
rates ("indexed securities"), including securities the potential investment
return on which is inversely related to a change in particular measurements of
value or interest rates ("inverse securities"). The Fund has express
limitations on the percentage of its assets that may be committed to certain of
such investments. Other of such investments have no express quantitative
limitations, although they may be made solely for hedging purposes, not for
speculation, and may in some cases require limitations as to the type of
permissible counterparty to the transaction. Investments in indexed securities,
including inverse securities, subject the Fund to the risks associated with
changes in the particular indices, which may include reduced or eliminated
interest payments and losses of invested principal. Derivative instruments may
have certain characteristics that have a similar effect on the return to Common
Stock investors as the leveraging of the Fund's portfolio; however, certain
derivative investments will not be taken into account as senior securities (as
defined in the 1940 Act) for purposes of calculating the percentage of leverage
of the Fund's portfolio. For a further discussion of the risks associated with
derivative investments, see "Investment Objective and Policies," "Investment
Objective and Policies--Other Investment Policies--Indexed and Inverse Floating
Obligations," "--Call Rights" and "Investment Objective and Policies--Options
and Futures Transactions."
Subject to its investment restrictions, the Fund is authorized to engage in
options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security that is the subject of the hedge and the inability to close futures
transactions under certain conditions. Options transactions involve the
potential loss of the opportunity to profit from any price increase in the
underlying security above the option exercise price or the potential loss of
the premium paid for the option. Because of the anticipated leveraged nature of
the Common Stock, hedging transactions will result in a larger impact on the
net asset value of the Common Stock than would be the case if the Common Stock
were not leveraged. Certain OTC options and assets used to cover OTC options
written by the Fund may be considered to be illiquid. The illiquidity of such
options or assets may prevent a successful sale of such options or assets,
result in a delay of sale, or reduce the amount of proceeds that might be
otherwise realized. See "Investment Objective and Policies--Options and Futures
Transactions."
10
<PAGE>
For so long as any shares of AMPS are rated by Moody's, the Fund will not buy
or sell financial futures contracts, write, purchase or sell call options on
financial futures contracts or purchase put options on financial futures
contracts or write call options (except covered call options) on portfolio
securities unless it receives written confirmation from Moody's that engaging
in such transactions would not impair the ratings then assigned to the shares
of AMPS by Moody's, except that the Fund may engage in Moody's Hedging
Transactions subject to the limitations described herein. For so long as any
shares of AMPS are rated by S&P, the Fund will not purchase or sell financial
futures contracts, write, purchase or sell options on financial futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not
impair the ratings then assigned to the shares of AMPS by S&P, except that the
Fund may engage in S&P Hedging Transactions subject to the limitations
described herein. See "Investment Objective and Policies--Rating Agency
Guidelines" and "--Options and Futures Transactions."
There are a number of specific factors investors in AMPS should consider.
-- The credit ratings of the AMPS could be reduced while an investor holds
the AMPS.
-- Neither Broker-Dealers nor the Fund are obligated to purchase shares of
AMPS in an Auction or otherwise nor is the Fund required to redeem
shares of AMPS in the event of a failed Auction.
-- If in an Auction for the AMPS Sufficient Clearing Bids do not exist, the
Applicable Rate will be the Maximum Applicable Rate, and in such event,
Beneficial Owners that have submitted Sell Orders will not be able to
sell in the Auction all, and may not be able to sell any, shares of AMPS
subject to such Sell Orders. Thus, under certain circumstances,
Beneficial Owners may not have liquidity of investment.
The Broker-Dealers intend to maintain a secondary trading market in the AMPS
outside of Auctions; however, they have no obligation to do so and there can be
no assurance that a secondary market for the AMPS will develop or, if it does
develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The AMPS will not be registered on any stock exchange
or on 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.
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 Stock shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. See "Description of Capital Stock--
Certain Provisions of the Charter."
11
<PAGE>
THE FUND
MuniHoldings Fund, Inc. (the "Fund") is a recently organized, non-
diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on February 27, 1997, and
has registered under the 1940 Act. The Fund's principal office is located at
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number
is (609) 282-2800.
The Fund commenced operations on May 2, 1997 upon the closing of an initial
public offering of 12,000,000 shares of its Common Stock. The proceeds of such
offering were approximately $179,610,000 after the payment of organizational
and offering expenses. On May 8, 1997 and May 15, 1997, 1,080,000 and 542,322
additional shares of Common Stock, respectively, were issued and sold by the
Fund pursuant to the Underwriter's exercise of its over-allotment option. The
proceeds of such sales were $16,200,000 and $8,134,830, respectively.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $108,950,000 after the
payment of offering expenses (estimated to be $225,000) and the sales load and
the payment to the Fund by the Underwriter to cover certain expenses. See
"Underwriting."
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies during a period estimated not to
exceed three months from the offer and sale of such shares of AMPS depending
on market conditions and the availability of appropriate securities. Pending
such investment, it is anticipated that the proceeds will be invested in
short-term tax-exempt securities. See "Investment Objective and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of May 15, 1997 and as adjusted to give effect to the issuance of the shares
of AMPS offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' equity:
Capital Stock (200,000,000 shares authorized)
Preferred Stock, par value $.10 per share (no
shares issued; 4,400 shares of AMPS issued and
outstanding, as adjusted, at $25,000 per share
liquidation preference)........................... -- $110,000,000
Common Stock, par value $.10 per share (13,628,989
shares issued and outstanding).................... $ 1,362,899 1,362,899
Capital in excess of par value attributable to Com-
mon Stock......................................... 202,703,909 201,653,909
Undistributed investment income--net............... 412,435 412,435
Unrealized appreciation on investments--net........ 1,087,813 1,087,813
------------ ------------
Net assets......................................... $205,567,056 $314,517,056
============ ============
</TABLE>
12
<PAGE>
PORTFOLIO COMPOSITION
As of May 15, 1997, approximately 93.0% of the market value of the Fund's
portfolio was invested in long-term municipal obligations and approximately
7.0% of the market value of the Fund's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of the Fund's long-term municipal obligation
investment portfolio as of May 15, 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 31 $106,567 46.6%
AA Aa 5 24,159 10.6
A A 3 12,976 5.7
BBB Baa 4 30,308 13.3
BB Ba 9 30,284 13.2
NR+ NR+ 7 24,313 10.6
--- -------- -----
Total . . . . . . . . . 59 $228,607 100.0%
=== ======== =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's ratings on the Fund's
municipal obligations. See "Schedule of Investments." S&P rating categories
may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and
C ratings. Moody's rating categories may be modified further by a 1, 2 or 3
in Aa, A, Baa, Ba and B ratings.
+ Securities that are not rated by S&P or Moody's. Such bonds may be rated by
nationally recognized statistical rating organizations other than S&P or
Moody's, or may not be rated by any such organization. With respect to the
percentage of the Fund's assets invested in such securities, the Investment
Adviser believes that 1.6% are of comparable quality to obligations rated
BBB/Baa and 9.0% are of comparable quality to obligations rated BB/Ba. This
determination is based on the Investment Adviser's own internal evaluation
and does not necessarily reflect how such securities would be rated by S&P
or Moody's if either were to rate the securities.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with current
income exempt from Federal income taxes. The Fund seeks to achieve its
investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations, the interest on which, in the opinion
of bond counsel to the issuer, is exempt from Federal income taxes. The
investment objective of the Fund is a fundamental policy that may not be
changed without a vote of a majority of the Fund's outstanding voting
securities, as defined below under "Investment Restrictions." There can be no
assurance that the investment objective of the Fund will be realized. At times
the Fund may seek to hedge its portfolio through the use of futures
transactions and options to reduce volatility in the net asset value of its
shares of Common Stock.
The Fund, at all times, except during temporary defensive periods, will
invest at least 80% of its total assets in a portfolio of obligations issued
by or on behalf of states, territories and possessions of the United States
and their political subdivisions, agencies or instrumentalities paying
interest that, in the opinion of bond counsel to the issuer, is exempt from
Federal income taxes ("Municipal Bonds"). The Fund, at all times, except
during temporary defensive periods, will maintain at least 75% of its total
assets in Municipal Bonds that are rated investment grade by a nationally
recognized statistical rating organization or, if unrated, are considered to
be of comparable quality by the Investment Adviser. Additionally, the Fund may
invest up to 25% of its total assets in Municipal Bonds that are rated below
investment grade by a nationally recognized statistical rating organization
or, if unrated, are considered to be of comparable quality by the Investment
Adviser. Such lower quality Municipal Bonds are frequently traded only in
markets where the number of potential purchasers and sellers, if any, is very
limited. The Fund may invest all or a portion of its assets in certain tax-
exempt securities classified as "private activity bonds" (in general, bonds
that benefit non-governmental entities) that may subject certain investors in
the Fund to an alternative minimum tax. The Fund will not invest more than 25%
of its total assets (taken at market value) in Municipal Bonds whose issuers
are located in the same state.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
13
<PAGE>
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the 1940 Act. Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term Municipal Bonds. Certain Non-Municipal Tax-
Exempt Securities may be characterized as derivative instruments. Non-Municipal
Tax-Exempt Securities will be considered "Municipal Bonds" for purposes of the
Fund's investment objective and policies.
The investment grade Municipal Bonds in which the Fund will invest are those
Municipal Bonds that are rated at the date of purchase in the four highest
rating categories of S&P, Moody's or Fitch or, if unrated, are considered to be
of comparable quality by the Investment Adviser. In the case of long-term debt,
the investment grade rating categories are AAA through BBB for S&P, Aaa through
Baa for Moody's and AAA through BBB for Fitch. In the case of short-term notes,
the investment grade rating categories are SP-l+ through SP-3 for S&P, MIG-1
through MIG-4 for Moody's and F-1+ through F-3 for Fitch. In the case of tax-
exempt commercial paper, the investment grade rating categories are A-1+
through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-l+ through F-3
for Fitch. Obligations ranked in the fourth highest rating category (BBB, SP-3
and A-3 for S&P; Baa, MIG-4 and Prime-3 for Moody's; and BBB and F-3 for
Fitch), while considered "investment grade," may have certain speculative
characteristics. There also may be sub-categories or gradations indicating
relative standing within the rating categories set forth above. See Appendix A
to this Prospectus for a description of S&P's, Moody's and Fitch's ratings of
Municipal Bonds. In assessing the quality of Municipal Bonds with respect to
the foregoing requirements, the Investment Adviser will take into account the
nature of any letters of credit or similar credit enhancement to which
particular Municipal Bonds are entitled and the creditworthiness of the
financial institution that provided such credit enhancement.
As noted above, the Fund may invest up to 25% of its assets in Municipal
Bonds that are rated below investment grade or, if unrated, are considered to
be of comparable quality by the Investment Adviser. These high yield bonds are
commonly referred to as "junk bonds" and are regarded as predominantly
speculative as to the issuer's ability to make payments of principal and
interest. Consequently, although such bonds can be expected to provide higher
yields, they may be subject to greater market price fluctuations and risk of
loss of principal than lower yielding, higher rated fixed-income securities.
Such securities are particularly vulnerable to adverse changes in the issuer's
industry and in general economic conditions. Issuers of high yield bonds may be
highly leveraged and may not have available to them more traditional methods of
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of these bonds because such securities may be unsecured
and may be subordinated to other creditors of the issuer. In addition, while
the high yield bonds in which the Fund may invest normally will not include
securities that at the time of investment are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after the Fund purchases a particular security, in which case the Fund
may experience losses and incur costs.
High yield bonds frequently have call or redemption features that permit an
issuer to repurchase such bonds from the Fund, which may decrease the net
investment income to the Fund and dividends to shareholders in the event that
the Fund is required to replace a called security with a lower yielding
security. The Fund may have difficulty disposing of certain high yield bonds
because there may be a thin trading market for such securities. Reduced
secondary market liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular issues when necessary to meet the
Fund's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations are generally available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations in the opinion of counsel to the issuer that
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid
14
<PAGE>
principal balance plus accrued interest on a short notice period not to exceed
seven days. Participating VRDOs provide the Fund with a specified undivided
interest (up to 100%) in the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility that
because of default or insolvency, the demand feature of VRDOs or Participating
VRDOs may not be honored. The Fund has been advised by its counsel that the
Fund should be entitled to treat the income received on Participating VRDOs as
interest from tax-exempt obligations.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates decline,
the value of a fixed-income portfolio can be expected to rise. Conversely, when
interest rates rise, the value of a fixed-income portfolio can be expected to
decline. Prices of longer-term securities generally fluctuate more in response
to interest rate changes than do short-term or medium-term securities. These
changes in net asset value are likely to be greater in the case of a fund
having a leveraged capital structure, as proposed for the Fund. See "Risks and
Special Considerations of Leverage."
The Fund intends to invest primarily in long-term Municipal Bonds with a
maturity of more than ten years. Also, the Fund may invest in intermediate-term
Municipal Bonds with a maturity of between three years and ten years. The Fund
may invest in short-term, tax-exempt securities, short-term U.S. Government
securities, repurchase agreements or cash. Investments in such short-term
securities or cash will not exceed 20% of the Fund's total assets except during
interim periods pending investment of the net proceeds of public offerings of
the Fund's securities or in anticipation of the repurchase or redemption of the
Fund's securities and temporary periods when, in the opinion of the Investment
Adviser, prevailing market or economic conditions warrant. The Fund does not
ordinarily intend to realize significant interest income not exempt from
Federal income tax.
The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by such Act in the proportion of its
assets that it may invest in securities of a single issuer. However, the Fund's
investments will be limited so as to qualify the Fund for special tax treatment
afforded regulated investment companies under the Code. See "Taxes." To
qualify, among other requirements, the Fund will limit its investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities
(other than U.S. Government securities) of a single issuer, and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities (other than
U.S. Government securities) of a single issuer. A fund that elects to be
classified as "diversified" under the 1940 Act must satisfy the foregoing 5%
requirement with respect to 75% of its total assets. To the extent that the
Fund assumes large positions in the securities of a small number of issuers,
the Fund's yield may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to finance various privately operated facilities, including
certain local facilities for water supply, gas, electricity, sewage or solid
waste disposal. For purposes of this Prospectus, such obligations are Municipal
Bonds if the interest paid thereon is exempt from Federal income tax, even
though such bonds may be industrial development bonds ("IDBs") or "private
activity bonds" as discussed below. Also, for purposes of this Prospectus, Non-
Municipal Tax-Exempt securities as discussed above will be considered Municipal
Bonds.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds, which latter category includes IDBs and, for bonds
issued after August 15, 1986, private activity bonds. General
15
<PAGE>
obligation bonds are secured by the issuer's pledge of faith, credit and
taxing power for the repayment of principal and the payment of interest.
Revenue or special obligation bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as from
the user of the facility being financed. IDBs are in most cases revenue bonds
and do not generally constitute the pledge of the credit or taxing power of
the issuer of such bonds. The repayment of principal and the payment of
interest on such industrial development bonds depends solely on the ability of
the user of the facility financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such payment. Municipal Bonds may also include "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
The Fund may purchase Municipal Bonds classified as "private activity bonds"
(in general, bonds that benefit non-governmental entities). Interest received
on certain tax-exempt securities that are classified as "private activity
bonds" may subject certain investors in the Fund to an alternative minimum
tax. There is no limitation on the percentage of the Fund's assets that may be
invested in Municipal Bonds that may subject certain investors to an
alternative minimum tax. See "Taxes--General." Also included within the
general category of Municipal Bonds are participation certificates issued by
government authorities or entities to finance the acquisition or construction
of equipment, land and/or facilities. The certificates represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations do
not constitute general obligations of the issuer for which the issuer's
unlimited taxing power is pledged, a lease obligation frequently is backed by
the issuer's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses which provide that the issuer has no obligation to make
lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known as
"leveraging") create an opportunity for greater total return since the Fund
will not be required to sell portfolio securities to repurchase or redeem
shares but, at the same time, such borrowings increase exposure to capital
risk. In addition, borrowed funds are subject to interest costs that may
offset or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Municipal Bonds on a delayed delivery basis or on a when-
issued basis at fixed purchase or sale terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment, and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery day may be more or less than its purchase price. A
separate account of the Fund will be established
16
<PAGE>
with its custodian consisting of cash, cash equivalents or liquid Municipal
Bonds having a market value at all times at least equal to the amount of the
commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in Municipal
Bonds the return on which is based on a particular index of value or interest
rates. For example, the Fund may invest in Municipal Bonds that pay interest
based on an index of Municipal Bond interest rates. The principal amount
payable upon maturity of certain Municipal Bonds also may be based on the
value of an index. To the extent the Fund invests in these types of Municipal
Bonds, the Fund's return on such Municipal Bonds will be subject to risk with
respect to the value of the particular index. Also, the Fund may invest in so-
called "inverse floating obligations" or "residual interest bonds" on which
the interest rates typically vary inversely with a short-term floating rate
(which may be reset periodically by a dutch auction, a remarketing agent, or
by reference to a short-term tax-exempt interest rate index). The Fund may
purchase in the secondary market synthetically-created inverse floating rate
bonds evidenced by custodial or trust receipts. Generally, interest rates on
inverse floating rate bonds will decrease when short-term rates increase, and
will increase when short-term rates decrease. Such securities have the effect
of providing a degree of investment leverage, since they may increase or
decrease in value in response to changes, as an illustration, in market
interest rates at a rate that is a multiple (typically two) of the rate at
which fixed-rate, long-term, tax-exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
generally will be more volatile than the market values of fixed-rate tax-
exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
which contain limitations on the extent to which the interest rate may vary.
The Investment Adviser believes that indexed and inverse floating obligations
represent a flexible portfolio management instrument for the Fund that allows
the Investment Adviser to vary the degree of investment leverage relatively
efficiently under different market conditions.
Call Rights. The Fund may purchase a Municipal Bond issuer's right to call
all or a portion of such Municipal Bond for mandatory tender for purchase (a
"Call Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Municipal Bond will expire without value. The economic effect
of holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this Prospectus.
The Fund intends that, so long as shares of AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's
and S&P in connection with the Fund's receipt of a rating for such shares on
or prior to their Date of Original Issue of at least "aaa" from Moody's and
AAA from S&P. Moody's
17
<PAGE>
and S&P, which are nationally recognized statistical rating organizations,
issue ratings for various securities reflecting the perceived creditworthiness
of such securities. The guidelines described below have been developed by
Moody's and S&P in connection with issuances of asset-backed and similar
securities, including debt obligations and variable rate preferred stock,
generally on a case-by-case basis through discussions with the issuers of
these securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be varied sufficiently and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law but have been adopted by the Fund in
order to satisfy current requirements necessary for Moody's and S&P to issue
the above-described ratings for shares of AMPS, which ratings generally are
relied upon by institutional investors in purchasing such securities. The
guidelines provide a set of tests for portfolio composition and asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act. See "Description of AMPS--Asset Maintenance."
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has
established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and S&P guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value
at least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date, thereby incurring additional transaction costs
and possible losses and/or gains on dispositions of portfolio securities. To
the extent any such failure is not cured in a timely manner, shares of AMPS
will be subject to redemption. See "Description of AMPS--Asset Maintenance"
and "Description of AMPS--Redemption." The AMPS Basic Maintenance Amount
includes the sum of (i) the aggregate liquidation value of AMPS then
outstanding and (ii) certain accrued and projected payment obligations of the
Fund. See "Description of AMPS--Asset Maintenance."
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of AMPS, at any time, may change or
withdraw any such rating. As set forth in the Articles Supplementary, the
Board of Directors, without shareholder approval, may modify certain
definitions or restrictions 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 S&P that any such change would not impair the
ratings then assigned by Moody's and S&P to the AMPS.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines described above address the likelihood that a holder of shares of
AMPS will be able to sell such shares in an Auction. The ratings are based on
current information furnished to Moody's and S&P by the Fund and the
Investment Adviser and information obtained from other sources. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Common Stock has not been rated by a
nationally recognized statistical rating organization.
S&P AAA Rating Guidelines. The Discounted Value of the Fund's S&P Eligible
Assets is calculated on each Valuation Date. See "Description of AMPS--Asset
Maintenance--AMPS Basic Maintenance Amount." S&P Eligible Assets include cash,
Receivables for Municipal Bonds Sold (as defined below) and Municipal Bonds
eligible for consideration under S&P's current guidelines. For purposes of
calculating the Discounted Value of the Fund's portfolio under current S&P
guidelines, the fair market value of Municipal Bonds eligible
18
<PAGE>
for consideration under such guidelines must be discounted by the applicable
S&P Discount Factor set forth in the table below. The Discounted Value of a
Municipal Bond eligible for consideration under S&P guidelines is the fair
market value thereof divided by the S&P Discount Factor. The S&P Discount
Factor used to discount a particular Municipal Bond will be determined by
reference to (a) the rating by S&P or Moody's on such Municipal Bond and (b)
the S&P Exposure Period. The S&P Exposure Period is the maximum period of time
following a Valuation Date, including the Valuation Date and the AMPS Basic
Maintenance Cure Date, that the Fund has to cure any failure to maintain, as
of such Valuation Date, a Discounted Value for its portfolio at least equal to
the AMPS Basic Maintenance Amount.
S&P Discount Factors applicable to Municipal Bonds for a range of S&P
Exposure Periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS RATING CATEGORY
------------------------------------------
EXPOSURE PERIOD AAA AA A BB
--------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
40 Business Days................. 190% 195% 210% 250%
22 Business Days................. 170 175 190 230
10 Business Days................. 155 160 175 215
7 Business Days................. 150 155 170 210
3 Business Days................. 130 135 150 190
</TABLE>
Since the S&P Exposure Period currently applicable to the Fund is seven
Business Days, the S&P Discount Factors currently applicable to Municipal
Bonds eligible for consideration under S&P guidelines will be determined by
reference to the factors set forth opposite the exposure period line entitled
"7 Business Days." Notwithstanding the foregoing, (i) the S&P Discount Factor
for short-term Municipal Bonds will be 115%, so long as such Municipal Bonds
are rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
in 30 days or less, or 125% if such Municipal Bonds are not rated by S&P but
are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, such short-term
Municipal Bonds rated by Moody's but not rated by S&P having a demand feature
exercisable in 30 days or less must be backed by a letter of credit, liquidity
facility or guarantee from a bank or other financial institution having a
short-term rating of at least A-1+ from S&P; and further provided that such
short-term Municipal Bonds rated by Moody's but not rated by S&P may comprise
no more than 50% of short-term Municipal Bonds that qualify as S&P Eligible
Assets and (ii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Bonds Sold. "Receivables for Municipal Bonds Sold,"
for purposes of calculating S&P Eligible Assets as of any Valuation Date,
means the book value of receivables for Municipal Bonds sold as of or prior to
such Valuation Date if such receivables are due within five Business Days of
such Valuation Date. For purposes of the foregoing, Anticipation Notes rated
SP-1+ or, if not rated by S&P, rated VMIG-1 by Moody's, which do not mature or
have a demand feature exercisable in 30 days and which do not have a long-term
rating, shall be considered to be short-term Municipal Bonds.
The S&P guidelines require certain minimum issue size and geographical
diversification and impose other requirements for purposes of determining S&P
Eligible Assets. In order to be considered S&P Eligible Assets, Municipal
Bonds must:
(i) be interest bearing and pay interest at least semi-annually;
(ii) be payable with respect to principal and interest in U.S. dollars;
(iii) be publicly rated BBB or higher by S&P or, except in the case of
Anticipation Notes that are grant anticipation notes or bond anticipation
notes, which must be rated by S&P to be included in S&P Eligible Assets, if
not rated by S&P but rated by Moody's, be rated at least A by Moody's
(provided that such Moody's-rated Municipal Bonds will be included in S&P
Eligible Assets only to the extent the fair market value of such Municipal
Bonds does not exceed 50% of the aggregate fair market value of the S&P
Eligible Assets. For purposes of determining the S&P Discount Factors
applicable to any such Moody's-rated Municipal Bonds, such Municipal Bonds
will be deemed to have an S&P rating that is one full rating category lower
than its Moody's rating);
(iv) not be subject to a covered call or covered put option written by
the Fund;
(v) not be part of a private placement of Municipal Bonds; and
19
<PAGE>
(vi) be part of an issue with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million
(but in no event below $10 million), be issued by an issuer with a total of
at least $50 million of securities outstanding.
Notwithstanding the foregoing:
(i) Municipal Bonds of any one issuer or guarantor (excluding bond
insurers) will be considered S&P Eligible Assets only to the extent the
fair market value of such Bonds does not exceed 10% of the aggregate fair
market value of the S&P Eligible Assets, provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the fair market value
of such Municipal Bonds exceeds 5% of the aggregate fair market value of
the S&P Eligible Assets;
(ii) Municipal Bonds guaranteed or insured by any one bond insurer will
be considered S&P Eligible Assets only to the extent the fair market value
of such Municipal Bonds does not exceed 25% of the aggregate fair market
value of the S&P Eligible Assets; and
(iii) Municipal Bonds issued by issuers in any one state or territory
will be considered S&P Eligible Assets only to the extent the fair market
value of such Municipal Bonds does not exceed 20% of the aggregate fair
market value of S&P Eligible Assets.
The Fund may include Municipal Bonds as S&P Eligible Assets pursuant to
guidelines and restrictions to be established by S&P, provided that S&P
advises the Fund in writing that such action will not adversely affect its
then-current rating on the AMPS.
As discussed herein, the Fund may engage in options or futures transactions.
For so long as any shares of AMPS are rated by S&P, the Fund will not purchase
or sell financial futures contracts, write, purchase or sell options on
financial futures contracts or write put options (except covered put options)
or call options (except covered call options) on portfolio securities unless
it receives written confirmation from S&P that engaging in such transactions
will not impair the ratings then assigned to the shares of AMPS by S&P, except
that the Fund may purchase or sell financial futures contracts based on the
Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and
call options on such contracts (collectively "S&P Hedging Transactions"),
subject to the following limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions 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 the least of (A) more than
1,000 outstanding financial futures contracts based on the Municipal Index,
(B) outstanding financial futures contracts based on the Municipal Index
exceeding in number 25% of the quotient of the fair market value of the
Fund's total assets divided by $1,000 or (C) outstanding financial futures
contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded financial futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold the lesser of (A)
outstanding financial futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the fair market
value of the Fund's total assets divided by $100,000 ($200,000 in the case
of the two-year United States Treasury Note) or (B) outstanding financial
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded financial futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract that the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (A) the Fund
does not have S&P Eligible Assets with an aggregate Discounted Value equal
to or greater
20
<PAGE>
than the AMPS Basic Maintenance Amount on two consecutive Valuation Dates
and (B) the Fund is required to pay Variation Margin on the second such
Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract or option thereon in the month prior
to the delivery month under the terms of such financial futures contract or
option thereon unless the Fund holds the securities deliverable under such
terms; and
(v) when the Fund writes a financial futures contract or an option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P) fixed-income securities in a
segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in
the account of or on behalf of the Fund's broker with respect to such
financial futures contract or option equals the fair market value of the
financial futures contract or option, or, in the event the Fund writes a
financial futures contract or option thereon that requires delivery of an
underlying security, it shall hold such underlying security in its
portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin
or Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the
aggregate settlement value, as marked to market, of any outstanding financial
futures contracts based on the Municipal Index that are owned by the Fund plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding financial futures contracts based on Treasury Bonds which
contracts are owned by the Fund.
Moody's "aaa" Rating Guidelines. The Discounted Value of the Fund's Moody's
Eligible Assets is calculated on each Valuation Date. See "Description of
AMPS--Asset Maintenance--AMPS Basic Maintenance Amount." Moody's Eligible
Assets include cash, Receivables for Municipal Bonds (as defined below), and
Municipal Bonds eligible for consideration under Moody's guidelines. For
purposes of calculating the Discounted Value of the Fund's portfolio under
current Moody's guidelines, the fair market value of Municipal Bonds eligible
for consideration under such guidelines must be discounted by the applicable
Moody's Discount Factor set forth in the table below. The Discounted Value of
a Municipal Bond eligible for consideration under Moody's guidelines is the
lower of par and the quotient of the fair market value thereof divided by the
Moody's Discount Factor. The Moody's Discount Factor used to discount a
particular Municipal Bond will be determined by reference to (a) the rating by
Moody's or S&P on such Municipal Bond and (b) the Moody's Exposure Period.
Moody's Discount Factors for a range of Moody's Exposure Periods are set forth
below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
-----------------------------------------------------
MOODY'S EXPOSURE PERIOD AAA(1) AA(1) A(1) BAA(1) OTHER(2) VMIG-1(3) SP-1+(3)
----------------------- ------ ----- ---- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less......... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven
weeks.................. 154 164 173 205 235 137 149
9 weeks or less but
greater than eight
weeks.................. 158 169 179 209 242 138 150
</TABLE>
- --------
(1) Moody's rating.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Municipal Bonds rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's,
rated SP-1+ or A-1+ by S&P which do not mature or have a demand feature at
par exercisable within the Moody's Exposure Period and which do not have a
long-term rating. For the purposes of the definition of Moody's Eligible
Assets, these securities will have an assumed rating of A by Moody's.
Since the Moody's Exposure Period currently is 49 days, the Moody's Discount
Factors currently applicable to Municipal Bonds eligible for consideration
under Moody's guidelines will be determined by reference to the factors set
forth opposite the exposure period line entitled "7 weeks or less."
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be applied
to short-term Municipal Bonds so long as such Municipal Bonds are rated at
least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at
par exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Municipal Bonds will be 125%
21
<PAGE>
if such Municipal Bonds are not rated by Moody's but are rated A-1+, SP-1+ or
AA by S&P and mature or have a demand feature at par exercisable within the
Moody's Exposure Period, and (ii) no Moody's Discount Factor will be applied
to cash or to Receivables for Municipal Bonds Sold. "Receivables for Municipal
Bonds Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than the aggregate of the following: (i) the
book value of receivables for Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within five Business Days of such
Valuation Date, and if the trades which generated such receivables are (A)
settled through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (B) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of Municipal Bonds sold as of or prior to such Valuation Date
that generated receivables, if such receivables are due within five Business
Days of such Valuation Date but do not comply with either of conditions (A) or
(B) of the preceding clause (i).
The Moody's guidelines impose certain requirements as to minimum issue size,
issuer diversification and geographical concentration, as well as other
requirements for purposes of determining whether Municipal Bonds constitute
Moody's Eligible Assets, as set forth in the table below:
<TABLE>
<CAPTION>
MAXIMUM STATE
MINIMUM MAXIMUM OR TERRITORY
ISSUE SIZE UNDERLYING CONCENTRATION
RATING ($ MILLIONS) OBLIGOR (%)(1) (%)(1)(3)
------ ------------ -------------- -------------
<S> <C> <C> <C>
Aaa................................ 10 100 100
Aa................................. 10 20 60
A.................................. 10 10 40
Baa................................ 10 6 20
Other (2).......................... 10 4 12
</TABLE>
- --------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) are each limited to 10% of Moody's Eligible Assets. For
diversification purposes, Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above,
any such Municipal Bond backed by the guaranty, letter of credit or insurance
issued by a third party will be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such Municipal Bond.
Current Moody's guidelines also require that Municipal Bonds constituting
Moody's Eligible Assets pay interest in cash, be publicly rated Baa or higher
by Moody's or, if not rated by Moody's but rated by S&P, that they be rated at
least BBB- by S&P, not have suspended ratings by Moody's and be part of an
issue of Municipal Bonds of at least $10,000,000. For purposes of determining
the Moody's Discount Factors applicable to any such S&P-rated Municipal Bonds,
such Municipal Bonds (excluding any short-term Municipal Bonds) will be deemed
to have a Moody's rating that is one full rating category lower than its S&P
rating. When the Fund sells a Municipal Bond and agrees to repurchase it at a
future date, the Discounted Value of such Municipal Bond will constitute a
Moody's Eligible Asset and the amount the Fund is required to pay upon
repurchase of such bond will count as a liability for purposes of calculating
the AMPS Basic Maintenance Amount. When the Fund purchases a Municipal Bond
and agrees to sell it at a future date to another party, cash receivable by
the Fund thereby will constitute a Moody's Eligible Asset if the long-term
debt of such other party is rated at least A2 by Moody's and such agreement
has a term of 30 days or less; otherwise the Discounted Value of such
Municipal Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Fund for the payment of
dividends or redemption.
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For so long as shares of AMPS are rated by Moody's, in managing the Fund's
portfolio, the Investment Adviser will not alter the composition of the Fund's
portfolio if, in the reasonable belief of the Investment Adviser, the effect
of any such alteration would be to cause the Fund to have Moody's Eligible
Assets with an aggregate Discounted Value, as of the immediately preceding
Valuation Date, less than the AMPS Basic Maintenance Amount as of such
Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of
Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount by five
percent or less, the Investment Adviser will not alter the composition of the
Fund's portfolio in a manner reasonably expected to reduce the aggregate
Discounted Value of Moody's Eligible Assets unless the Fund shall have
confirmed that, after giving effect to such alteration, the aggregate
Discounted Value of Moody's Eligible Assets would exceed the AMPS Basic
Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
buy or sell financial futures contracts, write, purchase or sell call options
on financial futures contracts or purchase put options on financial futures
contracts or write call options (except covered call options) on portfolio
securities unless it receives written confirmation from Moody's that engaging
in such transactions would not impair the ratings then assigned to the shares
of AMPS by Moody's, except that the Fund may purchase or sell exchange-traded
financial futures contracts based on the Municipal Index or Treasury Bonds,
and purchase, write or sell exchange-traded put options on such financial
futures contracts, and purchase, write or sell exchange-traded call options on
such financial futures contracts (collectively "Moody's Hedging
Transactions"), subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction based on
the Municipal Index (other than Closing Transactions) that would cause the
Fund at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded financial futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal or (B)
outstanding financial futures contracts based on the Municipal Index having
a fair market value exceeding the fair market value of all Municipal Bonds
constituting Moody's Eligible Assets owned by the Fund (other than Moody's
Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on Treasury Bonds having an aggregate
fair market value exceeding 40% of the aggregate fair market value of
Moody's Eligible Assets owned by the Fund and rated Aa by Moody's (or, if
not rated by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding
financial futures contracts based on Treasury Bonds having an aggregate
fair market value exceeding 80% of the aggregate fair market value of all
Municipal Bonds constituting Moody's Eligible Assets owned by the Fund
(other than Moody's Eligible Assets already subject to a Moody's Hedging
Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's but
rated by S&P, rated A or AA by S&P) (for purposes of the foregoing clauses
(i) and (ii), the Fund shall be deemed to own the number of financial
futures contracts that underlie any outstanding options written by the
Fund);
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
Street Journal is less than 5,000;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a financial
futures contract by no later than the first Business Day of the month in
which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only with
respect to financial futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Fund will not engage in options and futures transactions for
leveraging or speculative purposes and will not write any call options or
sell any financial futures contracts for the purpose of hedging the
anticipated purchase of an asset prior to completion of such purchase; and
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<PAGE>
(vii) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the
Fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Fund that are either exchange-traded and "readily reversible"
or that expire within 49 days after the date as of which such valuation is
made shall be valued at the lesser of (A) Discounted Value and (B) the
exercise price of the call option written by the Fund; (ii) assets subject to
call options written by the Fund not meeting the requirements of clause (i) of
this sentence shall have no value; (iii) assets subject to put options written
by the Fund shall be valued at the lesser of (A) the exercise price and (B)
the Discounted Value of the subject security; (iv) futures contracts shall be
valued at the lesser of (A) settlement price and (B) the Discounted Value of
the subject security, provided that, if a contract matures within 49 days
after the date as of which such valuation is made, where the Fund is the
seller the contract may be valued at the settlement price and where the Fund
is the buyer the contract may be valued at the Discounted Value of the subject
securities; and (v) where delivery may be made to the Fund with any security
of a class of securities, the Fund shall assume that it will take delivery of
the security with the lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(i) 10% of the exercise price of a written call option; (ii) the exercise
price of any written put option; (iii) where the Fund is the seller under a
financial futures contract, 10% of the settlement price of the financial
futures contract; (iv) where the Fund is the purchaser under a financial
futures contract, the settlement price of assets purchased under such
financial futures contract; (v) the settlement price of the underlying
financial futures contract if the Fund writes put options on a financial
futures contract; and (vi) 105% of the fair market value of the underlying
financial futures contracts if the Fund writes call options on a financial
futures contract and does not own the underlying contract.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions), except that the Fund may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short term, fixed-income securities rated P-1,
MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a fair market value that equals or exceeds the amount of
the Fund's obligations under any Forward Commitments to which it is from
time to time a party or long-term, fixed income securities with a
Discounted Value that equals or exceeds the amount of the Fund's
obligations under any Forward Commitment to which it is from time to time a
party, and
(ii) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which
the Fund is a party and of all securities deliverable to the Fund pursuant to
such Forward Commitments shall be zero.
For so long as shares of AMPS are rated by S&P or Moody's, the Fund, unless
it has received written confirmation from S&P and/or Moody's, as the case may
be, that such action would not impair the ratings then
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<PAGE>
assigned to the AMPS by S&P and/or Moody's, as the case may be, will not (i)
borrow money except for the purpose of clearing transactions in portfolio
securities (which borrowings under any circumstances shall be limited to the
lesser of $10 million and an amount equal to 5% of the fair market value of
the Fund's assets at the time of such borrowings and which borrowings shall be
repaid within 60 days and not be extended or renewed and shall not cause the
aggregate Discounted Value of Moody's Eligible Assets and S&P Eligible Assets
to be less than the AMPS Basic Maintenance Amount), (ii) engage in short sales
of securities, (iii) lend any securities, (iv) issue any class or series of
stock ranking prior to or on a parity with the AMPS with respect to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, (v) reissue any AMPS previously
purchased or redeemed by the Fund, (vi) merge or consolidate into or with any
other corporation or entity, (vii) change the Fund's pricing service or (vii)
engage in reverse repurchase agreements.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts and options thereon. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of Common Stock, the net asset value of the Common Stock will fluctuate. There
can be no assurance that the Fund's hedging transactions will be effective.
For so long as the AMPS are rated by Moody's and S&P, the Fund's use of
options and financial futures contracts will be subject to the limitations
described under "Investment Objective and Policies--Rating Agency Guidelines."
Furthermore, the Fund will only engage in hedging activities from time to time
and may not necessarily be engaging in hedging activities when movements in
interest rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains derived from transactions in options and
futures contracts and distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to
shareholders. See "Taxes--Tax Treatment of Options and Futures Transactions."
In addition, in order to obtain ratings of the Preferred Stock from one or
more nationally recognized statistical rating organizations, the Fund may be
required to limit its use of hedging techniques in accordance with the
specified guidelines of such rating organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and
risks associated therewith. The investment policies with respect to the
hedging transactions of the Fund are not fundamental policies and may be
modified by the Board of Directors of the Fund without the approval of the
Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Municipal Bonds it owns, thereby giving the holder of
the option the right to buy the underlying security covered by the option from
the Fund at the stated exercise price until the option expires. The Fund
writes only covered call options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the option. The Fund may not write covered call options
on underlying securities in an amount exceeding 15% of the market value of its
total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid
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for the put option and any related transaction costs. Prior to its expiration,
a put option may be sold in a closing sale transaction; profit or loss from
the sale will depend on whether the amount received is more or less than the
premium paid for the put option plus the related transaction costs. A closing
sale transaction cancels out the Fund's position as the purchaser of an option
by means of an offsetting sale of an identical option prior to the expiration
of the option it has purchased. In certain circumstances, the Fund may
purchase call options on securities held in its portfolio on which it has
written call options or on securities that it intends to purchase. The Fund
will not purchase options on securities if, as a result of such purchase, the
aggregate cost of all outstanding options on securities held by the Fund would
exceed 5% of the market value of the Fund's total assets.
Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in Municipal Bonds against declines in
value and hedging against increases in the cost of securities it intends to
purchase. A financial futures contract obligates the seller of a contract to
deliver and the purchaser of a contract to take delivery of the type of
financial instrument covered by the contract or, in the case of index-based
financial futures contracts, to make and accept a cash settlement, at a
specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts. A
purchase of financial futures contracts may provide a hedge against an
increase in the cost of securities intended to be purchased because such
appreciation may be offset, in whole or in part, by an increase in the value
of the position in the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or
received. Instead, an amount of cash or securities acceptable to the broker
equal to approximately 5% of the contract amount must be deposited with the
broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the
price of the financial futures contract fluctuates making the long and short
positions in the financial futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging Municipal Bonds which
the Fund holds or anticipates purchasing against adverse changes in interest
rates. The Fund also may purchase and sell financial futures contracts on U.S.
Government securities and purchase and sell put and call options on such
financial futures contracts for such hedging purposes. With respect to U.S.
Government securities, currently there are financial futures contracts based
on long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts and options, such
as financial futures contracts and options on other municipal bond indices
that may become available, if the Investment Adviser should determine that
there is normally sufficient correlation between the prices of such financial
futures contracts and the Municipal Bonds in which the Fund invests to make
such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC option transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having
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<PAGE>
capital of at least $50 million. Certain OTC options and assets used to cover
OTC options written by the Fund may be considered to be illiquid. The
illiquidity of such options or assets may prevent a successful sale of such
options or assets, result in a delay of sale, or reduce the amount of proceeds
that might otherwise be realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security which is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss which will not
be completely offset by movements in the price of such security. There is a
risk of imperfect correlation where the securities underlying financial
futures contracts have different maturities, ratings, geographic compositions
or other characteristics than the security being hedged. In addition, the
correlation may be affected by additions to or deletions from the index that
serves as a basis for a financial futures contract. Finally, in the case of
financial futures contracts on U.S. Government securities and options on such
financial futures contracts, the anticipated correlation of price movements
between the U.S. Government securities underlying the futures or options and
Municipal Bonds may be adversely affected by economic, political, legislative
or other developments which have a disparate impact on the respective markets
for such securities.
Under regulations of the Commodity Futures Trading Commission (the "CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell financial futures contracts and options thereon (i) for bona
fide hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes do not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
short-term, high-grade, fixed-income securities in a segregated account with
the Fund's custodian so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker equals the
market value of the financial futures contract, thereby ensuring that the use
of such financial futures contract is unleveraged.
Although certain risks are involved in options and futures transactions, the
Investment Adviser believes that, because the Fund will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The Fund may be restricted in engaging in options and futures transactions due
to the Federal tax requirement that less than 30% of its gross income in each
taxable year be derived from the sale or other disposition of securities held
for less than three months. See "Taxes--Tax Treatment of Options and Futures
Transactions."
The volume of trading in the exchange markets with respect to Municipal Bond
options may be limited, and it is impossible to predict the amount of trading
interest that may exist in such options. In addition, there can be no
assurance that viable exchange markets will continue to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
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<PAGE>
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges which limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past reached or exceeded the daily limit on a number of
consecutive trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaging in hedging transactions
when movements in interest rates occur.
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of this Prospectus.
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; provided, however, that prior
to any Auction, the Fund may elect, subject to certain limitations described
herein, upon giving notice to holders thereof, a Special Dividend Period. The
Applicable Rate for a particular Dividend Period will be determined by an
Auction conducted on the Business Day before the start of such Dividend
Period. Beneficial Owners and Potential Beneficial Owners of shares of AMPS
may participate in Auctions therefor, although, except in the case of a
Special Dividend Period, Beneficial Owners desiring to continue to hold all of
their shares of AMPS regardless of the Applicable Rate resulting from Auctions
need not participate. For an explanation of Auctions and the method of
determining the Applicable Rate, see "Description of AMPS--The Auction."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of AMPS of each series 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.
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When issued and sold, the shares of AMPS will have a liquidation preference
of $25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) and will be fully paid and non-assessable.
See "Description of AMPS--Liquidation Rights." The shares of AMPS will not be
convertible into shares of Common Stock or other capital stock of the Fund,
and the holders thereof will have no preemptive rights. The shares of AMPS of
each series 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 herein. See "Description of AMPS--Redemption."
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, IBJ Schroder Bank & Trust Company will be the
transfer agent, registrar, dividend disbursing agent and redemption agent for
the shares of AMPS. The Auction Agent, however, will serve merely as the agent
of the Fund, acting in accordance with the Fund's instructions, and will not
be responsible for any evaluation or verification of any matters certified to
it.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any shares of AMPS so long
as the Fund is current in the payment of dividends on AMPS and on any other
capital stock of the Fund ranking on a parity with the AMPS with respect to
the payment of dividends or upon liquidation.
The following is a brief description of the terms of the shares of AMPS.
This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the Fund's Charter and Articles
Supplementary, including the provisions thereof establishing the AMPS. The
Fund's Charter and the form of Articles Supplementary establishing the terms
of the AMPS have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
THE AUCTION
General. Holders of the shares of AMPS of each series will be entitled to
receive cumulative cash dividends on their shares when, as and if declared by
the Board of Directors of the Fund, out of funds legally available therefor,
on the Initial Dividend Payment Date with respect to the Initial Dividend
Period and, thereafter, on each Dividend Payment Date with respect to a
Subsequent Dividend Period (generally a period of seven days subject to
certain exceptions set forth under "Description of AMPS--Dividends--General")
at the rate per annum equal to the Applicable Rate for each such Dividend
Period.
The provisions of the Articles Supplementary establishing the terms of the
shares of AMPS offered hereby will provide that the Applicable Rate for each
series of AMPS for each Dividend Period after the Initial Dividend Period
therefor will be equal to the rate per annum that the Auction Agent advises
has resulted on the Business Day preceding the first day of such Dividend
Period due to implementation of the auction procedures set forth in the
Articles Supplementary (the "Auction Procedures") in which persons determine
to hold or offer to purchase or sell shares of AMPS of such series. The
Auction Procedures are attached as Appendix C to this Prospectus. Each
periodic operation of such procedures with respect to the shares of AMPS is
referred to hereinafter as an "Auction." If, however, the Fund should fail to
pay or duly provide for the full amount of any dividend on shares of AMPS of
any series or the redemption price of shares of AMPS of such series called for
redemption, the Applicable Rate for shares of AMPS will be determined as set
forth under "Description of AMPS--Dividends--Determination of Dividend Rate."
Auction Agent Agreement. The Fund will enter into an agreement (the "Auction
Agent Agreement") with IBJ Schroder Bank & Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with this Fund, the "Auction Agent"), which provides, among other
things, that the Auction Agent will follow the Auction Procedures for the
purpose of determining the Applicable Rate for the AMPS. The Fund will pay the
Auction Agent compensation for its services under the Auction Agent Agreement.
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<PAGE>
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. The Auction Agent will enter into agreements with Merrill
Lynch, Goldman, Sachs & Co. and Lehman Special Securities Incorporated 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, ML & Co. A Broker-Dealer Agreement may be
terminated by the Auction Agent or a Broker-Dealer on five days' notice to the
other party, provided that the Broker-Dealer Agreement with Merrill Lynch may
not be terminated without the prior written consent of the Fund, which consent
may not be unreasonably withheld.
Securities Depository. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the shares of
AMPS of each series. One or more registered certificates for all of the shares
of 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. See
Appendix C (Auction Procedures). The Securities Depository will maintain lists
of its participants and will maintain the positions (ownership interests) of
shares of AMPS held by each Agent Member, whether as the Beneficial Owner
thereof for its own account or as nominee for the Beneficial Owner thereof.
Payments made by the Fund to holders of AMPS will be duly made by making
payments to the nominee of the Securities Depository.
Auction Procedures. The following is a brief summary of the procedures to be
used in conducting Auctions. Separate auctions will be conducted for each
series of AMPS. Accordingly, as used in the following brief summary, unless
the context otherwise requires, "AMPS" means the series of AMPS subject to the
related Auction and "Beneficial Owners," "Potential Beneficial Owners,"
"Existing Holders" and "Potential Holders" mean Beneficial Owners, Potential
Beneficial Owners, Existing Holders and Potential Holders of such series,
respectively. This summary is qualified by reference to the Auction procedures
set forth in Appendix C hereto. The Settlement Procedures to be used with
respect to Auctions are set forth in Appendix B hereto.
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends. An Auction to determine the Applicable Rate for
each series of AMPS offered hereby for each Dividend Period for such series
(other than the Initial Dividend Period therefor) will be held on the first
Business Day (as hereinafter defined) preceding the first day of such Dividend
Period, which first day is also the Dividend Payment Date for the preceding
Dividend Period (the date of each Auction being referred to herein as an
"Auction Date"). "Business Day" means a day on which the New York Stock
Exchange is open for trading and which is not a Saturday, Sunday or other day
on which banks in The City of New York are authorized or obligated by law to
close. Auctions for shares of Series A AMPS for Dividend Periods after the
Initial Dividend
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<PAGE>
Period normally will be held every Tuesday after the preceding Dividend
Payment Date, and each subsequent Dividend Period normally will begin on the
following Wednesday (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 Thursday after the preceding Dividend Payment Date, and
each subsequent Dividend Period normally will begin on the following Friday
(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 Tuesday that
normally would be an Auction Date for Series A AMPS is not a Business Day,
then such Auction Date will be the preceding Monday and the first day of the
related Dividend Period will continue to be the following Wednesday. See
"Description of AMPS--Dividends" for information concerning the circumstances
under which a Dividend Payment Date may fall on a date other than the days
specified above, which may affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net capital
gains or other income subject to regular Federal income taxes in any dividend
on shares of AMPS, the Fund will notify the Auction Agent of the amount to be
so included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, in turn it will notify each Broker-
Dealer, who, on or prior to such Auction Date, in accordance with its Broker-
Dealer Agreement, will notify its customers who are Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order
in the Auction to be held on such Auction Date. The Fund also may include such
income in a dividend on shares of AMPS without giving advance notice thereof
if it increases the dividend by an additional amount calculated as if such
income were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend; provided that the Fund will notify the Auction Agent of
the additional amounts to be included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. See "Description of AMPS--
Dividends--Additional Dividends."
Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) Hold Order--indicating the number of outstanding shares, if any,
of AMPS that such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for the next Dividend Period for such
shares;
(ii) Bid--indicating the number of outstanding shares, if any, of
AMPS that such Beneficial Owner desires to continue to hold, provided
that the Applicable Rate for the next Dividend Period for such shares
is not less than the rate per annum then specified by such Beneficial
Owner; and/or
(iii) Sell Order--indicating the number of outstanding shares, if
any, of AMPS that such Beneficial Owner offers to sell without regard
to the Applicable Rate for the next Dividend Period for such shares;
and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of shares of AMPS to determine whether such Potential Beneficial
Owners desire to submit Bids indicating the number of shares of AMPS which
they offer to purchase provided that the Applicable Rate for the next
Dividend Period for such shares is not less than the rates per annum
specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted
by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or
by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on
any Auction Date shall be irrevocable.
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<PAGE>
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to shares of AMPS then held by such Beneficial Owner, as well as Bids
for additional shares of AMPS. For information concerning the priority given
to different types of Orders placed by Beneficial Owners, see "Submission of
Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent.
The Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) and (ii)
whether the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
CREDIT RATINGS PERCENTAGE OF PERCENTAGE OF
----------------------------------- REFERENCE RATE-- REFERENCE RATE--
MOODY'S S&P NO NOTIFICATION NOTIFICATION
---------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend Period.
The Fund will take all reasonable action necessary to enable S&P and Moody's
to provide a rating for the AMPS. If either S&P or Moody's shall not make such
a rating available, or neither S&P nor Moody's shall make such a rating
available, the Underwriter or its affiliates and successors, after
consultation with the Fund, will select another nationally recognized
statistical rating organization (a "Substitute Rating Agency") or two other
nationally recognized statistical rating organizations ("Substitute Rating
Agencies") to act as a Substitute Rating Agency or Substitute Rating Agencies,
as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
Neither the Fund nor the Auction Agent will be responsible for a Broker-
Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a Beneficial Owner.
A Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial
Owner or a Potential Beneficial Owner and therefore participate in an Auction
as an Existing Holder or Potential Holder on behalf of both itself and its
customers. Any Order placed with the Auction Agent by a Broker-Dealer as or on
behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated
in the same manner as an Order placed with a Broker-Dealer by a Beneficial
Owner or a Potential Beneficial Owner. Similarly, any failure by a Broker-
Dealer to submit to the Auction Agent an Order in respect of any AMPS held by
it or its customers who are Beneficial Owners will be
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<PAGE>
treated in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of AMPS held by it, as described in the next
paragraph. Inasmuch as a Broker-Dealer participates in an Auction as an
Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying
beneficial ownership interests represented thereby. For information concerning
the priority given to different types of Orders placed by Existing Holders,
see "Submission of Orders by Broker-Dealers to Auction Agent." Each purchase
or sale in an Auction will be settled on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding
shares of AMPS held by a Beneficial Owner are not submitted to the Auction
Agent prior to the Submission Deadline, either because a Broker-Dealer failed
to contact such Beneficial Owner or otherwise, the Auction Agent shall deem a
Hold Order (in the case of an Auction relating to a Dividend Period which is
not Special Dividend Period) and a Sell Order (in the case of an Auction
relating to a Special Dividend Period) to have been submitted on behalf of
such Beneficial Owner covering the number of outstanding shares of AMPS held
by such Beneficial Owner and not subject to Orders submitted to the Auction
Agent.
If all of the outstanding shares of AMPS are subject to Submitted Hold
Orders, the Dividend Period next succeeding the Auction automatically shall be
the same length as the immediately preceding Dividend Period, and the
Applicable Rate for the next Dividend Period for all shares of AMPS will be
40% of the Reference Rate on the date of the applicable Auction (or 60% of
such rate if the Fund has provided notification to the Auction Agent prior to
the Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS).
For the purposes of an Auction, shares of AMPS for which the Fund shall have
given notice of redemption and deposited moneys therefor with the Auction
Agent in trust 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," will not be considered as outstanding and will not be included in
such Auction. Pursuant to the Articles Supplementary of the Fund, the Fund
will be prohibited from reissuing and its affiliates (other than the
Underwriter) will be prohibited from transferring (other than to the Fund) any
shares of AMPS they may acquire. Neither the Fund nor any affiliate of the
Fund (other than the Underwriter) may submit an Order in any Auction, except
that an affiliate of the Fund that is a Broker-Dealer may submit an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00 p.m.,
New York City time, on each Auction Date, or such other time on the Auction
Date as may be specified by the Auction Agent (the "Submission Deadline"),
each Broker-Dealer will submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Fund) as the Existing
Holder or Potential Holder in respect of the shares of AMPS subject to such
Orders. Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the
number of outstanding shares of AMPS held by such Existing Holder, provided
that if more than one Hold Order is submitted by such Existing Holder and
the number of shares of AMPS subject to such Hold Orders exceeds the number
of outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each
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<PAGE>
of such Hold Orders will be reduced pro rata so that such Hold Orders, in
the aggregate, will cover exactly the number of outstanding shares of AMPS
held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the number of
outstanding shares of AMPS subject to any Hold Order referred to in clause
(i) above (and if more than one Bid submitted by such Existing Holder
specifies the same rate per annum and together they cover more than the
remaining number of shares that can be the subject of valid Bids after
application of clause (i) above and of the foregoing portion of this clause
(ii) to any Bid or Bids specifying a lower rate or rates per annum, the
number of shares subject to each of such Bids will be reduced pro rata so
that such Bids, in the aggregate, cover exactly such remaining number of
outstanding shares); and the number of outstanding shares, if any, subject
to Bids not valid under this clause (ii) shall be treated as the subject of
a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the sum of the number of shares of AMPS subject to Hold Orders
referred to in clause (i) above and the number of shares of AMPS subject to
valid Bids by such Existing Holder referred to in clause (ii) above;
provided that, if more than one Sell Order is submitted by any Existing
Holder and the number of shares of AMPS subject to such Sell Orders is
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 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, 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.
34
<PAGE>
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.
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.
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<PAGE>
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related shares of AMPS by
telephone at approximately 3:00 P.M., New York City time, on the Auction Date
for such Auction. Each such Broker-Dealer that submitted an Order for the
account of a customer then will advise such customer whether such Bid or Sell
Order was accepted or rejected, will confirm purchases and sales with each
customer purchasing or selling shares of AMPS as a result of the Auction and
will advise each customer purchasing or selling shares of AMPS to give
instructions to its Agent Member of the Securities Depository to pay the
purchase price against delivery of such shares or to deliver such shares
against payment therefor as appropriate. If a customer selling shares of AMPS
as a result of an Auction shall fail to instruct its Agent Member to deliver
such shares, the Broker-Dealer that submitted such customer's Bid or Sell
Order will instruct such Agent Member to deliver such shares against payment
therefor. Each Broker-Dealer that submitted a Hold Order in an Auction on
behalf of a customer also will advise such customer of the Applicable Rate for
the next Dividend Period for the AMPS. The Auction Agent will record each
transfer of shares of AMPS on the record book of Existing Holders to be
maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the day
after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of shares of AMPS as determined in such
Auction. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment in same-day funds. If the
procedures of the Securities Depository applicable to AMPS shall be changed to
provide for payment in next-day funds, then purchasers may be required to make
payment in next-day funds. If the certificates for shares of AMPS are not held
by the Securities Depository or its nominee, payment will be made in same-day
funds to the Auction Agent against delivery of such certificates.
If any Existing Holder selling shares of AMPS in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased shares
of AMPS in such Auction may deliver to such person a number of whole shares of
AMPS that is less than the number of shares that otherwise was to be purchased
by such person. In such event, the number of shares of AMPS to be so delivered
will be determined by such Broker-Dealer. Delivery of such lesser number of
shares will constitute good delivery. Each Broker-Dealer Agreement also will
provide that neither the Fund nor the Auction Agent will have responsibility
or liability with respect to the failure of a Potential Beneficial Owner,
Beneficial Owner or their respective Agent Members to deliver shares of AMPS
or to pay for shares of AMPS purchased or sold pursuant to an Auction or
otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Fund to each Broker-Dealer on the basis of the purchase price
of shares of AMPS placed by such Broker-Dealer at such Auction. The service
charge (i) for any 7-Day Dividend Period 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.
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<PAGE>
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders
in Auctions for its own account, unless the Fund notifies all Broker-Dealers
that they no longer may do so; provided that Broker-Dealers may continue to
submit Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for
its own account in any Auction of any series of AMPS, it may have knowledge of
Orders placed through it in that Auction and therefore have an advantage over
other Bidders, but such Broker-Dealer would not have knowledge of Orders
submitted by other Broker-Dealers in that Auction.
The Broker-Dealers intend to maintain a secondary trading market in the AMPS
outside of Auctions; however, they have no obligation to do so and there can
be no assurance that a secondary market for the AMPS will develop or, if it
does develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the
trade by the Broker-Dealers). The AMPS will not be registered on any stock
exchange or on 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.
DIVIDENDS
General. The holders of shares of each series of AMPS will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund, out
of funds legally available therefor, cumulative cash dividends on their
shares, at the Applicable Rate determined as set forth below under
"Determination of Dividend Rate," payable on the respective dates set forth
below. Dividends on the shares of AMPS so declared and payable shall be paid
(i) in preference to and in priority over any dividends so declared and
payable on the Common Stock, and (ii) to the extent permitted under the Code
and to the extent available, out of net tax-exempt income earned on the Fund's
investments. To the extent permitted under the Code, dividends on shares of
AMPS, to the extent that they are derived from Municipal Bonds, will be exempt
from Federal income taxes, subject to possible application of the alternative
minimum tax. See "Taxes."
Dividends on the shares of AMPS will accumulate from the date on which the
Fund originally issues the shares of AMPS (the "Date of Original Issue") and
will be payable on each series of AMPS on the dates described below. Dividends
on shares of each series of AMPS with respect to the Initial Dividend Period
shall be payable on the Initial Dividend Payment Date with respect to each
series of AMPS. Following the Initial Dividend Payment Date for each series of
AMPS, dividends on each series of AMPS will be payable, at the option of the
Fund, either (i) with respect to any 7-Day Dividend Period and any Short Term
Dividend Period of 35 or fewer days, on the day next succeeding the last day
thereof or (ii) with respect to any Short Term Dividend Period of more than 35
days and with respect to any Long Term Dividend Period, monthly on the first
Business Day of each calendar month during such Short Term Dividend Period or
Long Term Dividend Period and on the day next succeeding the last day thereof
(each such date referred to in clause (i) or (ii) being referred to herein as
a "Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, (i) the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date if such Normal
Dividend Payment Date is a Monday, Tuesday, Wednesday or Thursday, or (ii) the
Dividend Payment Date shall be the first Business Day next preceding such
Normal Dividend Payment Date if such Normal Dividend Payment Date is a Friday.
Thus, following the Initial Dividend Payment Date for each series of AMPS,
dividends generally will be payable (in the case of Dividend Periods which are
not Special Dividend Periods) on each succeeding Wednesday in the case of
Series A AMPS and on each succeeding Friday in the case of Series B 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 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 and Special Dividend Periods are
hereinafter sometimes referred to as
37
<PAGE>
"Dividend Periods." Each dividend payment date determined as provided above is
hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which holder is
expected to be the nominee of the Securities Depository. See "Description of
AMPS--The Auction--Securities Depository." The Securities Depository will
credit the accounts of the Agent Members of the Existing Holders in accordance
with the Securities Depository's normal procedures which 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 series.
Holders of shares of AMPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described under "Additional Dividends" and "Non-Payment Period; Late
Charge" below. No interest will be payable in respect of any dividend payment
or payments on the shares of AMPS which may be in arrears.
The amount of cash dividends per share of any series of AMPS payable (if
declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period 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), evenly divisible by seven, and not fewer than
seven nor more than 364 in the case of a Short Term Dividend Period or one
whole year or more but not greater than five years in the case of a Long Term
Dividend Period, specified in such notice, provided that the Fund may not give
a Request for Special Dividend Period (and any such request shall be null and
void) unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends, any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more
than seven Business Days prior to an Auction Date for the AMPS and, in the
case of a Long Term Dividend Period, shall be given on or prior to the second
Business Day but not more than 28 days prior to an Auction Date for the AMPS.
Upon receiving such Request for Special Dividend Period, the Broker-Dealers
jointly shall determine whether, given the factors set forth below, it is
advisable that the Fund issue a Notice of Special Dividend Period for a series
of AMPS as contemplated by such Request for Special Dividend Period and the
Optional Redemption Price of the AMPS during such Special Dividend Period and
the Specific Redemption
38
<PAGE>
Provisions and shall give the Fund and the Auction Agent written notice (a
"Response") of such determination by no later than the second Business Day
prior to such Auction Date. In making such determination, the Broker-Dealers
will consider (i) existing short-term and long-term market rates and indices
of such short-term and long-term rates, (ii) existing market supply and demand
for short-term and long-term securities, (iii) existing yield curves for
short-term and long-term securities comparable to the AMPS, (iv) industry and
financial conditions which may affect the AMPS, (v) the investment objective
of the Fund and (vi) the Dividend Periods and dividend rates at which current
and potential beneficial holders of the AMPS would remain or become beneficial
holders. If the Broker-Dealers shall not give the Fund and the Auction Agent a
Response by such second Business Day or if the Response states that given the
factors set forth above it is not advisable that the Fund give a Notice of
Special Dividend Period for the AMPS, the Fund may not give a Notice of
Special Dividend Period in respect of such Request for Special Dividend
Period. In the event the Response indicates that it is advisable that the Fund
give a Notice of Special Dividend Period for the AMPS, the Fund, by no later
than the second Business Day prior to such Auction Date, may give a notice (a
"Notice of Special Dividend Period") to the Auction Agent, the Securities
Depository and each Broker-Dealer, which notice will specify (i) the duration
of the Special Dividend Period, (ii) the Optional Redemption Price as
specified in the related Response and (iii) the Specific Redemption
Provisions, if any, as specified in the related Response. The Fund also shall
provide a copy of such Notice of Special Dividend Period to Moody's and S&P.
The Fund shall not give a Notice of Special Dividend Period, and, if such
Notice of Special Dividend Period shall have been given already, shall give
telephonic and written notice of its revocation (a "Notice of Revocation") to
the Auction Agent, each Broker-Dealer, and the Securities Depository on or
prior to the Business Day prior to the relevant Auction Date if (x) either the
1940 Act AMPS Asset Coverage is not satisfied or the Fund shall fail to
maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value at least equal to the AMPS Basic Maintenance
Amount, in each case on each of the two Valuation Dates immediately preceding
the Business Day prior to the relevant Auction Date on an actual basis and on
a pro forma basis giving effect to the proposed Special Dividend Period (using
as a pro forma dividend rate with respect to such Special Dividend Period the
dividend rate which the Broker-Dealers shall advise the Fund is an
approximately equal rate for securities similar to the AMPS with an equal
dividend period), provided that, in calculating the aggregate Discounted Value
of Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall
be deemed to be one week longer, (y) sufficient funds for the payment of
dividends payable on the immediately succeeding Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the close of business on
the third Business Day preceding the related Auction Date or (z) the Broker-
Dealers jointly advise the Fund that, after consideration of the factors
listed above, they have concluded that it is advisable to give a Notice of
Revocation. The Fund also shall provide a copy of such Notice of Revocation to
Moody's and S&P. If the Fund is prohibited from giving a Notice of Special
Dividend Period as a result of the factors enumerated in clause (x), (y) or
(z) above or if the Fund gives a Notice of Revocation with respect to a Notice
of Special Dividend Period, the next succeeding Dividend Period for that
series will be a 7-Day 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,
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.
Determination of Dividend Rate. The dividend rate on shares of each series
of 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 for
each series of AMPS (the "Initial Dividend Period") will be the rate per annum
set forth on the inside cover page hereof. Commencing on the Initial Dividend
Payment Date for each series of AMPS, the Applicable Rate on the shares of
such series of AMPS for each Subsequent Dividend Period, which Subsequent
Dividend Period shall be a period commencing on and including a Dividend
Payment Date and ending on and including the calendar day prior to the next
Dividend Payment Date (or last Dividend Payment Date in a Dividend Period if
there is more than one Dividend Payment Date), shall be equal to the rate per
annum that results from the Auction with respect to such Subsequent Dividend
Period. The Initial Dividend Period and Subsequent Dividend Period for each
series of AMPS is referred to herein as a "Dividend Period." Cash dividends
shall be calculated as set forth above under "Dividends--General."
39
<PAGE>
Non-Payment Period; Late Charge. A Non-Payment Period will commence if the
Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
New York City time, on the Business Day preceding such Dividend Payment Date,
the full amount of any dividend on shares of AMPS payable on such Dividend
Payment Date or (ii) deposit, irrevocably in trust, in same-day funds, with
the Auction Agent by 12:00 noon, New York City time, (A) on such Dividend
Payment Date the full amount of any cash dividend on such shares (if declared)
payable on such Dividend Payment Date or (B) on any redemption date for shares
of AMPS called for redemption, the Mandatory Redemption Price per share of
such AMPS or, in the case of an optional redemption, the Optional Redemption
Price per share. Such Non-Payment Period will consist of the period commencing
on and including the aforementioned Dividend Payment Date or redemption date,
as the case may be, and ending on and including the Business Day on which, by
12:00 noon, New York City time, all unpaid cash dividends and unpaid
redemption prices shall have been so deposited or otherwise shall have been
made available to the applicable holders in same-day funds, provided that a
Non-Payment Period for any series of AMPS will not end unless the Fund shall
have given at least five days' but no more than 30 days' written notice of
such deposit or availability to the Auction Agent, the Securities Depository
and all holders of shares of AMPS of such series. Notwithstanding the
foregoing, the failure by the Fund to deposit funds as provided for by clauses
(ii) (A) or (ii) (B) above within three Business Days after any Dividend
Payment Date or redemption date, as the case may be, in each case to the
extent contemplated below, shall not constitute a "Non-Payment Period." The
Applicable Rate for each Dividend Period for shares of AMPS of any series,
commencing during a Non-Payment Period, will be equal to the Non-Payment
Period Rate; and each Dividend Period commencing after the first day of, and
during, a Non-Payment Period shall be a 7-Day Dividend Period. Any dividend on
shares of AMPS due on any Dividend Payment Date for such shares (if, prior to
the close of business on the second Business Day preceding such Dividend
Payment Date, the Fund has declared such dividend payable on such Dividend
Payment Date to the persons who held such shares as of 12:00 noon, New York
City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to such shares not paid to such persons when due
may be paid to such persons in the same form of funds by 12:00 noon, New York
City time, on any of the first three Business Days after such Dividend Payment
Date or due date, as the case may be, provided that such amount is accompanied
by a late charge calculated for such period of non-payment at the Non-Payment
Period Rate applied to the amount of such non-payment based on the actual
number of days comprising such period divided by 365. In the case of a willful
failure of the Fund to pay a dividend on a Dividend Payment Date or to redeem
any shares of AMPS on the date set for such redemption, the preceding sentence
shall not apply and the Applicable Rate for the Dividend Period commencing
during the Non-Payment Period resulting from such failure shall be the Non-
Payment Period Rate. For the purposes of the foregoing, payment to a person in
same-day funds on any Business Day at any time will be considered equivalent
to payment to that person in New York Clearing House (next-day) funds at the
same time on the preceding Business Day, and any payment made after 12:00
noon, New York City time, on any Business Day shall be considered to have been
made instead in the same form of funds and to the same person before 12:00
noon, New York City time, on the next Business Day. The Non-Payment Period
Rate initially will be 200% of the applicable Reference Rate (or 275% of such
rate if the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS), provided that the Board of Directors of the Fund shall have the
authority to adjust, modify, alter or change from time to time the initial
Non-Payment Period Rate if the Board of Directors of the Fund determines and
Moody's and S&P (and any Substitute Rating Agency in lieu of Moody's or S&P in
the event either of such parties shall not rate the AMPS) advise the Fund in
writing that such adjustment, modification, alteration or change will not
adversely affect their then-current ratings on the AMPS.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on shares of Common
Stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, as applicable (and after giving effect thereto),
asset coverage (as defined in the 1940 Act) with respect to the outstanding
shares of AMPS would be less than 200% (or such other percentage as in the
future may be required by law). The Fund estimates that, based on the
composition of its portfolio at
40
<PAGE>
May 15, 1997, asset coverage with respect to shares of AMPS would be
approximately 286% 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."
Upon any failure to pay dividends on shares of AMPS for two years or more,
the holders of the shares of AMPS will acquire certain additional voting
rights. See "Voting Rights" below. Such rights shall be the exclusive remedy
of the holders of shares of AMPS upon any failure to pay dividends on shares
of the Fund.
For so long as any shares of AMPS are outstanding, the Fund will not
declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, Common Stock or other stock, if any,
ranking junior to shares of AMPS as to dividends or upon liquidation) in
respect of Common Stock or any other stock of the Fund ranking junior to or on
a parity with shares of AMPS as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any shares
of Common Stock or any other such junior stock (except by conversion into or
exchange for stock of the Fund ranking junior to AMPS as to dividends and upon
liquidation) or any such parity stock (except by conversion into or exchange
for stock of the Fund ranking junior to or on a parity with AMPS as to
dividends and upon liquidation), unless (A) immediately after such
transaction, the Fund would have S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount, and the 1940 Act AMPS Asset Coverage (see
"Asset Maintenance" and "Redemption" below) would be satisfied, (B) full
cumulative dividends on shares of AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid on or before the date of such
declaration or payment has been paid and (D) the Fund has redeemed the full
number of shares of AMPS required to be redeemed by any provision for
mandatory redemption contained in the Articles Supplementary.
Additional Dividends. If the Fund retroactively allocates any net capital
gains or other income subject to regular Federal income taxes to shares of
AMPS without having given advance notice thereof to the Auction Agent as
described above under "The Auction--Auction Date; Advance Notice of Allocation
of Taxable Income; Inclusion of Taxable Income in Dividends," which may only
happen when such allocation is made as a result of the redemption of all or a
portion of the outstanding shares of AMPS or the liquidation of the Fund (the
amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Fund, within 90 days (and generally within 60 days) after
the end of the Fund's fiscal year for which a Retroactive Taxable Allocation
is made, will provide notice thereof to the Auction Agent and to each holder
of shares (initially Cede as nominee of the Securities Depository) during such
fiscal year at such holder's address as the same appears or last appeared on
the stock books of the Fund. The Fund, within 30 days after such notice is
given to the Auction Agent, will pay to the Auction Agent (who then will
distribute to such holders of shares of AMPS), out of funds legally available
therefor, an amount equal to the aggregate Additional Dividend (as defined
below) with respect to all Retroactive Taxable Allocations made to such
holders during the fiscal year in question. See "Taxes."
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder
if the amount of the aggregate Retroactive Taxable Allocations had been
excludable from the gross income of such holder. Such Additional Dividend
shall be calculated (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of AMPS is subject to the
Federal alternative minimum tax with respect to dividends received from the
Fund; and (iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each holder of shares of AMPS at the greater of: (a)
the maximum marginal regular Federal
41
<PAGE>
individual income tax rate applicable to ordinary income or capital gains
depending on the taxable character of the distribution (including any surtax);
or (b) the maximum regular Federal corporate income tax rate applicable to
ordinary income or capital gains depending on the taxable character of the
distribution (disregarding in both (a) and (b) the effect of any state and
local taxes and the phase out of, or provision limiting, personal exemptions,
itemized deductions, or the benefit of lower tax brackets). Although the Fund
generally intends to designate any Additional Dividend as an exempt-interest
dividend to the extent permitted by applicable law, it is possible that all or
a portion of any Additional Dividend will be taxable to the recipient thereof.
See "Taxes--Tax Treatment of Additional Dividends." The Fund will not pay a
further Additional Dividend with respect to any taxable portion of an
Additional Dividend.
If the Fund does not give advance notice of the amount of taxable income to
be included in a dividend on shares of AMPS in the related Auction, as
described above under "The Auction--Auction Date; Advance Notice of Allocation
of Taxable Income; Inclusion of Taxable Income in Dividends," the Fund may
include such taxable income in a dividend on shares of AMPS if it increases
the dividend by an additional amount calculated as if such income were a
Retroactive Taxable Allocation and the additional amount were an Additional
Dividend and notifies the Auction Agent of such inclusion at least five days
prior to the applicable Dividend Payment Date.
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 sales load and
offering expenses for the shares of AMPS) will be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less
liabilities not constituting
senior securities $314,517,056
= = 286%
---------------------------- ------------
Senior securities $110,000,000
representing indebtedness
plus liquidation value
of the shares of AMPS
</TABLE>
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
each Business Day (a "Valuation Date") S&P Eligible Assets and Moody's
Eligible Assets each having in the aggregate a Discounted Value at least equal
to the AMPS Basic Maintenance Amount. If the Fund fails to meet such
requirement as of any Valuation Date and such failure is not cured on or
before the sixth Business Day after such Valuation Date (the "AMPS Basic
Maintenance Cure Date"), the Fund will be required under certain circumstances
to redeem certain of the shares of AMPS. Upon any failure to maintain the
required Discounted Value, the Fund will use its best efforts to alter the
composition of its portfolio to reattain a Discounted Value at least equal to
the AMPS Basic Maintenance Amount on or prior to the AMPS Basic Maintenance
Cure Date. See "Redemption."
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<PAGE>
The AMPS Basic Maintenance Amount as of any Valuation Date is defined as the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS outstanding on such Valuation Date multiplied by the sum of $25,000
and any applicable redemption premium attributable to the designation of a
Premium Call Period; (B) the aggregate amount of cash dividends (whether or
not earned or declared) that will have accumulated for each share of AMPS
outstanding to (but not including) the end of the current Dividend Period that
follows such Valuation Date in the event the then-current Dividend Period will
end within 49 calendar days of such Valuation Date or through the 49th day
after such Valuation Date in the event the then-current Dividend Period will
not end within 49 calendar days of such Valuation Date; (C) in the event the
then-current Dividend Period will end within 49 calendar days of such
Valuation Date, the aggregate amount of cash dividends that would accumulate
at the Maximum Applicable Rate applicable to a Dividend Period of 28 or fewer
days on any shares of AMPS outstanding from the end of such Dividend Period
through the 49th day after such Valuation Date, multiplied by the larger of
the Moody's Volatility Factor and the S&P Volatility Factor determined from
time to time by Moody's and S&P, respectively (except that if such Valuation
Date occurs during a Non-Payment Period, the cash dividend for purposes of
calculation would accumulate at the then-current Non-Payment Period Rate); (D)
the amount of anticipated Fund expenses for the 90 days subsequent to such
Valuation Date; (E) the amount of the Fund's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities
as of such Valuation Date to the extent not reflected in any of (i) (A)
through (i) (E) (including, without limitation, and immediately upon
determination, any amounts due and payable by the Fund pursuant to repurchase
agreements, any amounts payable for Municipal Bonds purchased as of such
Valuation Date) less (ii) either (A) the Discounted Value of any Fund assets,
or (B) the face value of any of the Fund's assets if such assets mature prior
to or on the date of redemption of AMPS or payment of a liability and are
either securities issued or guaranteed by the United States Government or
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). For purposes of the foregoing,
"Maximum Potential Additional Dividend Liability," as of any Valuation Date,
means the aggregate amount of Additional Dividends that would be due if the
Fund were to make Retroactive Taxable Allocations, with respect to any fiscal
year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Fund, as of
the end of the calendar month immediately preceding such Valuation Date and
assuming such Additional Dividends are fully taxable.
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings have been based on criteria established in
connection with rating the AMPS. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of
a debt obligation, the higher the related discount factor) and the frequency
with which the relevant asset is marked to market. In no event shall the
Discounted Value of any asset of the Fund exceed its unpaid principal balance
or face amount as of the date of calculation. The Discount Factor relating to
any asset of the Fund and the AMPS Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Fund, without shareholder
approval, but only in the event the Fund receives written confirmation from
S&P, Moody's and any Substitute Rating Agency that any such changes would not
impair the ratings then assigned to the shares of AMPS by S&P or Moody's or
any Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which the Fund
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount, the Fund is required to deliver to the Auction Agent, Moody's and S&P
a report with respect to the calculation of the AMPS Basic Maintenance Amount
and the value of its portfolio holdings as of the date of such failure (an
"AMPS Basic Maintenance Report"). Additionally, on or before the third
Business Day after the first day of a Special Dividend Period, the Fund will
deliver an AMPS Basic Maintenance Report to S&P and the Auction Agent. The
Fund also will deliver an AMPS Basic Maintenance Report as of the twenty-fifth
day of the last month of each fiscal quarter of the Fund (or, if such day is
not a Business Day, the next succeeding Business Day) on or before the third
Business Day after such day. Within ten Business Days
43
<PAGE>
after delivery of such report relating to the twenty-fifth day 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. Also, on or before 5:00 p.m., New York City time, on the first
Business Day after shares of Common Stock are repurchased by the Fund, the
Fund will complete and deliver to S&P and Moody's an AMPS Basic Maintenance
Report as of the close of business on such date that Common Stock is
repurchased. If any such letter prepared by the Fund's independent accountants
shows that an error was made in the most recent AMPS Basic Maintenance Report,
the calculation or determination made by the Fund's independent accountants
will be conclusive and binding on the Fund.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided below, the Fund,
at its option, may redeem shares of AMPS of any series, in whole or in part,
out of funds legally available therefor, at the Optional Redemption Price per
share on any Dividend Payment Date; provided that no share of AMPS may be
redeemed at the option of the Fund during (a) the Initial Dividend Period with
respect to a series of shares or (b) a Non-Call Period to which such share is
subject. "Optional Redemption Price" means $25,000 per share of AMPS plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption plus any applicable redemption
premium, if any, attributable to the designation of a Premium Call Period. In
addition, holders of AMPS may be entitled to receive Additional Dividends in
the event of redemption of such AMPS to the extent provided herein. See
"Description of AMPS--Dividends--Additional Dividends." The Fund has the
authority to redeem the AMPS for any reason and may redeem all or part of the
outstanding shares of AMPS if it anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to holders of Common Stock for
any significant period of time than that obtainable if the Common Stock were
unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share,
shares of AMPS to the extent permitted under the 1940 Act and Maryland law, on
a date fixed by the Board of Directors, if the Fund fails to maintain S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or to satisfy
the 1940 Act AMPS Asset Coverage and such failure is not cured on or before
the AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. "Mandatory
Redemption Price" means $25,000 per share of AMPS plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption. In addition, holders of AMPS may be entitled to
receive Additional Dividends in the event of redemption of such AMPS to the
extent provided herein. See "Description of AMPS--Dividends--Additional
Dividends." The number of shares of AMPS to be redeemed will be equal to the
lesser of (a) the minimum number of shares of AMPS the redemption of which, if
deemed to have occurred immediately prior to the opening of business on the
Cure Date, together with all other shares of the Preferred Stock subject to
redemption or retirement, would result in the Fund having S&P Eligible Assets
and Moody's Eligible Assets each with an aggregate Discounted Value equal to
or greater than the AMPS Basic Maintenance Amount or satisfaction of the 1940
Act AMPS Asset Coverage, as the case may be, on such Cure Date (provided that,
if there is no such minimum number of shares the redemption of which would
have such result, all shares of AMPS then outstanding will be redeemed), and
(b) the maximum number of shares of AMPS, together with all other shares of
Preferred Stock subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor on such redemption date. In
determining the number of shares of AMPS required to be redeemed in accordance
with the foregoing, the Fund shall allocate the number required to be redeemed
which would result in the Fund having S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount or satisfaction of the 1940 Act AMPS Asset
Coverage, as the case may be, pro rata among shares of AMPS and other
Preferred Stock subject to redemption pursuant to provisions similar to those
set forth below; provided that, shares of AMPS which may not be redeemed at
the option of the Fund due to the designation of a Non-Call Period applicable
to such shares (A) will be subject to mandatory redemption only to the extent
that other shares are not available to satisfy the number of shares required
to be
44
<PAGE>
redeemed and (B) will be selected for redemption in an ascending order of
outstanding number of days in the Non-Call Period (with shares with the lowest
number of days to be redeemed first) and by lot in the event of shares having
an equal number of days in such Non-Call Period. The Fund is required to
effect such a mandatory redemption not later than 35 days after such Cure
Date, except that if the Fund does not have funds legally available for the
redemption of all of the required number of shares of AMPS which are subject
to mandatory redemption or the Fund otherwise is unable to effect such
redemption on or prior to 35 days after such Cure Date, the Fund will redeem
those shares of AMPS which it was unable to redeem on the earliest practicable
date on which it is able to effect such redemption.
General. If shares of AMPS of any series are to be redeemed, a notice of
redemption will be mailed to each record holder of such shares of AMPS
(initially Cede as nominee of the Securities Depository) and to the Auction
Agent not less than 17 nor more than 30 days prior to the date fixed for the
redemption thereof. Each notice of redemption will include a statement setting
forth: (i) the redemption date, (ii) the aggregate number of shares of AMPS of
such series to be redeemed, (iii) the redemption price, (iv) the place or
places where shares of AMPS of such series are to be surrendered for payment
of the redemption price, (v) a statement that dividends on the shares to be
redeemed will cease to accumulate on such redemption date (except that holders
may be entitled to Additional Dividends) and (vi) the provision of the
Articles Supplementary pursuant to which such shares are being redeemed. The
notice also will be published in The Wall Street Journal. No defect in the
notice of redemption or in the mailing or publication thereof will affect the
validity of the redemption proceedings, except as required by applicable law.
In the event that less than all of the outstanding shares of any series of
AMPS are to be redeemed, the 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 (utilizing
in the case of S&P and S&P Exposure Period of 22 Business Days) 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 price thereof and any
Additional Dividends, but without interest, and such shares no longer will be
deemed to be outstanding. The Fund will be entitled to receive, from time to
time, the interest, if any, earned on such 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.
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<PAGE>
Notwithstanding the provisions for redemption described above, no shares of
AMPS shall be subject to optional redemption (i) unless all dividends in
arrears on the outstanding shares of AMPS, and all capital stock of the Fund
ranking on a parity with the AMPS with respect to the payment of dividends or
upon liquidation, have been or are being contemporaneously paid or declared
and set aside for payment and (ii) if redemption thereof would result in the
Fund's failure to maintain Moody's Eligible Assets or S&P Eligible Assets with
an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of all series of AMPS will be
entitled to receive, out of the assets of the Fund available for distribution
to shareholders, before any distribution or payment is made upon any shares of
Common Stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount
of any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the date of distribution, and after such payment the holders of
AMPS will be entitled to no other payments except for any Additional
Dividends. If such assets of the Fund shall be insufficient to make the full
liquidation payment on each outstanding series of AMPS and liquidation
payments on any other outstanding class or series of Preferred Stock of the
Fund ranking on a parity with the AMPS as to payment upon liquidation, then
such assets will be distributed among the holders of each such series of AMPS
and the holders of shares of such other class or series ratably in proportion
to the respective preferential amounts to which they are entitled. After
payment of the full amount of liquidation distribution to which they are
entitled, the holders of AMPS will not be entitled to any further
participation in any distribution of assets by the Fund except for any
Additional Dividends. A consolidation, merger or share exchange of the Fund
with or into any other entity or entities or a sale, whether for cash, shares
of stock, securities or properties, of all or substantially all or any part of
the assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of shares of AMPS will be entitled to one
vote per share on each matter submitted to a vote of stockholders and will
vote together with holders of shares of Common Stock as a single class.
In connection with the election of the Fund's directors, holders of shares
of AMPS and any other Preferred Stock, voting as a separate class, shall be
entitled at all times to elect two of the Fund's directors, and the remaining
directors will be elected by holders of shares of Common Stock and shares of
AMPS and any other Preferred Stock, voting together as a single class. In
addition, if at any time dividends on outstanding shares of AMPS shall be
unpaid in an amount equal to at least two full years' dividends thereon or if
at any time holders of any shares of Preferred Stock are entitled, together
with the holders of AMPS, to elect a majority of the directors of the Fund
under the 1940 Act, then the number of directors constituting the Board of
Directors automatically shall be increased by the smallest number that, when
added to the two directors elected exclusively by the holders of shares of
AMPS and any other Preferred Stock as described above, would constitute a
majority of the Board of Directors as so increased by such smallest number,
and at a special meeting of shareholders which will be called and held as soon
as practicable, and at all subsequent meetings at which directors are to be
elected, the holders of shares of AMPS and any other Preferred Stock, voting
as a separate class, will be entitled to elect the smallest number of
additional directors that, together with the two directors which such holders
in any event will be entitled to elect, constitutes a majority of the total
number of directors of the Fund as so increased. The terms of office of the
persons who are directors at the time of that election will continue. If the
Fund thereafter shall pay, or declare and set apart for payment in full, all
dividends payable on all outstanding shares of AMPS and any other Preferred
Stock for all past Dividend Periods, the additional voting rights of the
holders of shares of AMPS and any other Preferred Stock as described above
shall cease, and the terms of office of all of the additional directors
elected by the holders of shares of AMPS and any other Preferred Stock (but
not of the directors with respect to whose election the holders of Common
Stock were entitled to vote or the two
46
<PAGE>
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 Charter,
whether by merger, consolidation or otherwise, so as to adversely affect any
of the contract rights expressly set forth in the Charter of holders of shares
of AMPS or any other Preferred Stock. To the extent permitted under the 1940
Act, in the event shares of more than one series of AMPS are outstanding, the
Fund shall not approve any of the actions set forth in clause (i) or (ii)
which adversely affects the contract rights expressly set forth in the Charter
of a holder of shares of a series of AMPS differently than those of a holder
of shares of any other series of AMPS without the affirmative vote of at least
a majority of votes entitled to be cast by holders of the shares of AMPS of
each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The Board of
Directors, however, without shareholder approval, may amend, alter or repeal
any or all of the various rating agency guidelines described herein in the
event the Fund receives confirmation from the rating agencies that any such
amendment, alteration or repeal would not impair the ratings then assigned to
shares of AMPS. Unless a higher percentage is provided for under "Description
of Capital Stock--Certain Provisions in the Charter," the affirmative vote of
a majority of the votes entitled to be cast by holders of outstanding shares
of AMPS and any other Preferred Stock, voting as a separate class, will be
required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act including, among other
things, changes in the Fund's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Objective and Policies." The class vote of holders of shares of AMPS and any
other Preferred Stock described above in each case will be in addition to a
separate vote of the requisite percentage of shares of Common Stock and shares
of AMPS and any other Preferred Stock, voting together as a single class,
necessary to authorize the action in question.
The foregoing voting provisions will not apply to any series of AMPS if, at
or prior to the time when the act with respect to which such vote otherwise
would be required shall be effected, such shares shall have been (i) redeemed
or (ii) called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
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<PAGE>
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 as a single class, and the majority of the
outstanding shares of AMPS and any other Preferred Stock, voting as a separate
class (which for this purpose and under the 1940 Act means the lesser of (i)
67% of the shares of each class of capital stock represented at a meeting at
which more than 50% of the outstanding shares of each class of capital stock
are represented or (ii) more than 50% of the outstanding shares of each class
of capital stock). The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies that invest in real estate or interest therein, and the Fund may
purchase and sell financial futures contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase
Municipal Bonds and other debt securities in accordance with is investment
objective, policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors without shareholder 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. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on Municipal Bonds, U.S. Government
obligations and related indices or otherwise in connection with bona fide
hedging activities and may purchase and sell Call Rights to require
mandatory tender for the purchase of related Municipal Bonds.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.
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<PAGE>
For so long as shares of AMPS are rated by Moody's, the Fund will not change
these additional investment restrictions unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of AMPS by Moody's.
The Fund has no intention to file a voluntary application for relief under
Federal bankruptcy law or any similar application under state law for so long
as the Fund is solvent and does not foresee becoming insolvent.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. Because of the affiliation of the Underwriter with the
Fund, the Fund is prohibited from engaging in certain transactions involving
the Underwriter 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 the Underwriter of securities in transactions in which it acts as
principal. An exemptive order has been obtained that permits the Fund to
effect principal transactions with the Underwriter in high quality, short-
term, tax-exempt securities subject to conditions set forth in such order. The
Fund may consider in the future requesting an order permitting other principal
transactions with the Underwriter, but there can be no assurance that such
application will be made and, if made, that such order would be granted.
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations during the last five years are set forth below. Unless
otherwise noted, the address of each Director and executive officer is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (64)--President and Director (1)(2)--President of the
Investment Adviser (which term, as used herein, includes its corporate
predecessors) since 1977; President of MLAM (which term, as used herein,
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. ("MLFD") since 1977.
Ronald W. Forbes (56)--Director(2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York
at Albany since 1989.
Cynthia A. Montgomery (44)--Director(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 20163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Business
Administration, The University of Michigan from 1979 to 1985; Director, UNUM
Corporation since 1990 and Director of Newell Co. since 1995.
Charles C. Reilly (65)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Kevin A. Ryan (64)--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder, current Director and Professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
Richard R. West (59)--Director(2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1994, and Dean from 1984 to 1993, and currently Dean Emeritus
of New York University Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company) and Alexander's Inc. (real estate company).
49
<PAGE>
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of MLFD
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Vincent R. Giordano (52)--Senior Vice President(1)(2)--Senior Vice President
of the Investment Adviser and MLAM since 1984; Senior Vice President of
Princeton Services since 1993.
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990.
Kenneth A. Jacob (45)--Vice President(1)(2)--Vice President of the
Investment Adviser and MLAM since 1984.
John Loffredo, CFA (34)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1991.
Robert A. DiMella, CFA (30)--Vice President and Portfolio Manager(1)(2)--
Assistant Vice President of MLAM since 1995; Assistant Portfolio Manager of
MLAM from 1993 to 1995; Assistant Portfolio Manager with Prudential Investment
Advisers from 1992 to 1993.
Gerald M. Richard (47)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of MLFD since 1981,
Treasurer thereof since 1984 and employee thereof since 1978.
Patrick D. Sweeney (43)--Secretary(1)(2)--Vice President of MLAM since 1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee, officer or member of the
advisory board of one or more investment companies for which the
Investment Adviser, MLAM or their affiliates act as investment adviser.
In connection with the election of the Fund's Directors, holders of shares
of AMPS and other Preferred Stock, voting as a separate class, are entitled to
elect two of the Fund's Directors, and the remaining Directors will be elected
by holders of Common Stock and Preferred Stock voting together as a single
class. Messrs. Reilly and West have been designated as the Directors to be
elected by holders of the Preferred Stock. See "Description of Capital Stock."
50
<PAGE>
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser an
annual fee of $4,000 per year plus $800 per meeting attended, together with
such Director's actual out-of-pocket expenses relating to attendance at
meetings. The Fund also pays members of its Audit Committee, which consists of
all of the Directors not affiliated with the Investment Adviser, an annual fee
of $2,000. The Chairman of the Audit Committee receives an additional fee of
$1,000 per year.
The following table sets forth compensation to be paid by the Fund to the
non-interested Directors projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31, 1996 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser, MLAM and their affiliates ("FAM/MLAM Advised Funds") to the non-
interested Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM FUND FUND EXPENSE DIRECTORS
---------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Ronald W. Forbes(1)..... $ 9,200 None $142,500
Cynthia A.
Montgomery(1).......... $ 9,200 None $142,500
Charles C. Reilly(1).... $10,200 None $293,833
Kevin A. Ryan(1)........ $ 9,200 None $142,500
Richard R. West(1)...... $ 9,200 None $269,833
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Forbes (23 registered investment
companies consisting of 36 portfolios); Ms. Montgomery (23 registered
investment companies consisting of 36 portfolios); Mr. Reilly (41
registered investment companies consisting of 54 portfolios); Mr. Ryan (23
registered investment companies consisting of 36 portfolios); and Mr. West
(50 registered investment companies consisting of 63 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM and is owned and controlled
by ML & Co., a financial services holding company. The Investment Adviser will
provide the Fund with investment advisory and management services. The
Investment Adviser or MLAM acts as the investment adviser for over 130 other
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of March 31, 1997, the Investment Adviser and MLAM had a total of
approximately $247.2 billion in investment company and other portfolio assets
under management (approximately $31.8 billion of which were invested in
municipal securities), including accounts of certain affiliates of the
Investment Adviser. The principal business address of the Investment Adviser
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of
the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. John Loffredo and Robert
A. DiMella are the portfolio managers for the Fund and are primarily
responsible for the Fund's day-to-day management.
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For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the issuance of
shares of Preferred Stock, minus the sum of accrued liabilities of the Fund
and accumulated dividends on the shares of Preferred Stock). For purposes of
this calculation, average weekly net assets are determined at the end of each
month on the basis of the average net assets of the Fund for each week during
the month. The assets for each weekly period are determined by averaging the
net assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, stock certificates and shareholder reports,
charges of the custodian and the transfer and dividend disbursing agent and
registrar, fees and expenses with respect to the issuance of Preferred Stock,
Securities and Exchange Commission (the "Commission") fees, fees and expenses
of unaffiliated Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Accounting services
are provided to the Fund by the Investment Adviser, and the Fund reimburses
the Investment Adviser for its costs in connection with such services.
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 shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
its affiliate during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund
52
<PAGE>
advised by the Investment Adviser. Furthermore, the Codes provide for trading
"blackout periods" that prohibit trading by investment personnel of the Fund
within periods of trading by the Fund in the same (or equivalent) security (15
or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms which provided supplemental
investment research to the Investment Adviser, including the Underwriter, may
receive orders for transactions by the Fund. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses
of the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information.
The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Under
the 1940 Act, except as permitted by exemptive order, persons affiliated with
the Fund are prohibited from dealing with the Fund as principal in the
purchase and sale of securities. Since transactions in the over-the-counter
market usually involve transactions with dealers acting as principal for their
own account, the Fund will not deal with affiliated persons, including the
Underwriter and its affiliates, in connection with such transactions except
that, pursuant to an exemptive order obtained by the Investment Adviser, the
Fund may engage in principal transactions with the Underwriter in high
quality, short-term, tax-exempt securities. See "Investment Restrictions." An
affiliated person of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis.
The Fund may also purchase tax-exempt instruments in individually negotiated
transactions with the issuer. Because an active trading market may not exist
for such securities, the prices that the Fund may pay for these securities or
receive on their resale may be lower than that for similar securities with a
more liquid market.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons,
appears advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances after
the Fund's portfolio is invested in accordance with its investment objective,
will be less than 100%. The portfolio turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by the monthly average of the value of the portfolio securities
owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.
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<PAGE>
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income
and 90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The IRS, in a revenue ruling, held that certain auction rate preferred stock
would be treated as stock for Federal income tax purposes. The terms of the
AMPS are substantially similar, but not identical, to the auction rate
preferred stock discussed in the revenue ruling, and in the opinion of Brown &
Wood 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 interest, whether or not they
exceeded the earnings and profits of the Fund, would be included in full in
the income of the recipient and would be taxed as ordinary income. Counsel
believes that such a position, if asserted by the IRS, would be unlikely to
prevail.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Fund which
are attributable to interest on tax-exempt obligations and designated by the
Fund as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal tax purposes. Exempt-interest dividends
are included, however, in determining the portion, if any, of a person's
Social Security and railroad retirement benefits subject to Federal income
taxes. Interest on indebtedness incurred or continued to purchase or carry
shares of a RIC paying exempt-interest dividends, such as the Fund, is not
deductible for Federal income tax purposes to the extent attributable to
exempt-interest dividends. Each shareholder is advised to consult a tax
adviser with respect to whether exempt-interest dividends retain the exclusion
under Code Section 103(a) if such shareholder would be treated as a
"substantial user" or "related person" under Code Section 147(a) with respect
to property financed with the proceeds of an issue of "industrial development
bonds" or "private activity bonds," if any, held by the Fund.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over short-term capital
losses derived from the sale of securities or from
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<PAGE>
certain transactions in futures or options ("capital gain dividends") are
taxable as long-term capital gains for Federal income tax purposes, regardless
of the length of time the shareholder has owned Fund shares. Distributions by
the Fund, whether from exempt-interest income, ordinary income or capital
gains, will not be eligible for the dividends received deduction allowed to
corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two
classes of shares, it may designate distributions made to each class in any
year as consisting of no more than such class's proportionate share of
particular types of income, including exempt interest and net long-term
capital gains. A class's proportionate share of a particular type of income is
determined according to the percentage of total dividends paid by the RIC
during such year that was paid to such class. Thus, the Fund is required to
allocate a portion of its net capital gains and other taxable income to the
shares of AMPS of each series. The Fund generally will notify the Auction
Agent of the amount of any net capital gains and other taxable income to be
included in any dividend on shares of AMPS prior to the Auction establishing
the Applicable Rate for such dividend. Except for the portion of any dividend
that it informs the Auction Agent will be treated as capital gains or other
taxable income, the Fund anticipates that the dividends paid on the shares of
AMPS will constitute exempt-interest dividends. The amount of net capital
gains and ordinary income allocable to shares of AMPS (the "taxable
distribution") will depend upon the amount of such gains and income realized
by the Fund and the total dividends paid by the Fund on shares of Common Stock
and shares of AMPS during a taxable year, but the taxable distribution
generally is not expected to be significant.
In the opinion of Brown & Wood LLP, counsel to the Fund, under current law
the manner in which the Fund intends to allocate items of tax-exempt income,
net capital gains, and other taxable income, if any, between shares of Common
Stock and shares of AMPS will be respected for Federal income tax purposes.
However, the tax treatment of Additional Dividends may affect the Fund's
calculation of each class' allocable share of capital gains and other taxable
income. See "Tax Treatment of Additional Dividends." In addition, there is
currently no direct guidance from the IRS or other sources specifically
addressing whether the Fund's method for allocating tax-exempt income, net
capital gains, and other taxable income between shares of Common Stock and
shares of AMPS will be respected for Federal income tax purposes, and it is
possible that the IRS could disagree with counsel's opinion and attempt to
reallocate the Fund's net capital gains or other taxable income. In the event
of a reallocation, some of the dividends identified by the Fund as exempt-
interest dividends to holders of shares of AMPS may be recharacterized as
additional capital gains or other taxable income. In the event of such
recharacterization, the Fund would not be required to make payments to such
shareholders to offset the tax effect of such reallocation. In addition, a
reallocation may cause the Fund to be liable for income tax and excise tax on
any reallocated taxable income. Brown & Wood 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 Brown & Wood LLP represents only its best
legal judgment and is not binding on the IRS or the courts.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on "private activity bonds" issued after
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August 7, 1986. Private activity bonds are bonds which, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and which benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" which could subject certain
investors in such bonds, including shareholders of the Fund, to an alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after its taxable year-end the
portion of its dividends declared during the year which constitutes an item of
tax preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings", which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay an alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in high yield securities, as described in the
Prospectus. Furthermore, the Fund may also invest in instruments the return on
which includes nontraditional features such as indexed principal or interest
payments ("nontraditional instruments"). These instruments may be subject to
special tax rules under which the Fund may be required to accrue and
distribute income before amounts due under the obligations are paid. In
addition, it is possible that all or a portion of the interest payments on
such high yield securities and/or nontraditional instruments could be
recharacterized as taxable ordinary income.
If at any time when shares of AMPS are outstanding the Fund does not meet
the asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of Common Stock until the asset coverage is
restored. See "Description of AMPS--Restrictions on Dividends and Other
Payments." This may prevent the Fund from distributing at least 90% of its net
income, and may, therefore, jeopardize the Fund's qualification for taxation
as a RIC. Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund, in its sole discretion, may redeem shares of AMPS in order to
maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a RIC.
See "Description of AMPS--Redemption." There can be no assurance, however,
that any such action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of Preferred Stock that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such Preferred Stock
are "preferential" under the Code and therefore not eligible for the dividends
paid deduction. The Fund intends to issue Preferred Stock that counsel advises
will not result in the payment of a preferential dividend and may seek a
private letter ruling from the IRS to that effect. If the Fund ultimately
relies solely on a legal opinion when it issues such Preferred Stock, there is
no assurance that the IRS would agree that dividends on the Preferred Stock
are not preferential. If 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. In this case,
dividends on the Common Stock would not be exempt from Federal income taxes.
Additionally, the Fund would be subject to the alternative minimum tax.
Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
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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.
TAX TREATMENT OF ADDITIONAL DIVIDENDS
If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of shares of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS--Dividends--Additional
Dividends." The Federal income tax consequences of Additional Dividends under
existing law are uncertain. The Fund intends to treat a holder as receiving a
dividend distribution in the amount of any Additional Dividend only as and
when such Additional Dividend is paid. An Additional Dividend generally will
be designated by the Fund as an exempt-interest divided except as otherwise
required by applicable law. However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year for which
the Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to
the Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or financial futures contract.
STATE AND LOCAL TAXES
The exemption from Federal income tax for exempt-interest dividends does not
necessarily result in an exemption for such dividends under the income or
other tax laws of any state or local taxing authority. Shareholders are
advised to consult their own tax advisers concerning state and local tax
matters.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes.
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NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the NYSE (generally, 4:00 p.m. New York time)
on each day during which the New York Stock Exchange is open for trading. For
purposes of determining the net asset value of a share of Common Stock, the
value of the securities held by the Fund plus any cash or other assets
(including interest accrued but not yet received) minus all liabilities
(including accrued expenses) and the aggregate liquidation value of the
outstanding shares of AMPS is divided by the total number of shares of Common
Stock outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The Municipal Bonds in which the Fund invests are traded primarily in the
over-the-counter markets. In determining net asset value, the Fund utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the Board of Directors. The pricing service typically values portfolio
securities at the bid price or the yield equivalent when quotations are
readily available. Municipal Bonds for which quotations are not readily
available are valued at fair market value on a consistent basis as determined
by the pricing service using a matrix system to determine valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Board of Directors.
The Board of Directors has determined in good faith that the use of a pricing
service is a fair method of determining the valuation of portfolio securities.
Obligations with remaining maturities of 60 days or less are valued at
amortized cost, unless this method no longer produces fair valuations.
Positions in futures contracts are valued at closing prices for such contracts
established by the exchange on which they are traded, or if market quotations
are not readily available, are valued at fair value on a consistent basis
using methods determined in good faith by the Board of Directors.
The Fund determines and makes available for publication the net asset value
of its 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.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares were initially classified as Common
Stock. The Board of Directors is authorized, however, to classify or
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption. In this regard, the Board of Directors has reclassified 4,400
shares of unissued Common Stock as AMPS. For a description of the shares of
AMPS, see "Description of AMPS."
The following table shows the amount of (i) capital stock authorized, (ii)
capital stock held by the Fund for its own account and (iii) capital stock
outstanding for each class of authorized securities of the Fund as of May 15,
1997.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
AMOUNT HELD (EXCLUSIVE OF
BY FUND AMOUNT HELD
AMOUNT FOR ITS OWN BY FUND FOR ITS
TITLE OF CLASS AUTHORIZED ACCOUNT OWN ACCOUNT)
- -------------- ----------- ----------- ---------------
<S> <C> <C> <C>
Common Stock............................ 199,995,600 -0- 13,628,989
Auction Market Preferred Stock.......... 4,400 -0- -0-
</TABLE>
COMMON STOCK
Holders of Common Stock are entitled to share equally in dividends declared
by the Board of Directors payable to holders of Common Stock and in the net
assets of the Fund available for distribution to holders of
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<PAGE>
Common Stock after payment of the preferential amounts payable to holders of
any outstanding Preferred Stock. Neither holders of Common Stock nor holders
of Preferred Stock have pre-emptive or conversion rights and shares of Common
Stock are not redeemable. The outstanding shares of Common Stock are fully
paid and non-assessable.
Holders of Common Stock are entitled to one vote for each share held and
will vote with the holders of any outstanding shares of AMPS or other
Preferred Stock on each matter submitted to a vote of holders of Common Stock,
except as described under "Description of AMPS--Voting Rights."
Shareholders are entitled to one vote for each share held. The shares of
Common Stock, AMPS and any other Preferred Stock do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of Common
Stock, AMPS and any other Preferred Stock voting for the election of Directors
can elect all of the Directors standing for election by such holders, and, in
such event, the holders of the remaining shares of Common Stock, AMPS and any
other Preferred Stock will not be able to elect any of such Directors.
So long as any shares of AMPS or any other Preferred Stock are outstanding,
holders of Common Stock will not be entitled to receive any dividends of or
other distributions from the Fund unless all accumulated dividends on
outstanding shares of AMPS and any other Preferred Stock have been paid, and
unless asset coverage (as defined in the 1940 Act) with respect to such AMPS
and any other Preferred Stock would be at least 200% after giving effect to
such distributions. See "Description of AMPS--Restrictions on Dividends and
Other Payments."
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The shares of Common Stock commenced trading on the New York Stock Exchange
on May 6, 1997. At May 15, 1997, the net asset value per share of Common Stock
was $15.08, and the closing price per share of Common Stock on the New York
Stock Exchange was $15.125.
PREFERRED STOCK
Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of 4,400 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
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A director may be removed from office
with or without cause but only by vote of the holders of at least 66 2/3% of
the votes entitled to be voted on the matter. A director elected by all of the
holders of capital stock may be removed only by action of such holders, and a
director elected by the holders of AMPS and any other Preferred Stock may be
removed only by action of AMPS and any other Preferred Stock.
In addition, the Charter requires the favorable vote of the holders of at
least 66 2/3% of the Fund's shares of capital stock, then entitled to be
voted, voting as a single class, to approve, adopt or authorize the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with any other corporation,
59
<PAGE>
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by shareholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing would also require the favorable vote of at least a majority of the
Fund's shares of Preferred Stock then entitled to be voted, including the
AMPS, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
shareholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding shares of capital stock
(including the AMPS and any other Preferred Stock) entitled to be voted on the
matter, voting as a single class (or a majority of such shares if the
amendment was previously approved, adopted or authorized by at least two-
thirds of the total number of Directors fixed in accordance with the by-laws),
and, the affirmative vote of at least a majority of outstanding shares of
Preferred Stock of the Fund (including the AMPS), voting as a separate class.
Such a vote also would satisfy a separate requirement in the 1940 Act that the
change be approved by the shareholders. Shareholders of an open-end investment
company may require the company to redeem their shares of common stock at any
time (except in certain circumstances as authorized by or under the 1940 Act)
at their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption. Conversion
to an open-end investment company would also require redemption of all
outstanding shares of Preferred Stock (including the AMPS) and would require
changes in certain of the Fund's investment policies and restrictions, such as
those relating to the issuance of senior securities, the borrowing of money
and the purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Commission
for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custody agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of a
Purchase Agreement with the Fund and the Investment Adviser, to purchase from
the Fund all of the shares of AMPS of each series offered hereby. The
Underwriter is committed to purchase all of such shares if any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of AMPS to the public at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriter may allow, and
such dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. The sales load of $ per share is
equal to % of the initial public offering price. Investors must pay for any
AMPS purchased in the initial public offering on or before June , 1997.
The Underwriter has agreed to pay the Fund an amount to cover expenses
incurred in connection with the issuance and sale of the AMPS offered hereby
(estimated to be $225,000) and other expenses.
60
<PAGE>
The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"Description of AMPS--The Auction--General--Broker-Dealer Agreements" and will
be entitled to fees for services as a Broker-Dealer as set forth under
"Description of AMPS--Broker-Dealers." The Underwriter also may provide
information to be used in ascertaining the Reference Rate.
The Fund anticipates that the Underwriter from time to time may act as a
broker in connection with the execution of the Fund's portfolio transactions.
The Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-
term, tax-exempt securities, subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser.
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.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of AMPS will be IBJ Schroder Bank & Trust Company, One State Street, New York,
New York 10004. The transfer agent, dividend disbursing agent and shareholder
servicing agent for the shares of Common Stock is The Bank of New York, 101
Barclay Street, New York, New York 10286.
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby will be
passed upon for the Fund and the Underwriter by Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557. Brown & Wood LLP will rely as to
matters of Maryland law on the opinion of Wilmer, Cutler & Pickering,
Baltimore, Maryland.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of April 25,
1997 included in this Prospectus and the Registration Statement has been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing. The selection of independent auditors is subject to ratification by
shareholders of the Fund.
AVAILABLE 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, proxy statements and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Regional Office, at Seven World
Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office,
at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and
Midwest Regional Office, at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can
be obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Fund, that file electronically with the Commission. Reports, proxy
statements and other information concerning the Fund can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
61
<PAGE>
Additional information regarding the Fund and the shares of AMPS is
contained in the Registration Statement on Form N-2, including amendments,
exhibits and schedules thereto, relating to such shares filed by the Fund with
the Commission in Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the
Fund and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission.
62
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder of
MuniHoldings Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Fund, Inc. as of April 25, 1997. This statement of assets,
liabilities and capital is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this statement of assets,
liabilities and capital based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings Fund, Inc. at April 25, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Princeton, New Jersey
April 28, 1997
63
<PAGE>
MUNIHOLDINGS FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
APRIL 25, 1997
<TABLE>
<S> <C>
ASSETS
Cash............................................................. $100,005
Deferred organization and offering expenses (Note 1)............. 390,000
--------
Total assets................................................... 490,005
--------
LIABILITIES
Accrued expenses (Note 1)........................................ 390,000
--------
NET ASSETS......................................................... $100,005
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares
authorized; 6,667 shares issued and outstanding (Note 1)........ $ 667
Paid in Capital in excess of par................................. 99,338
--------
Total Capital--Equivalent to $15.00 net asset value
per share of common stock (Note 1)............................ $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on
February 27, 1997 as a closed-end, non-diversified management investment
company and has had no operations other than the sale to Fund Asset
Management, L.P. (the "Investment Adviser") of an aggregate of 6,667 shares of
Common Stock for $100,005 on April 25, 1997. The general partner of the
Investment Adviser is an indirect, wholly-owned subsidiary of Merrill Lynch &
Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a five-year period beginning with the commencement of operations of the Fund.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.55 of 1% of
the average daily net assets of the Fund. The Investment Adviser or an
affiliate will pay Merrill Lynch, Pierce, Fenner & Smith Incorporated a
commission in the amount of 3.00% of the price to the public per share in
connection with the initial public offering of the Fund's common stock.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
64
<PAGE>
MUNIHOLDINGS FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
MAY 15, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- ------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <S> <C>
ALABAMA--2.4%
AAA Aaa $ 5,000 Jefferson County, Alabama, Sewer Revenue
Warrants, Series D, 5.75% due
2/01/2027(f).............................. $ 4,962
- ------------------------------------------------------------------------------------------------
ARIZONA--2.8%
A1+ P1 2,800 Maricopa County, Arizona, Pollution Control
Corporation, PCR, Refunding (Arizona
Public Service Co.), VRDN, Series E, 4%
due 5/01/2029 (a)......................... 2,800
NR* NR* 3,000 Navajo County, Arizona, IDA, IDR (Stone
Container Corp. Project), AMT, 7.40% due
4/01/2026................................. 3,044
- ------------------------------------------------------------------------------------------------
CALIFORNIA--8.6%
Anaheim, California, Public Financing
Authority, Lease Revenue Bonds (Public
Improvement Projects), Sub-Series C (e):
AAA Aaa 5,945 6%** due 9/01/2021........................ 1,472
AAA Aaa 18,810 6.03%** due 9/01/2027..................... 3,247
AAA Aaa 3,000 6.03%** due 9/01/2028..................... 488
NR* Baa2 1,340 California Educational Facilities Authority
Revenue Bonds (Pooled College & University
Projects), Series B, 6.125% due
4/01/2013................................. 1,353
Riverside County, California, Asset Leasing
Corporation, Leasehold Revenue Bonds
(Riverside County Hospital Project)(d):
AAA Aaa 7,500 6.04%** due 6/01/2022..................... 1,757
AAA Aaa 8,265 6.07%** due 6/01/2026..................... 1,512
AAA Aaa 7,500 San Diego, California, IDR, RITR, 7.685%
due 9/01/2018(b).......................... 7,894
- ------------------------------------------------------------------------------------------------
FLORIDA--8.1%
AAA Aaa 2,585 Florida State Division Board, Finance
Department, General Services Revenue Bonds
(Environmental Preservation),
Series 2000-A, 5.75% due 7/01/2013(c)..... 2,636
AAA Aaa 2,000 Lee County, Florida, Hospital Board of
Directors, Hospital Revenue Bonds, INFLOS,
9.114% due 4/01/2020(b)(d)................ 2,248
AAA Aaa 6,815 Pensacola, Florida, Airport Revenue Bonds,
Series A, 5.75%
due 10/01/2027(d)......................... 6,814
A1 VMIG1+ 5,000 Pinellas County, Florida, Health Facilities
Authority, Revenue Refunding Bonds (Pooled
Hospital Loan Program), DATES, 4.05% due
12/01/2015(a)............................. 5,000
- ------------------------------------------------------------------------------------------------
ILLINOIS--3.4%
NR* NR* 1,000 Beardstown, Illinois, IDR (Jefferson
Smurfit Corp. Project),
8% due 10/01/2016......................... 1,095
Illinois Health Facilities Authority
Revenue Bonds, Series A (d):
AAA Aaa 1,050 (Highland Park Hospital Project), 5.75%
due 10/01/2026............................ 1,034
AAA Aaa 1,710 Refunding (Advocate Healthcare), 5.875%
due 8/15/2022............................. 1,709
NR* NR* 3,000 Round Lake Beach, Illinois, Tax Increment
Revenue Refunding Bonds, 7.50% due
12/01/2013................................ 3,154
- ------------------------------------------------------------------------------------------------
INDIANA--1.9%
NR* Aaa 3,930 Indiana State Housing Finance Authority,
S/F Mortgage Revenue Bonds, Series A-1,
6.25% due 1/01/2017....................... 4,021
- ------------------------------------------------------------------------------------------------
KENTUCKY--4.1%
AAA Aaa 5,000 Louisville & Jefferson County, Kentucky,
Metropolitan Sewer District, Sewer and
Drain System Revenue Refunding Bonds,
Series A, 6.25% due 5/15/2026(d)(h)....... 5,269
NR* NR* 3,150 Perry County, Kentucky, Solid Waste
Disposal Revenue Bonds, (TJ International
Project), AMT, 6.55% due 4/15/2027........ 3,160
- ------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
MUNIHOLDINGS FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
MAY 15, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- --------------------------------------------------------------------------------------
<C> <C> <C> <C> <S> <C>
LOUISIANA--4.9%
BB NR* $10,000 Port New Orleans, Louisiana, IDR, Refunding
(Continental Grain Co. Project), 6.50% due
1/01/2017................................. $10,098
- --------------------------------------------------------------------------------------
MASSACHUSETTS--0.5%
AAA Aaa 1,000 Massachusetts State HFA, Rental Housing
Mortgage Revenue Bonds, AMT, Series B,
6.40% due 7/01/2038(d).................... 1,013
- --------------------------------------------------------------------------------------
MISSISSIPPI--3.7%
BBB- Ba1 7,675 Claiborne County, Mississippi, PCR,
Refunding (System Energy Resources Inc.
Project), 6.20% due 2/01/2026............. 7,535
- --------------------------------------------------------------------------------------
MISSOURI--0.5%
BB NR* 905 Missouri State Health and Educational
Facilities Authority Revenue Bonds
(Southwest Baptist University Project),
9.50% due 10/01/2001...................... 971
- --------------------------------------------------------------------------------------
MONTANA--1.7%
AA Aa2 3,465 Montana State Board of Housing, S/F
Mortgage Refunding Bonds, Series A-1,
5.95% due 12/01/2027...................... 3,489
- --------------------------------------------------------------------------------------
NEBRASKA--1.0%
AAA NR* 2,000 Nebraska Investment Finance Authority, S/F
Housing Revenue Bonds, AMT, Series C,
6.30% due 9/01/2028....................... 2,020
- --------------------------------------------------------------------------------------
NEVADA--5.6%
Nevada Housing Division:
NR* Aaa 4,335 Senior Bonds, AMT, Series B-1, 6.05% due
10/01/2018................................ 4,349
NR* Aaa 2,810 Senior Bonds, AMT, Series B-1, 6.15% due
4/01/2029................................. 2,819
(S/F Program), Senior Series D-1, 6.15%
NR* Aaa 4,315 due 10/01/2017............................ 4,400
- --------------------------------------------------------------------------------------
NEW HAMPSHIRE--2.6%
NR* Aa 5,240 New Hampshire State Housing Finance
Authority, S/F Mortgage Acquisition,
Revenue Bonds, AMT, Series G, 6.30% due
1/01/2026................................. 5,294
- --------------------------------------------------------------------------------------
NEW MEXICO--4.1%
Farmington, New Mexico, PCR, Refunding
(Public Service Company--San Juan
Project):
BB+ Ba1 2,000 Series A, 6.30% due 12/01/2016............ 2,021
BB+ Ba1 2,500 Series B, 6.30% due 12/01/2016 ........... 2,526
AAA Aaa 1,825 Los Alamos County, New Mexico, Utility
System Revenue Refunding Bonds, Series A,
6% due 7/01/2015(e)....................... 1,886
AAA NR* 2,000 New Mexico Mortgage Finance Authority (S/F
Mortgage Program), AMT, Series B-2, 6.30%
due 7/01/2028 ............................ 2,024
- --------------------------------------------------------------------------------------
NEW YORK--22.8%
New York City, New York, Municipal Water
Finance Authority, Water and Sewer System
Revenue Bonds:
AAA Aaa 14,000 Series B, 5.875% due 6/15/2026(e)......... 14,089
AAA Aaa 1,065 RITR, 7.045% due 6/15/2026(b)(d).......... 1,066
BBB+ Baa1 7,000 New York, New York, UT, Series E, 6% due
8/01/2011................................. 7,039
BBB+ Baa1 15,145 New York State Dormitory Authority Revenue
Refunding Bonds (Mental Health Services
Facilities), Series B, 5.50% due
8/15/2017................................. 14,382
AAA Aaa 3,000 New York State HFA, Housing Mortgage
Project Revenue Refunding Bonds, Series A,
6.125% due 11/01/2020(e).................. 3,027
NR* Aa2 7,085 New York State Mortgage Agency, Homeowner
Mortgage Revenue Bonds, AMT, Series 50,
6.625% due 4/01/2025...................... 7,350
- --------------------------------------------------------------------------------------
NORTH CAROLINA--4.2%
A1+ NR* 6,400 North Carolina Educational Facilities
Finance Agency, Revenue Refunding Bonds
(Guilford College Project), VRDN, 4% due
9/01/2023(a).............................. 6,400
A1+ NR* 2,300 Raleigh-Durham, North Carolina, Airport
Authority, Special Facility Revenue
Refunding Bonds (American Airlines), VRDN,
Series A, 4.05% due 11/01/2015(a)......... 2,300
- --------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
MUNIHOLDINGS FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
MAY 15, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- ----------------------------------------------------------------------------------------------
<C> <C> <C> <C> <S> <C>
OHIO--0.9%
AAA Aaa $1,850 Cleveland, Ohio, Waterworks Revenue
Refunding and Improvement Bonds (First
Mortgage), Series H, 5.75% due
1/01/2026(d).............................. $1,853
- ----------------------------------------------------------------------------------------------
OKLAHOMA--0.5%
BB+ NR* 985 Blaine County, Oklahoma, Industrial
Authority, IDR (US Gypsum Co. Project),
7.25% due 10/01/2010...................... 1,043
- ----------------------------------------------------------------------------------------------
PENNSYLVANIA--8.6%
Beaver County, Pennsylvania, IDA, PCR,
Refunding (Cleveland Electric Project):
BB Ba2 1,600 7.625% due 5/01/2025...................... 1,729
BB Ba2 1,500 Series A, 7.75% due 7/15/2025............. 1,638
AAA Aaa 4,750 Lehigh County, Pennsylvania, IDA, PCR,
Refunding (Pennsylvania Power & Light
Company Project), Series A, 6.40% due
11/01/2021(d)............................. 5,015
NR* NR* 4,970 Pennsylvania State Higher Educational
Facilities Authority, College and
University Revenue Bonds (Eastern
College), Series B, 8% due 10/15/2025..... 5,279
NR* NR* 4,000 Philadelphia, Pennsylvania, Authority for
IDR, Refunding (Commercial Development-
Days Inn), Series B, 6.50% due
10/01/2027................................ 3,941
- ----------------------------------------------------------------------------------------------
TENNESSEE--4.6%
NR* NR* 4,500 Hardeman County, Tennessee, Correctional
Facilities Corporation Revenue Bonds,
7.75% due 8/01/2017....................... 4,639
A+ A1 4,750 Tennessee Housing Development Agency,
Mortgage Finance Refunding Bonds, Series
A, 5.95% due 7/01/2028.................... 4,743
- ----------------------------------------------------------------------------------------------
TEXAS--14.9%
A- A3 5,615 Cass County, Texas Industrial Development
Corporation, Environmental Improvement
Revenue Bonds (International Paper Co.
Project), AMT, Series A, 6.25% due
4/01/2021 ................................ 5,702
Harris County, Texas, Health Facilities
Development Corporation, Hospital Revenue
Bonds:
A1+ NR* 700 (Methodist Hospital), VRDN, 4% due
12/01/2025 (a)............................ 700
AAA Aaa 4,000 RITR, Series 12, 8.07% due 10/01/2024 (b)
(d)....................................... 4,385
B+ Ba2 5,000 Houston, Texas, Airport System Revenue
Bonds (Special Facilities--Continental
Airline Terminal Improvement), AMT, Series
B, 6.125% due 7/15/2017................... 4,864
A- Baa1 2,500 Lower Colorado River Authority, Texas, PCR
(Samsung Austin Semiconductor), AMT,
6.375% due 4/01/2027...................... 2,532
AA Aa2 5,000 Lower Neches Valley Authority, Texas,
Industrial Development Corporation, Sewer
Facilities Revenue Bonds (Mobil Oil
Refining Corp. Project), AMT, 6.40% due
3/01/2030................................. 5,206
AAA NR* 1,825 Lubbock, Texas, Housing Finance
Corporation, S/F Mortgage Revenue
Refunding Bonds (Mortgage Backed
Securities Program), Series A, 6.125% due
12/01/2017 (g)............................ 1,847
BB Ba 5,000 Odessea, Texas, Junior College District,
Revenue Refunding Bonds, Series A, 8.125%
due 12/01/2018............................ 5,393
- ----------------------------------------------------------------------------------------------
VIRGINIA--4.7%
AAA NR* 1,500 Prince William County, Virginia, IDA,
Revenue Refunding Bonds (Potomac Place),
Series A, 6.25% due 12/20/2027 (g)........ 1,534
AAA Aaa 7,750 Richmond, Virginia, Metropolitan Authority,
Expressway Revenue Refunding Bonds, Series
B, 6.25% due 7/15/2022 (f)................ 8,094
- ----------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
MUNIHOLDINGS FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
MAY 15, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <S> <C>
WEST VIRGINIA--1.0%
AAA Aaa $2,260 West Virginia State Water Development
Authority, Water Development Revenue
Refunding Bonds (Loan Program II), Series
B, 5.25% due 11/01/2035 (e)............... $ 2,082
- --------------------------------------------------------------------------------------------------
WISCONSIN--1.4%
AA Aa2 2,800 Wisconsin Housing and Economic Development
Authority, Home Ownership Revenue
Refunding Bonds, AMT, Series B, 6.25% due
9/01/2027................................. 2,821
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$244,412)--119.5%............................................. 245,807
VARIATION MARGIN ON FINANCIAL FUTURES CONTRACTS--(0.0%)***............................. (68)
OTHER ASSETS LESS LIABILITIES--(19.5%)................................................. (40,172)
--------
NET ASSETS--100.0%..................................................................... $205,567
========
- --------------------------------------------------------------------------------------------------
</TABLE>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at May 15,
1997.
(b) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in effect
at May 15, 1997.
(c) AMBAC Insured.
(d) MBIA Insured.
(e) FSA Insured.
(f) FGIC Insured.
(g) GNMA Collateralized.
(h) All or a portion of security held as collateral in connection with open
financial futures contracts.
+ Highest short-term rating by Moody's Investors Service, Inc.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
*** Financial futures contracts sold as of May 15, 1997 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
NUMBER OF EXPIRATION (NOTES 1A &1B)
CONTRACTS ISSUE DATE (IN THOUSANDS)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
180 Municipal Bond June 1997 $20,936
- ---------------------------------------------------------------------------
Total Financial Futures Contracts
Sold
(Total Contract Price-$20,629).............................. $20,936
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
To simplify the listings of MuniHoldings Fund, Inc.'s portfolio holdings in the
Schedule of Investments, we have abbreviated the names of the securities
according to the list below.
AMT
Alternative Minimum Tax (subject to)
DATES
Daily Adjustable Tax-Exempt Securities
HFA
Housing Finance Agency
IDA
Industrial Development Authority
IDR
Industrial Development Revenue Bonds
INFLOS
Inverse Floating Rate Municipal Bonds
PCR
Pollution Control Revenue Bonds
RITR
Residual Interest Trust Receipts
S/F
Single-Family
UT
Unlimited Tax
VRDN
Variable Rate Demand Notes
68
<PAGE>
MUNIHOLDINGS FUND, INC.
FINANCIAL INFORMATION
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AS OF MAY 15, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$244,411,717)
(Note 1a)............................................. $245,806,686
Cash................................................... 83,062
Receivables:
Securities sold...................................... $8,412,101
Capital shares sold.................................. 8,134,830
Interest............................................. 3,398,338
Investment Adviser (Note 2).......................... 5,560 19,950,829
---------- ------------
Total assets........................................... 265,840,577
------------
LIABILITIES:
Payables:
Securities purchased................................. 59,829,982
Variation Margin (Note 1b)........................... 67,500 59,897,482
----------
Accrued expenses and other liabilities................. 376,039
------------
Total liabilities...................................... 60,273,521
------------
NET ASSETS:
Net assets............................................. $205,567,056
============
CAPITAL:
Common Stock, par value $.10 per share; 200,000,000
shares authorized (13,628,989 shares issued and
outstanding) (Note 4)................................. $ 1,362,899
Paid-in capital in excess of par....................... 202,703,909
Undistributed investment income--net................... 412,435
Unrealized appreciation on investments--net............ 1,087,813
------------
Total capital--Equivalent to $15.08 net asset value per
share of Common Stock (Market price--$15.125)......... $205,567,056
============
</TABLE>
See Notes to Financial Statements.
69
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MUNIHOLDINGS FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniHoldings Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. Prior to commencement of operations on May 2, 1997 the Fund had no
operations other than those relating to organizational matters and the sale of
6,667 shares of Common Stock on April 25, 1997, to Fund Asset Management, L.P.
("FAM") for $100,005. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options, which are traded on exchanges, are valued at
their last sale price as of the close of such exchanges or, lacking any sales,
at the last available bid price. Securities with remaining maturities of sixty
days or less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund, including valuations furnished by a
pricing service retained by the Fund, which may utilize a matrix system for
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
. Financial futures contracts--The Fund may purchase or sell interest rate
futures contracts and options on such futures contracts for the purpose
of hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific price
or yield. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
. Options--The Fund is authorized to write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market
to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or loss to
the extent the cost of the closing transaction exceeds the premium paid
or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
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(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner of FAM.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net
assets. For the period ended May 15, 1997, FAM earned fees of $39,288, all of
which was voluntarily waived. FAM also reimbursed the Fund additional expenses
of $5,560.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors
of FAM, PSI, and/or ML & Co.
3. INVESTMENTS:
Purchases of investments, excluding short-term securities, for the period
ended May 15, 1997 were $211,878,312. There were no long-term sales.
Net unrealized gains (losses) as of May 15, 1997 were as follows:
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
--------------
<S> <C>
Long-term investments................... $1,394,969
Financial futures contracts............. (307,156)
----------
Total................................... $1,087,813
==========
</TABLE>
As of May 15, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $1,394,969, of which $1,575,828 related to appreciated
securities and $180,859 related to depreciated securities. The aggregate cost
of investments at May 15, 1997 for Federal income tax purposes was
$244,411,717.
4. CAPITAL STOCK TRANSACTIONS:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were
initially classified as Common Stock. The Board of Directors is authorized,
however, to reclassify any unissued shares of capital stock without approval
of holders of Common Stock.
Common Stock
For the period ended May 15, 1997, shares issued and outstanding were
13,628,989. At May 15, 1997, total paid-in capital amounted to $204,066,808.
5. GENERAL:
As of May 15, 1997, the Fund had only fourteen days of investment operations
and had not yet declared dividends (whereas it will ordinarily do so on a
monthly basis). As a result, the Fund believes that more extensive interim
financial statements would not be indicative of the Fund's current and ongoing
operations. The Fund believes that such financial statements may be misleading
to potential investors and, accordingly, believes that inclusion of such
financial statements would be inappropriate. For the period ended May 15,
1997, the Fund had net investment income of $412,435. FAM voluntarily waived
and reimbursed all expenses.
71
<PAGE>
GLOSSARY
" "AA' (AA) Composite Commercial Paper Rate," on any Valuation Date, means
(i) the Interest Equivalent of the rate on commercial paper placed on behalf
of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or
the equivalent of such rating by another nationally recognized statistical
rating organization, as such rate is made available on a discount basis or
otherwise by the Federal Reserve Bank of New York for the Business Day
immediately preceding such date, or (ii) in the event that the Federal Reserve
Bank of New York does not make available such a rate, then the arithmetic
average of the Interest Equivalent of the rate on commercial paper placed on
behalf of such issuers, as quoted on a discount basis or otherwise by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on
the Business Day immediately preceding such date. If one of the Commercial
Paper Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7
or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 60-day and
90-day rates on such commercial paper; (iv) 85 or more days but fewer than 99
days, such rate shall be the Interest Equivalent of the 90-day rate on such
commercial paper; (v) 99 or more days but fewer than 120 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 90-day and 120-day
rates on such commercial paper; (vi) 120 or more days but fewer than 141 days,
such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate
on such commercial paper.
"Additional Dividend" has the meaning set forth on page 41 of this
Prospectus.
"Agent Member" means the member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of AMPS or on behalf of
a Potential Beneficial Owner.
"AMPS" means the Auction Market Preferred Stock, Series A and the Auction
Market Preferred Stock, Series B, 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 43 of this
Prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page 42 of
this Prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page 43 of this
Prospectus.
"Anticipation Notes" means the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page 32 of this
Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
"Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of AMPS.
"Auction" means a periodic operation of the Auction Procedures.
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"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Directors of the Fund or a duly
authorized committee thereof enters into an agreement with the Fund to follow
the Auction Procedures for the purpose of determining the Applicable Rate and
to act as transfer agent, registrar, dividend disbursing agent and redemption
agent for the AMPS.
"Auction Agent Agreement" means the agreement entered into between the Fund
and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for the purpose of determining the
Applicable Rate.
"Auction Date" has the meaning set forth on page 30 of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Appendix C to this Prospectus.
"Available AMPS" has the meaning specified in Paragraph 10(d)(i) of the
Auction Procedures.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Bid" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Bidder" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Board of Directors" or "Board" means the Board of Directors of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker-Dealer, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares of
AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including the Articles Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Fund
from time to time may appoint or, in lieu thereof, their respective affiliates
and successors.
"Common Stock" means the Common Stock, par value $.10 per share, of the
Fund.
"Date of Original Issue" means, with respect to each share of AMPS, the date
on which such share first is issued by the Fund.
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"Deposit Securities" means cash and Municipal Bonds rated at 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), A-1+ or SP-1+
by S&P.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount Factor,
as the case may be.
"Discounted Value" of any asset of the Fund means (i) with respect to an S&P
Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the lower of par and the quotient of the market value thereof divided
by the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 38 of this
Prospectus.
"Dividend Periods" has the meaning set forth on page 39 of this Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of shares of AMPS
in the records of the Auction Agent.
"Forward Commitment" has the meaning set forth on page 24 of this
Prospectus.
"Fund" means MuniHoldings Fund, Inc., a Maryland corporation that is the
issuer of the AMPS.
"Hold Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Initial Dividend Payment Date" has the meaning, with respect to each series
of AMPS, set forth on page 2 of this Prospectus.
"Initial Dividend Period" means, with respect to the AMPS, the period from
and including the Date of Original Issue to but excluding the Initial Dividend
Payment Date for each series of AMPS.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing
security.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page 4 of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page 44 of this
Prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning specified under "Description of
AMPS--The Auction--Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders" in the Prospectus.
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"Maximum Potential Additional Dividend Liability" has the meaning set forth
on page 43 of this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page 21 of this
Prospectus.
"Moody's Eligible Assets" has the meaning set forth on page 21 of this
Prospectus.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and initially shall be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth on page 23 of this
Prospectus.
"Moody's Volatility Factor" means 272% as long as there has been no increase
enacted to the Marginal Tax Rate. If such an increase is enacted but not yet
implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION>
% CHANGE IN MOODY'S
MARGINAL TAX RATE VOLATILITY FACTOR
----------------- -----------------
<S> <C>
Less than 5%.................................... 292%
Greater than 5% but less than 10%............... 313%
Greater than 10% but less than 15%.............. 338%
Greater than 15% but less than 20%.............. 364%
Greater than 20% but less than 25%.............. 396%
Greater than 25% but less than 30%.............. 432%
Greater than 30% but less than 35%.............. 472%
Greater than 35% but less than 40%.............. 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.
"Municipal Bonds" has the meaning set forth on page 13 of this Prospectus.
"Municipal Index" has the meaning set forth on page 20 of this Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page 42 of this
Prospectus.
"1940 Act Cure Date" has the meaning set forth on page 42 of this
Prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page 40 of this
Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page 40 of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page 39 of this
Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page 39 of
this Prospectus.
"Optional Redemption Price" has the meaning set forth on page 44 of this
Prospectus.
"Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
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"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other person as may
be permitted by the Fund, including any Existing Holder, who may be interested
in acquiring shares of AMPS (or, in the case of an Existing Holder, additional
shares of AMPS).
"Preferred Stock" means Preferred Stock, par value $.10 per share, of the
Fund.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Receivables For Municipal Bonds Sold," for purposes of determining S&P
Eligible Assets, has the meaning set forth on page 19 of this Prospectus.
"Receivables for Municipal Bonds Sold," for purposes of determining Moody's
Eligible Assets, has the meaning set forth on page 22 of this Prospectus.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable
"AA" Composite Commercial Paper Rate and the Taxable Equivalent of the Short
Term Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period,
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on page 38
of this Prospectus.
"Response" has the meaning set forth on page 39 of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page 41 of
this Prospectus.
"S&P" means Standard & Poor's Ratings Services or its successors.
"S&P Discount Factor" has the meaning set forth on page 19 of this
Prospectus.
"S&P Eligible Assets" has the meaning set forth on page 18 of this
Prospectus.
"S&P Exposure Period" means the maximum period of time following a Valuation
Date, including the Valuation Date and the AMPS Basic Maintenance Cure Date,
that the Fund has under the Articles Supplementary to cure any failure to
maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount.
"S&P Hedging Transactions" has the meaning set forth on page 20 of this
Prospectus.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" has the meaning set forth on page 4 of this
Prospectus.
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"Special Dividend Period" has the meaning set forth on page 4 of this
Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Fund, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of AMPS subject
to such Dividend Period shall not be subject to redemption at the option of
the Fund and (ii) a period (a "Premium Call Period"), consisting of a number
of whole years and determined by the Board of Directors of the Fund, after
consultation with the Auction Agent and the Broker-Dealers, during each year
of which the shares of AMPS subject to such Dividend Period shall be
redeemable at the Fund's option at a price per share equal to $25,000 plus
accumulated but unpaid dividends plus a premium expressed as a percentage of
$25,000, as determined by the Board of Directors of the Fund after
consultation with the Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning specified in Subsection 10(a)(x) of
the Auction Procedures.
"Submitted Bid" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Hold Order" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Submitted Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Sell Order" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, or its respective affiliates and
successors, after consultation with the Fund, to act as a substitute rating
agency or substitute rating agencies, as the case may be, to determine the
credit ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning specified in Subsection 10(d)(i)
of the Auction Procedures.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date means
90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index"), or any successor index made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M., New
York City time, on such date by Kenny Information Systems Inc. or any
successor thereto, based upon 30-day yield evaluations at par of bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information
Systems Inc. or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57(a) (5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the Marginal Tax Rate (expressed as a decimal); provided, however, that
if the Kenny Index is not made so available by 8:30 A.M., New York City time,
on such date by Kenny Information Systems Inc. or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of
(A) the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal). The
Fund may not utilize a successor index to the Kenny Index unless Moody's and
S&P provide the Fund with written confirmation that the use of such successor
index will not adversely affect the then-current respective Moody's and S&P
ratings of the AMPS.
"Treasury Bonds" has the meaning set forth on page 20 of this Prospectus.
"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
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is made available on a discount basis or otherwise by the Federal Reserve Bank
of New York in its Composite 3:30 P.M. Quotations for U.S. Government
Securities report for such Business Day, or (ii) if such yield as so
calculated is not available, the Alternate Treasury Bill Rate on such date.
"Alternate Treasury Bill Rate" on any date means the Interest Equivalent of
the yield as calculated by reference to the arithmetic average of the bid
price quotations of the actively traded Treasury Bill with a maturity most
nearly comparable to the length of the related Dividend Period, as determined
by bid price quotations as of any time on the Business Day immediately
preceding such date, obtained from at least three recognized primary U.S.
Government securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of
New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government securities dealers selected by
the Auction Agent.
"Valuation Date" has the meaning set forth on page 42 of this Prospectus.
"Variation Margin" means, in connection with an outstanding financial
futures contract owned or sold by the Fund, the amount of cash or securities
paid to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such financial futures contract fluctuates.
"Winning Bid Rate" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
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APPENDIX A
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con. ( . . . )--Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
Al, Baal, Bal and B1.
Short-term Notes and Variable Rate Demand Obligations: The four ratings of
Moody's for short-term notes and VRDOs are MIG-1/VMIG-1, MIG-2/VMIG-2, MIG-
3/VMIG-3, and MIG-4/VMIG-4; MIG-1/VMIG-1
A-1
<PAGE>
denotes "best quality, enjoying strong protection from established cash
flows"; MIG-2/VMIG-2 denotes "high quality" with "ample margins of
protection"; MIG-3/VMIG-3 instruments are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades"; MIG-4/VMIG-4
instruments are of "adequate quality, carrying specific risk but having
protection . . . and not distinctly or predominantly speculative."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
Prime-l repayment capacity will often be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and with established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
to the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within the parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representations and gives no opinion on the legal
validity or enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES' ("S&P") MUNICIPAL DEBT
RATINGS
An S&P municipal debt rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P's from other sources S&P's considers reliable. S&P's does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information,
or for other circumstances.
A-2
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P's. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
BB, B, CCC, CC, C Debt rated "BB", "B", "CCC", "CC" and "C" is regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C--The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has
been filed but debt service payments are continued.
C1 The rating "Cl" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P's believes
that such payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-l" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired unless S&P's believes
that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P's by the issuer or obtained by S&P's from other sources it
considers reliable. S&P's does not conduct an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information or based on other circumstances.
An S&P municipal note rating reflects the liquidity concerns and market
access risks unique to such notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given a "+"
designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
A-4
<PAGE>
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-
1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining or uncertain, as follows:
Improving UP ARROW
Stable LEFT ARROW/RIGHT ARROW
Declining DOWN ARROW
Uncertain UP ARROW/DOWN ARROW
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive" indicating a
potential upgrade, "Negative" for potential downgrade, or "Evolving" where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within three to 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
A-5
<PAGE>
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
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F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be rated
below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
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APPENDIX B
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix B constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix C hereto, as the case
may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of a Beneficial Owner, the number of shares, if
any, of AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on
behalf of a Potential Beneficial Owner, the number of shares, if any, of
AMPS to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number of shares of AMPS to be purchased
by all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers
(and the name of the Agent Member, if any, of each such Buyer's Broker-
Dealer) acting for one or more purchasers of such excess number of shares
of AMPS and the number of such shares to be purchased from one or more
Beneficial Owners on whose behalf such Broker-Dealer acted by one or more
Potential Beneficial Owners on whose behalf each of such Buyer's Broker-
Dealers acted;
(vi) if the aggregate number of shares of AMPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid exceeds the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order, the name or names of one or more Seller's Broker-Dealers (and
the name of the Agent Member, if any, of each such Seller's Broker-Dealer)
acting for one or more sellers of such excess number of shares of AMPS and
the number of such shares to be sold to one or more Potential Beneficial
Owners on whose behalf such Broker-Dealer acted by one or more Beneficial
Owners on whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the
AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or
its Agent Member) through the Securities Depository the amount necessary to
purchase the number of shares of AMPS to be purchased pursuant to such Bid
against receipt of such shares and advise such Potential Beneficial Owner
of the Applicable Rate for the next succeeding Dividend Period;
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(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted
a Sell Order that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct such Beneficial Owner's Agent
Member to deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of shares of AMPS to be sold pursuant to
such Order against payment therefor and advise any such Beneficial Owner
that will continue to hold shares of AMPS of the Applicable Rate for the
next succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b) (i) above and any shares of AMPS received
by it pursuant to (b) (ii) above among the Potential Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners,
if any, on whose behalf such Broker-Dealer submitted Bids that were accepted
or Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by
the Auction Agent pursuant to (a) (v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall instruct
its Agent Member as provided in (b) (i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to the Agent Member of the Beneficial Owner
delivering shares to such Broker-Dealer pursuant to (b)(ii) above the
amount necessary to purchase such shares against receipt of such shares,
and (B) deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's Broker-
Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a) (vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b)(i) above against receipt of such
shares, and (B) deliver such shares through the Securities Depository to
the Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d) (i) above shall
instruct the Securities Depository to execute the transactions described in
(b) (i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d) (iii)
above, and the Securities Depository shall execute such transactions.
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(f) If a Beneficial Owner selling shares of AMPS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of AMPS that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner.
In such event, the number of shares of AMPS to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall
represent any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
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APPENDIX C
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Articles
Supplementary relating to the AMPS, and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. The terms not
defined below are defined in the forepart of this Prospectus. Nothing
contained in this Appendix C constitutes a representation by the Fund that in
each Auction each party referred to herein actually will perform the
procedures described herein to be performed by such party.
PARAGRAPH 10(A) CERTAIN DEFINITIONS.
As used in this Paragraph 10, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned pursuant to this
Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i) below.
(vi) "Hold Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) and (ii)
whether the Fund has provided modification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS as follows:
<TABLE>
<CAPTION>
APPLICABLE
PERCENTAGE OF APPLICABLE
CREDIT RATINGS REFERENCE RATE-- PERCENTAGE OF
------------------------------ NO REFERENCE RATE--
MOODY'S S&P NOTIFICATION NOTIFICATION
---------------- ------------- ---------------- ---------------- --- ---
<S> <C> <C> <C> <C> <C>
"aa3" or higher AA- or Higher 110% 150%
"a3" or "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Fund shall take all reasonable action necessary to enable S&P and
Moody's to provide a rating for the AMPS. If either S&P or Moody's shall not
make such a rating available, or if neither S&P nor Moody's shall make such a
rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after consultation with the Fund, shall select a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating
Agency or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph 10(b)(i) below.
C-1
<PAGE>
(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 information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order"
C-2
<PAGE>
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) 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
C-3
<PAGE>
(3) the number of outstanding shares, if any, of AMPS subject to any
Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares of AMPS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend
Period) and a Sell Order (in the case of an Auction relating to a Special
Dividend Period) to have been submitted on behalf of such Existing Holder
covering the number of outstanding shares of AMPS held by such Existing Holder
and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of outstanding shares of
AMPS held by such Existing Holder; provided that if more than one Hold
Order is submitted on behalf of such Existing Holder and the number of
shares of AMPS subject to such Hold Orders exceeds the number of
outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders shall be reduced pro
rata so that such Hold Orders, in the aggregate, cover exactly the number
of outstanding shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of outstanding shares of AMPS
held by such Existing Holder over the number of shares of AMPS subject to
any Hold Order referred to in Paragraph 10(c)(iv)(A) above (and if more
than one Bid submitted on behalf of such Existing Holder specifies the same
rate per annum and together they cover more than the remaining number of
shares that can be the subject of valid Bids after application of Paragraph
10(c)(iv)(A) above and of the foregoing portion of this Paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this Paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the number of shares of AMPS subject to Hold Orders referred to
in Paragraph 10(c)(iv)(A) and Bids referred to in Paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of AMPS subject to such Sell
Orders is greater than such excess, the number of shares of AMPS subject to
each of such Sell Orders shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of shares of AMPS equal
to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number
of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.
PARAGRAPH 10(d) DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE
AND APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed
C-4
<PAGE>
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;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the outstanding shares of AMPS are the subject of Submitted Hold Orders),
that the Applicable Rate for the next succeeding Dividend Period shall be
equal to the Maximum Applicable Rate; or
(C) if all of the outstanding shares of AMPS are the subject of Submitted
Hold Orders, that the Dividend Period next succeeding the Auction
automatically shall be the same length as the immediately preceding
Dividend Period and the Applicable Rate for the next succeeding Dividend
Period shall be equal to 59% of the Reference Rate (or 90% of such rate if
the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares
of AMPS) on the date of the Auction.
PARAGRAPH 10(e) ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF SHARES.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
C-5
<PAGE>
(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.
(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
C-6
<PAGE>
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 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-7
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
STATE OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER
WOULD BE UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 10
The Fund................................................................... 12
Use of Proceeds............................................................ 12
Capitalization............................................................. 12
Portfolio Composition...................................................... 13
Investment Objective and Policies.......................................... 13
Description of AMPS........................................................ 28
Investment Restrictions.................................................... 48
Directors and Officers..................................................... 49
Investment Advisory and Management Arrangements............................ 51
Portfolio Transactions..................................................... 53
Taxes...................................................................... 54
Net Asset Value............................................................ 58
Description of Capital Stock............................................... 58
Custodian.................................................................. 60
Underwriting............................................................... 60
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 61
Legal Opinions............................................................. 61
Experts.................................................................... 61
Available Information...................................................... 61
Report of Independent Auditors............................................. 63
Statement of Assets, Liabilities and Capital............................... 64
Financial Statements (Unaudited)........................................... 65
Glossary................................................................... 72
Appendix A--Ratings of Municipal Bonds and Commercial Paper................ A-1
Appendix B--Settlement Procedures.......................................... B-1
Appendix C--Auction Procedures............................................. C-1
</TABLE>
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$110,000,000
MUNIHOLDINGS FUND, INC.[LOGO]
AUCTION MARKET PREFERRED STOCK
["AMPS(R)"]
2,200 SHARES, SERIES A
2,200 SHARES, SERIES B
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
JUNE , 1997
(R)Registered trademark of Merrill Lynch & Co., Inc.
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