As filed with the Securities and Exchange Commission on March 3, 1997
Securities Act File No. 333-
Investment Company Act File No. 811-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER
/X/ THE SECURITIES ACT OF 1933
/ / PRE-EFFECTIVE AMENDMENT NO.
/ / POST-EFFECTIVE AMENDMENT NO.
AND/OR
REGISTRATION STATEMENT UNDER
/X/ THE INVESTMENT COMPANY ACT OF 1940
/ / AMENDMENT NO.
MUNIHOLDINGS FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ARTHUR ZEIKEL
MUNIHOLDINGS FUND, INC
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies to:
MARK B. GOLDFUS, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, N.J. 08543-9011 NEW YORK, NEW YORK 10048-0557
_________________
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, as amended (the "Securities Act"), other than securities offered
only in connection with dividend or interest reinvestment plans, check the
following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. / /
__________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED Proposed
MAXIMUM Maximum Amount
OFFERING Aggregate of Regis-
TITLE OF SECURITIES AMOUNT BEING PRICE PER Offering tration
BEING REGISTERED REGISTERED UNIT (1) Price(1) Fee(2)
Common Stock ($.10 par value) . . .66,666 shares $15.00 $999,990 $303.03
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted prior to the filing date to the designated lockbox at Mellon
Bank in Pittsburgh, PA.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
MuniHoldings Fund, Inc.
CROSS REFERENCE SHEET
Item Number, Form N-2 Caption in Prospectus
Part A--INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover Page . . Outside Front Cover Page
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages . . . . . . . . Cover Pages; Underwriting
3. Fee Table and Synopsis . . . Prospectus Summary; Fee Table
4. Financial Highlights . . . . Not Applicable
5. Plan of Distribution . . . . Prospectus Summary; Net Asset
Value; Underwriting
6. Selling Shareholders . . . . Not Applicable
7. Use of Proceeds . . . . . . Use of Proceeds; Investment
Objective and Policies
8. General Description of the Prospectus Summary; The Fund;
Registrant . . . . . . . . . Investment Objective and Policies;
Risks and Special Considerations
of Leverage; Investment
Restrictions; Dividends and
Distributions; Automatic Dividend
Reinvestment Plan; Mutual Fund
Investment Option
9. Management . . . . . . . . Directors and Officers; Investment
Advisory and Management
Arrangements; Custodian; Transfer
Agent, Dividend Disbursing Agent
and Registrar
10. Capital Stock, Long-Term Description of Capital Stock
Debt, and Other Securities .
11. Defaults and Arrears on Not Applicable
Senior Securities . . . . .
12. Legal Proceedings . . . . . Not Applicable
13. Table of Contents of the Not Applicable
Statement of Additional
Information . . . . . . . .
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Not Applicable
14. Cover Page . . . . . . . . .
15. Table of Contents . . . . . Not Applicable
16. General Information and Not Applicable
History . . . . . . . . . .
17. Investment Objective and Prospectus Summary; Investment
Policies . . . . . . . . . . Objective and Policies; Investment
Restrictions
18. Management . . . . . . . . . Directors and Officers; Investment
Advisory and Arrangements
19. Control Persons and Principal Investment Advisory and Management
Holders of Securities . . . Arrangements
20. Investment Advisory and Other Investment Advisory and Management
Services . . . . . . . . . . Arrangements; Custodian;
Underwriting; Transfer Agent,
Dividend Disbursing Agent and
Registrar; Legal Opinions; Experts
21. Brokerage Allocation and Portfolio Transactions
Other Practices . . . . . .
22. Tax Status . . . . . . . . . Taxes; Automatic Dividend
Reinvestment Plan
23. Financial Statements . . . . Independent Auditors; Independent
Auditors' Report; Statement of
Assets, Liabilities and Capital
Part C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
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 MARCH 3, 1997
PROSPECTUS
April , 1997
______ Shares
MuniHoldings Fund, Inc.
Common Stock
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MuniHoldings Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company that seeks to
provide shareholders with as high a level of current income exempt from
Federal income taxes as is consistent with its investment policies. 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.
Because the Fund is newly organized, its shares have no history of
public trading. Shares of closed-end investment companies frequently trade
at a discount from their net asset value. This risk may be greater for
investors expecting to sell their shares in a relatively short period after
completion of the public offering. See "Prospectus Summary--Risk Factors and
Special Considerations."
(Continued on next page)
Within approximately three months after completion of the offering of
Common Stock described herein the Fund intends to offer shares of preferred
stock representing approximately 35% of the Fund's capital immediately after
the issuance of such preferred stock. There can be no assurance, however,
that preferred stock representing such percentage of the Fund's capital will
actually be issued. INVESTORS SHOULD NOTE THE SPECIAL RISKS ASSOCIATED WITH
THE LEVERAGING OF THE COMMON STOCK. SEE "RISKS AND SPECIAL CONSIDERATIONS OF
LEVERAGE" AND "DESCRIPTION OF CAPITAL STOCK."
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 Public Sales Load (1)(2) Proceeds to Fund(3)
<S> <C> <C> <C>
Per Share . . . . . . . . . . . . . . . . . $ None $
Total(4) . . . . . . . . . . . . . . . . . $ None $
</TABLE>
(1) The Investment Adviser or an affiliate will pay the Underwriters a
commission in the amount of % of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby. See
"Underwriting."
(2) The Fund and the Investment Adviser have agreed to indemnify the several
Underwriters against certain liabilities under the Securities Act of
1933. See "Underwriting."
(3) Before deducting organizational and offering expenses payable by the
Fund estimated at $_________.
(4) The Fund has granted the Underwriters an option to purchase up to an
additional ____ shares to cover over-allotments. If all such shares are
purchased, the total Price to Public and Proceeds to Fund will be
$_____________. See "Underwriting."
------------
The shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued by the Fund and accepted by the Underwriters,
subject to approval of certain legal matters by counsel for the Underwriters
and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the shares will be made in New York,
New York on or about April , 1997.
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Merrill Lynch & Co.
-------------
The date of this Prospectus is April , 1997.
(Continued from preceding page)
The Fund may invest in certain tax-exempt securities classified as
"private activity bonds" that may subject certain investors in the Fund to an
alternative minimum tax. At times, the Fund may seek to hedge its portfolio
through the use of options and futures transactions. There can be no
assurance that the investment objective of the Fund will be realized. The
Fund is designed primarily for long-term investors and should not be
considered a vehicle for trading purposes. The address of the Fund is 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800.
Prior to this offering, there has been no public market for the Common
Stock of the Fund. Application will be made to list the Fund's shares of
Common Stock on the New York Stock Exchange. However, during an initial
period which is not expected to exceed four weeks from the date of this
Prospectus, the Fund's shares will not be listed on any securities exchange.
During such period, the Underwriters do not intend to make a market in the
Fund's shares. Consequently, it is anticipated that an investment in the
Fund will be illiquid during such period.
The issuance of the preferred stock will result in leveraging of the
Common Stock. Although the terms of the preferred stock offering will be
determined by the Fund's Board of Directors, it is anticipated that the
preferred stock will pay dividends that will be adjusted over either
relatively short-term periods (generally seven to 28 days) or medium-term
periods (up to five years) and that the dividend rate will be based upon
prevailing interest rates for debt obligations of comparable maturity. The
proceeds of the preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment objective. Because
under normal market conditions, obligations with longer maturities produce
higher yields than short-term and medium-term obligations, the Investment
Adviser believes that the spread inherent in the difference between the
short-term and medium-term rates paid by the Fund and the longer-term rates
received by the Fund will provide holders of Common Stock with a potentially
higher yield.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
FUND'S COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus.
THE FUND MuniHoldings Fund, Inc. (the
"Fund") is a newly organized,
non-diversified, closed-end
management investment company.
See "The Fund."
THE OFFERING The Fund is offering _____ shares
of Common Stock at an initial
offering price of $ per
share. The Common Stock is being
offered by underwriters (the
"Underwriters") represented by
Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill
Lynch" or the "Representative").
The Underwriters have been granted
an option, exercisable for 45 days
from the date of this Prospectus,
to purchase up to
additional shares to cover
over-allotments. See
"Underwriting."
INVESTMENT OBJECTIVE AND POLICIES The investment objective of the
Fund is to provide shareholders
with as high a level of current
income exempt from Federal income
taxes as is consistent with its
investment policies. The Fund
will seek 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 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."
LISTING Prior to this offering, there has
been no public market for the
Common Stock of the Fund.
Application will be made to list
the shares of Common Stock on the
New York Stock Exchange. However,
during an initial period, which is
not expected to exceed four weeks
from the date of this Prospectus,
the Fund's shares will not be
listed on any securities exchange.
During such period, the
Underwriters do not intend to make
a market in the Fund's shares.
Consequently, it is anticipated
that an investment in the Fund
will be illiquid during such
period. See "Underwriting."
LEVERAGE The Fund anticipates that it will
be substantially invested in
longer-term municipal obligations
within approximately three months
after completion of the offering
of Common Stock described herein.
To leverage the Common Stock, the
Fund intends to offer shares of
preferred stock within three
months after completion of this
offering representing
approximately 35% of the Fund's
capital immediately
after the issuance of such
preferred stock. There can be no
assurance, however, that preferred
stock representing such
percentage of the Fund's capital
will actually be issued. The
issuance of the preferred stock
will result in the leveraging of
the Common Stock. Although the
terms of the preferred stock
offering will be determined by the
Fund's Board of Directors, it is
anticipated that the preferred
stock will pay dividends that will
be adjusted over either relatively
short-term periods (generally
seven to 28 days) or medium-term
periods (up to five years) and
that the dividend rate will be
based upon prevailing interest
rates for debt obligations of
comparable maturity. The proceeds
of the preferred stock offering
will be invested in longer-term
obligations in accordance with the
Fund's investment objective.
Issuance and ongoing expenses of
the preferred stock will be borne
by the Fund and will reduce the
net asset value of the Common
Stock. Additionally, under
certain circumstances, when the
Fund is required to allocate
taxable income to holders of
preferred stock, it is anticipated
that the terms of the preferred
stock will require the Fund to
make an additional distribution to
such holders in an amount
approximately equal to the tax
liability resulting from such
allocation and such additional
distribution (such amount, an
"Additional Distribution").
The use of leverage by the Fund
creates an opportunity for
increased net income, but, at the
same time, creates special risks.
Because, under normal market
conditions, obligations with
longer maturities produce higher
yields than short-term and
medium-term obligations, the
Investment Adviser believes that
the spread inherent in the
difference between the short-term
and medium-term rates (and any
Additional Distribution) paid by
the Fund and the longer-term rates
received by the Fund will provide
holders of Common Stock with a
potentially higher yield.
Investors should note, however,
that leverage creates certain
risks for holders of Common Stock,
including higher volatility of
both the net asset value and
market value of the Common Stock.
Since any decline in the value of
the Fund's investments will be
borne entirely by holders of
Common Stock, the effect of
leverage in a declining market
would result in a greater decrease
in net asset value than if the
Fund were not leveraged, which
would likely be reflected in a
decline in the market price for
shares of Common Stock.
Additionally, fluctuations in the
dividend rates on, and the amount
of taxable income allocable to,
the preferred stock will affect
the yield to holders of Common
Stock. See "Risks and Special
Considerations of Leverage." Upon
issuance of the preferred stock,
holders of the Common Stock will
receive all net income of the Fund
remaining after payment of
dividends (and any Additional
Distribution) on the preferred
stock and will generally be
entitled to a pro rata share of
net realized capital gains. Upon
any liquidation of the Fund, the
holders of shares of preferred
stock will be entitled to receive
liquidating distributions
(expected to equal the original
purchase price per share of
preferred stock plus any
accumulated and unpaid dividends
thereon and any accumulated and
unpaid Additional Distribution)
before any distribution is made to
holders of Common Stock. See
"Description of Capital Stock--
Preferred Stock." Until the
preferred stock is issued, the
Common Stock will not be
leveraged, and the special
leverage considerations described
herein will not apply.
Holders of preferred stock, voting
as a separate class, will be
entitled to elect two of the
Fund's Directors, and holders of
common and preferred stock, voting
together as a single class, will
be entitled to elect the remaining
Directors. If, at any time,
dividends on the Fund's preferred
stock were to be in arrears in an
amount equal to two full years of
dividend payments, the holders of
all outstanding shares of
preferred stock, voting as a
separate class, would be entitled
to elect a majority of the Fund's
Directors. The holders of
preferred stock will also vote
separately on certain other
matters as required under the
Fund's Articles of Incorporation
and the Investment Company Act of
1940, as amended (the "1940 Act"),
and Maryland law, but otherwise
will have equal voting rights with
holders of Common Stock (one vote
per share) and will vote together
with holders of Common Stock as a
single class. See "Description of
Capital Stock--Preferred Stock--
Voting Rights."
There can be no assurance that the
Fund will be able to realize a
higher net return on its
investment portfolio than the then
current dividend rate (and any
Additional Distribution) on the
preferred stock. Changes in
certain factors could cause the
relationship between the
short-term and medium-term
dividend rates (and any Additional
Distribution) paid by the Fund on
the preferred stock and the
long-term rates received by the
Fund and its investment portfolio
to change so that such short-term
and medium-term rates (and any
Additional Distribution) may
substantially increase relative to
rates on the long-term obligations
in which the Fund may be invested.
Under such conditions, the benefit
of leverage to holders of Common
Stock will be reduced, and the
Fund's leveraged capital structure
could result in a lower rate of
return to holders of Common Stock
than if the Fund were not
leveraged. The Fund will have the
authority to redeem the preferred
stock for any reason and may
redeem all or part of the
preferred stock if it anticipates
that the Fund's leveraged capital
structure will result in a lower
rate of return to holders of the
Common Stock than that obtainable
if the Common Stock were
unleveraged for any significant
amount of time. The leveraging of
the Common Stock would be
eliminated during any period that
preferred stock is not
outstanding.
Prior to the time it offers the
preferred stock, the Fund intends
to apply for ratings on such stock
from one or more nationally
recognized statistical ratings
organizations ("NRSROs"). The
Fund believes that obtaining a
rating for the preferred stock
will enhance the marketability of
the preferred stock and thereby
reduce the dividend rate on the
preferred stock from that which
the Fund would be required to pay
if the preferred stock were not
rated.
INVESTMENT ADVISER Fund Asset Management, L.P. is the
Fund's investment adviser (the
"Investment Adviser") and is
responsible for the management of
the Fund's investment portfolio
and for providing administrative
services to the Fund. For its
services, the Fund pays the
Investment Adviser a monthly fee
at the annual rate of of 1%
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 February
28, 1997, the Investment Adviser
and MLAM had a total of
approximately $ billion in
investment company and other
portfolio assets under management
(approximately $ billion of
which was invested in municipal
securities), including accounts of
certain affiliates of the
Investment Adviser. See
"Investment Advisory and
Management Arrangements."
DIVIDENDS AND DISTRIBUTIONS The Fund intends to pay dividends
monthly and to distribute
substantially all of its net
investment income to holders of
Common Stock. From and after
issuance of the preferred stock,
monthly distributions to holders
of Common Stock will consist of
substantially all net investment
income remaining after the payment
of dividends (and any Additional
Distribution) on the preferred
stock. It is expected that the
Fund will commence paying
dividends to holders of Common
Stock within approximately 90 days
from the date of this Prospectus.
Net capital gains, if any, will be
distributed at least annually to
holders of Common Stock and, after
issuance of the preferred stock,
on a pro rata basis to holders of
Common Stock and preferred stock.
When capital gains or other
taxable income is allocated to
holders of preferred stock under
certain circumstances, it is
anticipated that the terms of the
preferred stock will require the
Fund to make an Additional
Distribution. The Fund is not
permitted to declare any cash
dividend or other distribution on
its Common Stock unless asset
coverage (as defined in the 1940
Act) with respect to the Fund's
preferred stock is at least 200%.
If the Fund issues preferred stock
representing 35% of its capital
after the time of issuance, its
asset coverage with respect to the
preferred stock will be
approximately 285%. If the Fund's
ability to make distributions on
its Common Stock is limited, this
could under certain circumstances
impair the ability of the Fund to
maintain its qualification for
taxation as a regulated investment
company, which would have adverse
tax consequences for holders of
Common Stock. See "Taxes."
AUTOMATIC DIVIDEND All dividend and capital gains
REINVESTMENT PLAN distributions will be
automatically reinvested in
additional shares of Common Stock
of the Fund unless a shareholder
elects to receive cash.
Shareholders whose shares are held
in the name of a broker or nominee
should contact such broker or
nominee to confirm that they may
participate in the Fund's dividend
reinvestment plan. See "Automatic
Dividend Reinvestment Plan."
MUTUAL FUND INVESTMENT OPTION Purchasers of shares of Common
Stock of the Fund in this offering
will have an investment option
consisting of the right to
reinvest the net proceeds from a
sale of such shares (the "Original
Shares") in Class D initial sales
charge shares of certain Merrill
Lynch-sponsored open-end mutual
funds ("Eligible Class D Shares")
at their net asset value, without
the imposition of the initial
sales charge, if the conditions
set forth below are satisfied.
First, the sale of the Original
Shares must be made through Merrill
Lynch, and the net proceeds
therefrom must be immediately
reinvested in Eligible Class D
Shares. Second, the Original
Shares must have been either
acquired in this offering or be
shares representing reinvested
dividends from shares of Common
Stock acquired in this offering.
Third, the Original Shares must
have been continuously maintained
in a Merrill Lynch securities
account. Fourth, there must be a
minimum purchase of $250 to be
eligible for the investment
option. Class D shares of the
mutual funds are subject to an
account maintenance fee at an
annual rate of up to 0.25% of the
average daily net asset value of
such mutual fund. See "Mutual
Fund Investment Option."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a newly organized, non-diversified closed-end management
investment company and has no operating history. As described under
"Listing" above, it is anticipated that an investment in the Fund will be
illiquid prior to listing of the Fund's shares on the New York Stock
Exchange. See "Underwriting". Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. Accordingly, the Common
Stock of the Fund is designed primarily for long-term investors and should
not be considered a vehicle for trading purposes. The net asset value of the
Fund's shares of Common Stock will fluctuate with interest rate changes as
well as with price changes of the Fund's portfolio securities, and these
fluctuations are likely to be greater in the case of a fund having a
leveraged capital structure, as contemplated for the Fund. See "Risks and
Special Considerations of Leverage."
The Fund has registered as a "nondiversified" investment company so that
it will be able to invest more than 5% of its assets in the obligations of
any single issuer, subject to the diversification requirements of Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), applicable
to the Fund. Since the Fund may invest a relatively high percentage of its
assets in the obligations of a limited number of issuers, the Fund may be
more susceptible than a more widely-diversified fund to any single economic,
political or regulatory occurrence.
The Fund intends to invest at least 75% of its total assets in municipal
obligations that are rated in the investment grade rating categories by
Standard & Poor's Ratings Services ("S&P"), Moody's Investors Service, Inc.
("Moody's") or Fitch Investors Service, Inc. ("Fitch") or, if not rated, are
considered to be of comparable quality by the Investment Adviser.
Obligations rated in the lowest investment-grade category may 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, 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."
The Fund will be subject to certain restrictions on investments imposed
by guidelines of one or more NRSROs that may issue ratings for the preferred
stock. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. It
is not anticipated that these covenants or guidelines will impede the
Investment Adviser from managing the Fund's portfolio in accordance with the
Fund's investment objective and policies.
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 counter-party to the transaction.
Investments in indexed securities, including inverse securities, subject the
Fund to the risks associated with changes in the particular indices, which
may include reduced or eliminated interest payments and losses of invested
principal. Derivative instruments may have certain characteristics that have
a similar effect on the return to Common Stock investors as the leverage
transactions discussed under "Risks and Special Considerations of Leverage;"
however, certain derivative investments will not be taken into account for
purposes of calculating the percentage of leverage of the Fund's portfolio.
For a further discussion of the risks associated with derivative investments,
see "Investment Objective and Policies," "Investment Objective and Policies--
Other Investment Policies--Indexed and Inverse Floating Obligations," "--Call
Rights" and "Investment Objective and Policies--Options and Futures
Transactions."
Subject to its investment restrictions, the Fund is authorized to engage
in options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security that is the subject of the hedge and the inability to close futures
transactions under certain conditions. Because of the anticipated leveraged
nature of the Common Stock, hedging transactions will result in a larger
impact on the net asset value of the Common Stock than would be the case if
the Common Stock were not leveraged. OTC options and assets used to cover
OTC options written by the Fund are considered by the staff of the Securities
and Exchange Commission to be illiquid. The illiquidity of such options or
assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might be otherwise
realized. See "Investment Objective and Policies--Options and Futures
Transactions." The Fund intends to apply for ratings of the preferred stock
from one or more NRSRO. In order to obtain these ratings, the Fund may be
required to limit its use of hedging techniques in accordance with the
specified guidelines of such NRSRO.
The Fund's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors
and could have the effect of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund. See "Description of
Capital Stock--Certain Provisions of the Articles of Incorporation."
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering price) None
Dividend Reinvestment Plan Fees . . . . . . . . . . . None
ANNUAL EXPENSES (as a percentage of net assets
attributable
to shares of Common Stock):
Management Fees(a)(b) . . . . . . . . . . . . . . . . %
Interest Payments on Borrowed Funds . . . . . . . . None
Other Expenses(b) . . . . . . . . . . . . . . . . . . %
Total Annual Expenses(b) . . . . . . . . . . . . . . . %
EXAMPLE 1 YEAR 3 YEARS
An investor would pay the following expenses on a $1,000
investment, assuming (1) total annual expenses of %
(assuming no leverage) and % (assuming leverage) and (2) a
5% annual return throughout the periods:
Assuming No Leverage $____ $___
Assuming Leverage $____ $___
(a) See "Investment Advisory and Management Arrangements"--page .
(b) In the event that the Fund utilizes leverage by issuing preferred stock
in an amount of approximately 35% of the Fund's capital, it is estimated
that the Management Fees would be %, Other Expenses would be % and
Total Annual Expenses would be %. See "Risks and Special
Considerations of Leverage."
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by the Securities and Exchange Commission regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE
OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS
THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
THE FUND
MuniHoldings Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on February , 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 has been organized as a closed-end investment company.
Closed-end investment companies differ from open-end investment companies
(commonly referred to as "mutual funds") in that closed-end investment
compares do not redeem their securities at the option of the shareholder,
whereas open-end companies issue securities redeemable at net asset value at
any time at the option of the shareholder and typically engage in a
continuous offering of their shares. Accordingly, open end companies are
subject to continuous asset in-flows and out-flows that can complicate
portfolio management. Shares of closed-end investment companies, however,
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering.
USE OF PROCEEDS
The net proceeds of this offering will be $_______________ (or
approximately $_______________ assuming the Underwriters exercise the
over-allotment option in full) after payment of organizational and offering
expenses.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of Common Stock, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in
short-term, tax-exempt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of current income exempt from Federal income taxes as is
consistent with its investment policies. 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
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the 1940 Act. Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term Municipal Bonds. Certain Non-Municipal
Tax-Exempt Securities may be characterized as derivative instruments. Non-
Municipal Tax-Exempt Securities will be considered "Municipal Bonds" for
purposes of the Fund's investment objective and policies.
Investment in shares of Common Stock of the Fund offers several
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal income taxes by investing in a professionally managed portfolio
comprised primarily of high grade Municipal Bonds. The Fund also relieves
the investor of the burdensome administrative details involved in managing a
portfolio of Municipal Bonds. Additionally, the Investment Adviser will seek
to enhance the yield on the Common Stock by leveraging the Fund's capital
structure through the issuance of preferred stock. The benefits are at least
partially offset by the expenses involved in operating an investment company.
Such expenses primarily consist of the advisory fee and operational costs.
Additionally, the use of leverage involves certain expenses and special risk
considerations. See "Risks and Special Considerations of Leverage."
The investment grade Municipal Bonds in which the Fund will invest are
those Municipal Bonds rated at the date of purchase in the four highest
rating categories of 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 may be sub-categories or
gradations indicating relative standing within the rating categories set
forth above. See Appendix I to this Prospectus for a description of S&P's,
Moody's and Fitch's ratings of Municipal Bonds. In assessing the quality of
Municipal Bonds with respect to the foregoing requirements, the Investment
Adviser will take into account the nature of any letters of credit or similar
credit enhancement to which particular Municipal Bonds are entitled and the
creditworthiness of the financial institution which provided such credit
enhancement.
As noted above, the Fund may invest up to 25% of its assets in Municipal
Bonds 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.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In
such instances, the Board of Directors and the Investment Adviser will take
into account in assessing the quality of such bonds not only the
creditworthiness of the issuer of such bonds but also the creditworthiness of
the financial institutions providing the credit enhancement.
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 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%) of 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. Such short-term
securities or cash will not exceed 20% of its total assets except during
interim periods pending investment of the net proceeds of public offerings of
the Fund's securities or in anticipation of the repurchase or redemption of
the Fund's securities and temporary periods when, in the opinion of the
Investment Adviser, prevailing market or economic conditions warrant. The
Fund does not ordinarily intend to realize significant interest income not
exempt from Federal income tax.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion
of its assets that it may invest in securities of a single issuer. However,
the Fund's investments will be limited so as to qualify the Fund for special
tax treatment afforded regulated investment companies under the Code. See
"Taxes." To qualify, among other requirements, the Fund will limit its
investments so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the market value of the Fund's total assets will be
invested in the securities (other than U.S. Government securities) of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities (other than U.S. Government securities) of a
single issuer. A fund which elects to be classified as "diversified" under
the 1940 Act must satisfy the foregoing 5% requirement with respect to 75% of
its total assets. To the extent that the Fund assumes large positions in the
securities of a small number of issuers, the Fund's yield may fluctuate to a
greater extent than that of a diversified company as a result of changes in
the financial condition or in the market's assessment of the issuers.
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
obligation bonds are secured by the issuer's pledge of faith, credit and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as from the user of
the facility being financed. 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 the principal and 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
331/3% 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, 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 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.
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 ("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 the 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. In addition, 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. Furthermore, the
Fund will only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in interest
rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and
futures contracts distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to
shareholders. See "Taxes--Tax Treatment of Options and Futures
Transactions." In addition, in order to obtain ratings of the preferred stock
from one or more NRSROs, the Fund may be required to limit its use of hedging
techniques in accordance with the specified guidelines of such organizations.
The following is a description of the options and futures transactions
in which the Fund may engage, limitations on the use of such transactions and
risks associated therewith. The investment policies with respect to the
hedging transactions of the Fund are not fundamental policies and may be
modified by the Board of Directors of the Fund without the approval of the
Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered
call options with respect to Municipal Bonds it owns, thereby giving the
holder of the option the right to buy the underlying security covered by the
option from the Fund at the stated exercise price until the option expires.
The Fund writes only covered call options, which means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option. The Fund may not write covered call
options on underlying securities in an amount exceeding 15% of the market
value of its total assets.
The Fund will receive a premium from writing a call option, which
increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. By writing a call,
the Fund limits its opportunity to profit from an increase in the market
value of the underlying security above the exercise price of the option for
as long as the Fund's obligation as a writer continues. Covered call options
serve as a partial hedge against a decline in the price of the underlying
security. The Fund may engage in closing transactions in order to terminate
outstanding options that it has written.
Purchase of Options. The Fund may purchase put options in connection
with its hedging activities. By buying a put the Fund has a right to sell
the underlying security at the exercise price, thus limiting the Fund's risk
of loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the put option plus the related transaction costs. A
closing sale transaction cancels out the Fund's position as the purchaser of
an option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the
Fund may purchase call options on securities held in its portfolio on which
it has written call options or on securities which it intends to purchase.
The Fund will not purchase options on securities if, as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Financial Futures Contracts and Options. The Fund is authorized to
purchase and sell certain financial futures contracts and options thereon
solely for the purpose of hedging its investments in Municipal Bonds against
declines in value and to hedge 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 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 futures contracts.
The purchase or sale of a 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
that 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, such as
financial futures contracts on other municipal bond indices which may become
available, if the Investment Adviser should determine that there is normally
sufficient correlation between the prices of such financial futures contracts
and the Municipal Bonds in which the Fund invests to make such hedging
appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC
options"). In general, exchange-traded contracts are third-party contracts
(i.e., performance of the parties' obligations is guaranteed by an exchange
or clearing corporation) with standardized strike prices and expiration
dates. OTC options transactions are two-party contracts with prices and
terms negotiated by the buyer and seller. See "Restrictions on OTC Options"
below for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in
OTC options only with member banks of the Federal Reserve System and primary
dealers in U.S. Government securities or with affiliates of such banks or
dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million or with any
other bank or dealer having capital of at least $150 million or whose
obligations are guaranteed by an entity having capital of at least $150
million. OTC options and assets used to cover OTC options written by the
Fund are considered by the staff of the Securities and Exchange Commission to
be illiquid. The illiquidity of such options or assets may prevent a
successful sale of such options or assets, result in a delay of sale, or
reduce the amount of proceeds that might otherwise be realized.
Risk Factors in Options and Futures Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements
in the price of financial futures contracts and movements in the price of the
security that 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 that will
not be completely offset by movements in the price of such security. There
is a risk of imperfect correlation where the securities underlying financial
futures contracts have different maturities, ratings, geographic compositions
or other characteristics than the security being hedged. In addition, the
correlation may be affected by additions to or deletions from the index which
serves as a basis for a financial futures contract. Finally, in the case of
financial futures contracts on U.S. Government securities and options on such
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 that have a disparate impact on the respective markets
for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell financial futures contracts and options thereon (i) for
bona fide hedging purposes, without regard to the percentage of the Fund's
assets committed to margin and option premiums, and (ii) for non-hedging
purposes if, immediately thereafter, the sum of the amount of initial margin
deposits on the Fund's existing futures positions and option premiums entered
into for non-hedging purposes do not exceed 5% of the market value of the
liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such transactions. Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
When the Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of
cash, cash equivalents (e.g., commercial paper and daily tender adjustable
notes) or short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian so that the amount so segregated plus the
amount of initial and variation margin held in the account of its broker
equals the market value of the financial futures contract, thereby ensuring
that the use of such financial futures contract is unleveraged.
Although certain risks are involved in options and futures transactions,
the Investment Adviser believes that, because the Fund will engage in options
and futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The Fund may be restricted in engaging in options and futures transactions
due to the requirement that less than 30% of its gross income in each taxable
year be derived from the sale or other disposition of securities held for
less than three months. See "Taxes--Tax Treatment of Options and Futures
Transactions."
The volume of trading in the exchange markets with respect to Municipal
Bond options may be limited, and it is impossible to predict the amount of
trading interest that may exist in such options. In addition, there can be
no assurance that viable exchange markets will continue.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures
transaction. The inability to close options and futures positions also could
have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with which the Fund has an
open position in an option or financial futures contract.
The liquidity of a secondary market in a financial futures contract may
be adversely affected by "daily price fluctuation limits" established by
commodity exchanges that 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 moved beyond 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 which is not fully or partially
offset by an increase in the value of portfolio securities. As a result, the
Fund's total return for such period may be less than if it had not engaged to
the hedging transaction. Furthermore, the Fund will only engage in hedging
transactions from time to time and may not necessarily be engaged in hedging
transactions when movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately three months after the completion of the offering
of shares of Common Stock, the Fund intends to offer shares of preferred
stock representing approximately 35% of the Fund's capital immediately after
the issuance of such preferred stock. There can be no assurance, however,
that preferred stock representing such percentage of the Fund's capital will
actually be issued. The issuance of the preferred stock will result in the
leveraging of the Common Stock. Although the terms of the preferred stock
offering will be determined by the Fund's Board of Directors, it is
anticipated that the preferred stock will pay dividends that will be adjusted
over either relatively short-term periods (generally seven to 28 days) or
medium-term periods (up to five years) and that the dividend rate will be
based upon prevailing interest rates for debt obligations of comparable
maturity. The proceeds of the preferred stock offering will be invested in
longer-term obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne by the
Fund and will reduce the net asset value of the Common Stock. Additionally,
under certain circumstances, when the Fund is required to allocate taxable
income to holders of preferred stock, it is anticipated that the terms of the
preferred stock will require the Fund to make an additional distribution to
such holders in an amount approximately equal to the tax liability resulting
from such allocation and such additional distribution (such amount, an
"Additional Distribution"). Because under normal market conditions,
obligations with longer maturities produce higher yields than short-term and
medium-term obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term rates (and
any Additional Distribution) paid by the Fund as dividends on the preferred
stock and the longer-term rates received by the Fund will provide holders of
Common Stock with a potentially higher yield.
Utilization of leverage, however, involves certain risks to the holders
of Common Stock. For example, issuance of the preferred stock may result in
higher volatility of the net asset value of the Common Stock and potentially
more volatility in the market value of the Common Stock. In addition,
fluctuations in the short-term and medium-term dividend rates on, and the
amount of taxable income allocable to, the preferred stock will affect the
yield to holders of Common Stock. So long as the Fund, taking into account
the costs associated with the preferred stock and the Fund's operating
expenses, is able to realize a higher net return on its investment portfolio
than the then current dividend rate (and any Additional Distribution) of the
preferred stock, the effect of leverage will be to cause holders of Common
Stock to realize a higher current rate of return than if the Fund were not
leveraged. Similarly, since a pro rata portion of the Fund's net realized
capital gains on its investment assets are generally payable to holders of
Common Stock if net capital gains are realized by the Fund, the effect of
leverage will be to increase the amount of such gains distributed to holders
of Common Stock. However, short-term, medium-term and long-term interest
rates change from time to time as does their relationship to each other
(i.e., the slope of the yield curve) depending upon such factors as supply
and demand forces, monetary and tax policies and investor expectations.
Changes in such factors could cause the relationship between short-term,
medium-term and long-term rates to change (i.e, to flatten or to invert the
slope of the yield curve) so that short-term and medium-term rates may
substantially increase relative to the long-term obligations in which the
Fund may be invested. To the extent that the current dividend rate (and any
Additional Distribution) on the preferred stock approaches the net return on
the Fund's investment portfolio, the benefit of leverage to holders of Common
Stock will be reduced, and if the current dividend rate (and any Additional
Distribution) on the preferred stock were to exceed the net return on the
Fund's portfolio, the Fund's leveraged capital structure would result in a
lower rate of return to holders of Common Stock than if the Fund were not
leveraged. Similarly, since both the cost associated with the issuance of
preferred stock and any decline in the value of the Fund's investments
(including investments purchased with the proceeds from any preferred stock
offering) will be borne entirely by holders of Common Stock, the effect of
leverage in a declining market would result in a greater decrease in net
asset value to holders of Common Stock than if the Fund were not leveraged.
In an extreme ease, a decline in net asset value could affect the Fund's
ability to pay dividends on the Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Code. See "Taxes." The Fund intends, however,
to take all measures necessary to continue to make Common Stock dividend
payments. If the Fund's current investment income were not sufficient to
meet dividend requirements on either the Common Stock or the preferred stock,
it could be necessary for the Fund to liquidate certain of its investments.
In addition, the Fund will have the authority to redeem the preferred stock
for any reason and may redeem all or part of the preferred stock if (i) it
anticipates that the Fund's leveraged capital structure will result in a
lower rate of return for any significant amount of time to holders of the
Common Stock than that obtainable if the Common Stock were unleveraged, (ii)
the asset coverage for the preferred stock declines below 200% either as a
result of a decline in the value of the Fund's portfolio investments or as a
result of the repurchase of Common Stock in tender offers, or (iii) in order
to maintain the asset coverage guidelines established by the NRSROs that have
rated the preferred stock. Redemption of the preferred stock or insufficient
investment income to make dividend payments, may reduce the net asset value
of the Common Stock and require the Fund to liquidate a portion of its
investments at a time when it may be disadvantageous, in the absence of such
extraordinary circumstances, to do so.
Assuming the utilization of leverage by the issuance of preferred stock
that pays dividends at a rate that generally will be adjusted every 28 days
in an amount representing approximately 35% of the Fund's capital at an
annual dividend rate of % payable on such preferred stock based on market
rates as of the date of this Prospectus, the annual return that the Fund's
portfolio must experience (net of expenses) in order to cover such dividend
payments would be %.
The following table is designed to illustrate the effect on the return
to a holder of the Fund's Common Stock of the leverage obtained by the
issuance of preferred stock representing approximately % of the Fund's
capital, assuming hypothetical annual returns on the Fund's portfolio of
minus 10% to plus 10%. As the table shows, leverage generally increases the
return to stockholders when portfolio return is positive and decreases the
return when the portfolio return is negative. The figures appearing in the
table are hypothetical and actual returns may be greater or less than those
appearing in the table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses) . . . . . . . . . . . . . . (10)% (5)% 0% 5% 10%
Corresponding Common Stock Return . . . . . . . % % % % %
</TABLE>
Until the preferred stock is issued, the Fund's Common Stock will not be
leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Common
Stock cannot be fully achieved until the proceeds of the offering of
preferred stock have been invested in long-term Municipal Bonds. In
addition, the leveraging of the Common Stock would be eliminated during any
period that preferred stock is not outstanding and the risks and special
considerations related to leverage described in this Prospectus would not
apply.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term or medium-term rates or other
change in market conditions to the point where the Fund's leverage could
adversely affect holders of Common Stock as noted above, or in anticipation
of such changes, the Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of Common Stock. The Fund also may attempt to reduce the
degree to which it is leveraged by redeeming preferred stock pursuant to the
provisions of the Fund's Articles Supplementary establishing the rights and
preferences of the preferred stock or otherwise purchasing shares of
preferred stock. Purchases and redemptions of preferred stock, whether on
the open market or in negotiated transactions, are subject to limitations
under the 1940 Act. If market conditions subsequently change, the Fund may
sell previously unissued shares of preferred stock or shares of preferred
stock that the Fund previously issued but later repurchased or redeemed.
The Fund intends to apply for ratings of the preferred stock from one or
more NRSRO. In order to obtain these ratings, the Fund may be required to
maintain portfolio holdings meeting specified guidelines of such
organizations. These guidelines may impose asset coverage requirements that
are more stringent than those imposed by the 1940 Act. It is not anticipated
that these guidelines will impede the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies. Ratings on preferred stock issued by the Fund should not be
confused with ratings on obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue shares of
preferred stock unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred stock (expected to equal the original purchase price of
the outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated and unpaid Additional Distribution).
In addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Stock unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the
amount of such dividend or distribution) is at least 200% of such
liquidation value. Under the Fund's proposed capital structure, assuming the
sale of shares of preferred stock representing approximately 35% of the
Fund's capital, the net asset value of the Fund's portfolio is expected to be
approximately 285% of the liquidation value of the Fund's preferred stock.
To the extent possible, the Fund intends to purchase or redeem shares of
preferred stock from time to time to maintain coverage of preferred stock of
at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and,
prior to issuance of the preferred stock, may not be changed without the
approval of the holders of a majority of the Fund's outstanding shares of
Common Stock (which for this purpose and under the 1940 Act means the lesser
of (i) 67% of the shares of Common Stock represented at a meeting at which
more than 50% of the outstanding shares of Common Stock are represented or
(ii) more than 50% of the outstanding shares). Subsequent to the issuance of
the preferred stock, the following investment restrictions may not be changed
without the approval of a majority of the outstanding shares of Common Stock
and of the outstanding shares of preferred stock, voting together as a class,
and the approval of a majority of the outstanding shares of preferred stock,
voting separately by class. 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
(the "1933 Act"), in selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase
Municipal Bonds and other debt securities in accordance with is investment
objective, policies and limitations.
6. Invest more than 25% of is total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors, provide that the Fund may not:
a. Purchase securities of other investment companies, except to
the extent that such purchases are permitted by applicable law.
Applicable law currently prohibits the Fund from
purchasing the securities of other investment
companies except if immediately thereafter not more
than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the
Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the
Fund's total assets, taken at market value, would be
invested in such securities, and (iv) the Fund,
together with other investment companies having the
same investment adviser and companies controlled by
such companies, owns not more than 10% of the total
outstanding stock of any one closed-end investment
company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings 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.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. Because of the affiliation of Merrill Lynch with the
Fund, the Fund is prohibited from engaging in certain transactions involving
Merrill Lynch except pursuant to an exemptive order or otherwise in
compliance with the provisions of the 1940 Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases
from or sales to Merrill Lynch of securities in transactions in which it acts
as principal. An exemptive order has been obtained which permits the Fund to
effect principal transactions with Merrill Lynch in high quality, short-term,
tax-exempt securities subject to conditions set forth in such order. The
Fund may consider in the future requesting an order permitting other
principal transactions with Merrill Lynch, but there can be no assurance that
such application will be made and, if made, that such order would be granted.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
(To be provided by amendment)
In the event that the Fund issues preferred stock, in connection with
the election of the Fund's Directors, holders of shares of preferred stock,
voting as a separate class, will be entitled to elect two of the Fund's
Directors, and the remaining Directors will be elected by all holders of
capital stock, voting as a single class. See "Description of Capital Stock."
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser
an annual fee of $_____ per year plus $___ per meeting attended, together
with such Director's actual out-of-pocket expenses relating to attendance at
meetings. The Fund also compensates members of its Audit Committee, which
consists of all of the Directors not affiliated with the Investment Adviser,
at a rate of $_____ per meeting attended. The Chairman of the Audit
Committee receives an additional fee of $_____ per year.
The following table sets forth compensation to be paid by the Fund
to the non-interested Directors projected through the end of the Fund's first
fiscal year and for the calendar year ended December 31, 1996 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
interested Directors.
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID
NAME OF DIRECTOR (1) FROM FUND FUND EXPENSE TO DIRECTORS
- -------------------- --------- ------------------- ----------------
None
None
None
None
None
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows: ___________________ (__ funds and
portfolios); ______________ ( funds and portfolios); ______________ (__
funds and portfolios); ________________ (___ funds and portfolios); and
_________________ (___ funds and 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 February 28, 1997, the Investment Adviser and MLAM
had a total of approximately $ billion in investment company and other
portfolio assets under management (approximately $ 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
performances of certain administrative and management services for the Fund.
________________, is the portfolio manager for the Fund and is primarily
responsible for the Fund's day-to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of
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 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 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 that provided supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Information so received will
be in addition to and not in lieu of the services required to be performed by
the Investment Adviser under the Investment Advisory Agreement, and the
expenses of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information.
The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.
Under the 1940 Act, except as permitted by exemptive order, persons
affiliated with the Fund are prohibited from dealing with the Fund as
principal in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own account, the Fund will not deal with affiliated
persons, including Merrill Lynch and its affiliates, in connection with such
transactions except that, pursuant to an exemptive order obtained by the
Investment Adviser, the Fund may engage in principal transactions with
Merrill Lynch in high quality, short-term, tax exempt securities. See
"Investment Restrictions." An affiliated person of the Fund may serve as its
broker in over-the-counter transactions conducted on an agency basis.
The Fund may also make loans to tax-exempt borrowers in individually
negotiated transactions with the borrower. Because an active trading market
may not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons
appears advisable to the Investment Adviser. The Fund will, however, monitor
its trading so as to comply with certain requirements for qualification as a
regulated investment company under the Code. 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.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends
from such net investment income will be declared and paid monthly to holders
of Common Stock. It is expected that the Fund will commence paying dividends
to holders of Common Stock within approximately 90 days of the date of this
Prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of Common Stock normally will consist of
substantially all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the preferred stock. All net
realized long-term or short-term capital gains, if any, will be distributed
at least annually to holders of Common Stock and pro rata to holders of
Common Stock and preferred stock. While any shares of preferred stock are
outstanding, the Fund may not declare any cash dividend or other distribution
on its Common Stock, unless at the time of such declaration, (i) all
accumulated preferred stock dividends, including any Additional Distribution,
have been paid, and (ii) the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or other
distribution) is at least 200% of the liquidation value of the outstanding
preferred stock (expected to equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated but unpaid Additional Distribution).
If the Fund's ability to make distributions on its Common Stock is limited,
such limitation could under certain circumstances impair the ability of the
Fund to maintain its qualification for taxation as a regulated investment
company, which could have adverse tax consequences for holders of Common
Stock. See "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning
the manner in which dividends and distributions to holders of Common Stock
may be automatically reinvested in shares of
Common Stock of the Fund. Dividends and distributions may be taxable to
shareholders under certain circumstances as discussed below, whether they are
reinvested in shares of the Fund or received in cash.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Fund intends to distribute substantially all of such income.
The Code requires to 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 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
that 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 income tax purposes.
Exempt-interest dividends are included, however, in determining the portion,
if any, of a person's Social Security and railroad retirement benefits
subject to Federal income taxes. Interest on indebtedness incurred or
continued to purchase or carry Fund shares is not deductible for Federal
income tax purposes to the extent attributable to exempt-interest dividends.
Each shareholder is advised to consult a tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Code Section 103(a) if
such shareholder would be treated as a "substantial user" or "related person"
under Code Section 147(a) with respect to property financed with the proceeds
of an issue of "industrial development bonds" or "private activity bonds," if
any, held by the Fund.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains
over net long-term capital losses ("ordinary income dividends"), such
distributions will be considered taxable ordinary income for Federal income
tax purposes. Distributions, if any, from an excess of net long-term capital
gains over net short-term capital losses derived from the sale of securities
or from certain transactions in futures or options ("capital gain dividends")
are taxable as long-term capital gains for Federal income tax purposes,
regardless of the length of time the shareholder has owned Fund shares.
Distributions by the Fund, whether from exempt-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 that 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 Internal Revenue Service 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
income 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.
Consequently, when both Common Stock and preferred stock are outstanding, the
Fund intends to designate distributions made to the classes as consisting of
particular types of income in accordance with the classes' proportionate
shares of such income. Thus, the Fund will designate dividends paid as
exempt-interest dividends in a manner that allocates such dividends between
the holders of Common Stock and preferred stock in proportion to the total
dividends paid to each class during the taxable year, or otherwise as
required by applicable law. Capital gain dividends will similarly be
allocated between the two classes in proportion to the total dividends paid
to each class during the taxable year, or otherwise as required by applicable
law. When capital gain or other taxable income is allocated to holders of
preferred stock pursuant to the allocation rules described above, the terms
of the preferred stock may require the Fund to make an additional
distribution to or otherwise compensate such holders for the tax liability
resulting from such allocation.
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 certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and that 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" that could subject certain
investors in such bonds, including shareholders of the Fund, to an increased
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 that
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 previously described.
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 preferred stock 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 "Dividends and Distributions." This may
prevent the Fund from distributing at least 90% of its net investment 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 preferred stock
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. 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 Internal
Revenue Service 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 Internal Revenue Service would agree that dividends on the preferred
stock are not preferential. If the Internal Revenue Service successfully
disallowed the dividends paid deduction for dividends on the preferred stock,
the Fund could be disqualified as a RIC. In this case, dividends on the
Common Stock would not be exempt from Federal income taxes. Additionally,
the Fund would be subject to the alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend
reinvestment plan will generally be excluded from gross income to the extent
that the cash amount reinvested would be excluded from gross
income. If, when the Fund's shares are trading at a premium over net asset
value, the Fund issues shares pursuant to the dividend reinvestment plan that
have a greater fair market value than the amount of cash reinvested, it is
possible that all or a portion of such discount (which may not exceed 5% of
the fair market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution, it is
also possible that the taxable character of this discount would be allocable
to all the shareholders, including shareholders who do not participate in the
dividend reinvestment plan. Thus, shareholders who do not participate in the
dividend reinvestment plan might be required to report as ordinary income a
portion of their distributions equal to their allocable share of the discount.
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.
Under certain Code provisions, some taxpayers may be subject to 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 not on file with the Fund or who,
to the Fund's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not otherwise subject
to backup withholding.
The Code provides that every shareholder required to file a tax return
must include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the
Fund) during the taxable year.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative minimum tax net operating loss deduction and the
deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of
alternative minimum taxable income in excess of $2,000,000. The
Environmental Tax has expired, but may be reinstated in the future. The
Environmental Tax was imposed even if the corporation was not required to pay
an alternative minimum tax because the corporation's regular income tax
liability exceeded its minimum tax liability. The Code provides, however,
that a RIC, such as the Fund, would not be subject to the Environmental Tax.
However, exempt-interest dividends paid by the Fund that create alternative
minimum taxable income for corporate shareholders (as described above) could
subject corporate shareholders of the Fund to the Environmental Tax.
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 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 investment.
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 other tax laws 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, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the
"Plan"), unless a holder of Common Stock otherwise elects, all dividend and
capital gains distributions will be automatically reinvested by
_________, as agent for shareholders in administering the Plan (the "Plan
Agent"), in additional shares of Common Stock of the Fund. Holders of Common
Stock who elect not to participate in the Plan will receive all distributions in
cash paid by check mailed directly to the shareholder of record (or, if the
shares are held in street or other nominee name, then to such nominee) by,
________________, as dividend paying agent. Such participants may elect not
to participate in the Plan and to receive all distributions of dividends and
capital gains in cash by sending written instructions to _________________,
as dividend paying agent, at the address set forth below. Participation in
the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by written notice if received by the Plan Agent not less than
ten days prior to any dividend record date; otherwise, such termination will
be effective with respect to any subsequently declared dividend or
distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares of Common
Stock. The shares will be acquired by the Plan Agent for the participant's
account, depending upon the circumstances described below, either (i) through
receipt of additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market ("open-market purchases") on the New York
Stock Exchange or elsewhere. If on the payment date for the dividend, the
net asset value per share of the Common Stock is equal to or less than the
market price per share of the Common Stock plus estimated brokerage
commissions (such condition being referred to herein as "market premium"),
the Plan Agent will invest the dividend amount in newly issued shares on
behalf of the participant. The number of newly issued shares of Common Stock
to be credited to the participant's account will be determined by dividing
the dollar amount of the dividend by the net asset value per share on the
date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If
on the dividend payment date the net asset value per share is greater than
the market value (such condition being referred to herein as "market
discount"), the Plan Agent will invest the dividend amount in shares acquired
on behalf of the participant in open-market purchases. Prior to the time the
shares of Common Stock commence trading on the New York Stock Exchange,
participants in the Plan will receive any dividends in newly issued shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during
which open-market purchases can be made will exist only from the payment date
on the dividend through the date before the next "ex-dividend" date, which
typically will be approximately ten days. If, before the Plan Agent has
completed its open-market purchases, the market price of a share of Common
Stock exceeds the net asset value per share, the average per share purchase
prices paid by the Plan Agent may exceed the net asset value of the Fund's
shares, resulting in the acquisition of fewer shares than if the dividend had
been paid in newly issued shares on the dividend payment date. Because of
the foregoing difficulty with respect to open-market purchases, the Plan
provides that if the Plan Agent is unable to invest the full dividend amount
in open-market purchases during the purchase period or if the market discount
shifts to a market premium during the purchase period, the Plan Agent will
cease making open-market purchases and will invest the uninvested portion of
the dividend amount in newly issued shares at the close of business on the
last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant and each shareholder's proxy will include
those shares purchased or received pursuant to the Plan. The Plan Agent will
forward all proxy solicitation materials to participants and vote proxies for
shares held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains distributions
payable either in shares or in cash. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open-market purchases in connection with the reinvestment of
dividends.
The automatic reinvestment of dividends and distributions will not
relieve participants of any Federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not
available to shareholders not participating in the Plan. If the market price
plus commissions of the Fund's shares is above the net asset value,
participants in the Plan will receive shares of the Fund at less than they
could otherwise purchase them and will have shares with a cash value greater
than the value of any cash distribution they would have received on their
shares. If the market price plus commissions is below the net asset value,
participants will receive distributions in shares with a net asset value
greater than the value of any cash distribution they would have received on
their shares. However, there may be insufficient shares available in the
market to make distributions in shares at prices below the net asset value.
Also, since the Fund does not redeem its shares, the price on resale may be
more or less than the net asset value. See "Taxes" for a discussion of tax
consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan.
There is no direct service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable
by the participants.
All correspondence concerning the Plan should be directed to the Plan
Agent at __________________ _____________, ______________, _____________.
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of Common Stock of the Fund in this offering will
have an investment option consisting of the right to reinvest the net
proceeds from a sale of such shares (the "Original Shares") in Class D
initial sales charge shares of certain Merrill Lynch-sponsored open-end
mutual funds ("Eligible Class D Shares") at their net asset value, without
the imposition of the initial sales charge, if the conditions set forth below
are satisfied. First, the sale of the Original Shares must be made through
Merrill Lynch, and the net proceeds therefrom must be immediately reinvested
in Eligible Class D Shares. Second, the Original Shares must have been
either acquired in this offering or be shares representing reinvested
dividends from shares of Common Stock acquired in this offering. Third, the
Original Shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class D shares of the mutual funds are
subject to an account maintenance fee at an annual rate of up to 0.25% of the
average daily net asset value of such mutual fund. The Eligible Class D
Shares may be redeemed at any time at the next determined net asset value,
subject in certain cases to a redemption fee. Prior to the time the shares
of Common Stock commence trading on the New York Stock Exchange, the
distributor for the mutual funds will advise Merrill Lynch financial
consultants as to those mutual funds that offer the investment option
described above.
NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
p.m., New York time) on the last business day in each week. For purposes of
determining the net asset value of a share of Common Stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The 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. 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 are 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. Within approximately three months after completion of the
offering of Common Stock described herein, the Fund intends to reclassify an
amount of unissued Common Stock as preferred stock and at that time to offer
shares of preferred stock representing approximately 35% of the Fund's
capital immediately after the issuance of such preferred stock.
COMMON STOCK
Shares of Common Stock, when issued and outstanding, will be fully paid
and non-assessable. Shareholders are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders upon
liquidation of the Fund. Shareholders are entitled to one vote for each
share held.
So long as any shares of the Fund's preferred stock are outstanding,
holders of Common Stock will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on
preferred stock have been paid and unless asset coverage (as defined in the
1940 Act) with respect to preferred stock would be at least 200% after giving
effect to such distributions. See "Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 shares of Common Stock of the Fund for $100,005. As of the
date of this Prospectus, the Investment Adviser owned 100% of the outstanding
shares of Common Stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
PREFERRED STOCK
It is anticipated that the Fund's shares of preferred stock will be
issued in one or more series, with rights as determined by the Board of
Directors, by action of the Board of Directors without the approval of the
holders of Common Stock. Under the 1940 Act, the Fund is permitted to have
outstanding more than one series of preferred stock so long as no single
series has a priority over another series as to the distribution of assets of
the Fund or the payment of dividends. Holders of Common Stock have no
preemptive right to purchase any shares of preferred stock that might be
issued. It is anticipated that the net asset value per share of the
preferred stock will equal its original purchase price per share plus
accumulated dividends per share.
The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 35% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of Common Stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
stock is likely to achieve the benefits to the holders of Common Stock
described in the Prospectus. Although the terms of the preferred stock,
including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Directors (subject
to applicable law and the Fund's Articles of Incorporation), the initial
series of preferred stock will be structured to carry either a relatively
short-term dividend rate, in which case periodic redetermination of the
dividend rate will be made at relatively shorn intervals (generally seven or
28 days), or a medium-term dividend rate, in which case periodic
redetermination of the dividend rate will be made at intervals of up to five
years. In either case, such redetermination of the dividend rate will be
made through an auction or remarketing procedure. Additionally, under
certain circumstances, when the Fund is required to allocate taxable income
to holders of the preferred stock, it is anticipated that the terms of the
preferred stock will require the Fund to make an Additional Distribution (as
defined in "Special Leverage Considerations and Risks--Effects of Leverage")
to such holders. The Board also has indicated that it is likely that the
liquidation preference, voting rights and redemption provisions of the
preferred stock will be as stated below. The Fund's Articles of
Incorporation, as amended, together with any Articles Supplementary, is
referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of Common Stock. After payment of
the full amount of the liquidating distribution to which they are entitled,
the preferred stockholders will not be entitled to any further participation
in any distribution of assets by the Fund. A consolidation or merger of the
Fund with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Fund will not be deemed 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
preferred stock will have equal voting rights with holders of shares of
Common Stock (one vote per share) and will vote together with holders of
Common Stock as a single class.
In connection with the election of the Fund's directors, holders of
shares of preferred stock, voting as a separate class, will be entitled to
elect two of the Fund's directors, and the remaining directors will be
elected by all holders of capital stock, voting as a single class. So long
as any preferred stock is outstanding, the Fund will have not less than five
directors. If at any time dividends on shares of the Fund's preferred stock
shall be unpaid in an amount equal to two full years' dividends thereon, the
holders of all outstanding shares of preferred stock, voting as a separate
class, will be entitled to elect a majority of the Fund's directors until all
dividends in default have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding
shares of the preferred stock, voting as a separate class, will be required
to (i) authorize, create or issue, or increase the authorized or issued
amount of, any class or series of stock ranking prior to or on a parity with
any series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation, or increase the authorized amount of
preferred stock or (ii) amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to adversely affect any
of the contract rights expressly set forth in the Charter of holders of
preferred stock.
Redemption Provisions. It is anticipated that shares of preferred stock
will generally be redeemable at the option of the Fund at a price equal to
their liquidation preference plus accumulated but unpaid dividends to the
date of redemption plus, under certain circumstances, a redemption premium.
Shares of preferred stock will also be subject to mandatory redemption at a
price equal to their liquidation preference plus accumulated but unpaid
dividends to the date of redemption upon the occurrence of certain specified
events, such as the failure of the Fund to maintain asset coverage
requirements for the preferred stock specified by the rating agencies that
issue ratings on the preferred stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors
and could have the effect of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund. A director may be
removed from office with or without cause, but only by vote of the holders of
at least 662/3% of the votes entitled to be voted on the matter. A director
elected by all the holders of capital stock may be removed only by action of
such holders, and a director elected by the holders of preferred stock
may be removed only by action of such holders.
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 662/3% 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 other corporations,
(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
two-thirds of the total number of Directors fixed in accordance with the
by-laws, in which case the affirmative vote of a majority of the Fund's
shares of capital stock is required. Following the proposed issuance of the
preferred stock, it is anticipated that the approval, adoption or
authorization of the foregoing would also require the favorable vote of a
majority of the Fund's shares of preferred stock then entitled to be voted,
voting as a separate class.
In addition, conversion of the Fund to an open-end investment company
would require an amendment to the Fund's Articles of Incorporation. The
amendment would have to be declared advisable by the Board of Directors prior
to its submission to shareholders. Such an amendment would require the
favorable vote of the holders of at least 662/3% of the Fund's outstanding
shares of capital stock (including any preferred stock) entitled to be voted
on the matter, voting as a single class (or a majority of such shares if the
amendment was previously approved, adopted or authorized by two-thirds of the
total number of Directors fixed in accordance with the by-laws), and,
assuming preferred stock is issued, the affirmative vote of a majority of
outstanding shares of preferred stock of the Fund, 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, and the Common Stock would no longer be listed on a stock
exchange.
Conversion to an open-end investment company would also require
redemption of all outstanding shares of preferred stock 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 662/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the
Securities and Exchange Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
_________________, ___________________________.
UNDERWRITING
The Underwriters named below, acting through their Representative,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, severally have agreed
subject to the terms and conditions of a Purchase Agreement with the Fund and
the Investment Adviser, to purchase from the Fund the numbers of shares of
Common Stock set forth opposite their respective names. The Underwriters
are committed to purchase all of such shares if any are purchased. Under
certain circumstances, the commitments of non-defaulting Underwriters may be
increased.
Underwriters Number of Shares
------------ ----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . .
__________
Total . . . . . . . . __________
The Representative has advised the Fund that the Underwriters propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus. There is no
sales charge or underwriting discount charged to investors on purchases of
shares of Common Stock in the offering. The Investment Adviser or an
affiliate has agreed to pay the Underwriters from its own assets a commission
in connection with the sale of shares of Common Stock in the offering in the
amount of $ per share. Such payment is equal to % of the initial
public offering price per share. The Representative also has advised the
Fund that from this amount the Underwriters may pay a concession to certain
dealers not in excess of $ per share on sales by such dealers and the
Underwriters may pay an allowance, and such dealers may pay a reallowance,
not in excess of $ per share on sales by certain other dealers. After
the initial public offering, the public offering price and other selling
terms may be changed. Investors must pay for shares of Common Stock
purchased in the offering on or before April , 1997.
The Fund has granted the Underwriters an option, exercisable for 45 days
after the date hereof, to purchase up to ____________ additional shares of
Common Stock to cover over-allotments, if any, at the initial offering price.
Prior to this offering, there has been no public market for the shares
of the Common Stock. Application will be made to list the shares of Common
Stock on the New York Stock Exchange. However, during an initial period,
which is not expected to exceed four weeks from the date of this Prospectus,
the Fund's shares will not be listed on any securities exchange.
Additionally, during such period, the Underwriters do not intend to make a
market in the Fund's shares, although a limited market may develop.
Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period. In order to meet the requirements for listing,
the Underwriters will undertake to sell lots of 100 or more shares to a
minimum of 2,000 beneficial owners.
The Fund anticipates that certain of the Underwriters may from time to
time act as brokers or dealers in connection with the execution of its
portfolio transactions after they have ceased to be Underwriters and, subject
to certain restrictions, may act as brokers while they are Underwriters.
The Representative is an affiliate of the Investment Adviser of the
Fund.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the
shares of Common Stock of the Fund will be _______________.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Fund and the Underwriters by Brown & Wood LLP,
New York, New York. 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 included in
this Prospectus has been so included in reliance on the report of ________,
independent auditors, and on their authority as experts in auditing and
accounting.
INDEPENDENT AUDITORS
_________________, _________________, ___________________, have been
selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by shareholders of the Fund.
The independent auditors are responsible for auditing the financial
statements of the Fund.
INDEPENDENT AUDITORS REPORT
To 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 _____ __, 1997. This financial statement is
the responsibility of the Fund's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniHoldings
Fund, Inc. as of _____ __, 1997 in conformity with generally accepted
accounting principles.
MuniHoldings Fund, Inc.
Statement of Assets, Liabilities and Capital
_______ __, 1997
ASSETS
Cash $100,005
Prepaid registration fees (Note 1)
Deferred organization expenses (Note 1) ________
Total assets ________
LIABILITIES
Accrued expenses (Note 1) ________
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) $
Paid in Capital in excess of par
Total Capital-Equivalent to $15.00 net asset value ________
per share of common stock (Note 1) $100,005
--------
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 , 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
for $100,005 on March , 1997.
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
of 1% of the average weekly net assets of the Fund.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as
such (and by complying with the applicable provisions of the Internal Revenue
Code of 1986, as amended) will not be subject to Federal income tax on
taxable income (including realized capital gains) that is distributed to
shareholders.
APPENDIX I
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, (e) 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 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"; MIG4/VMIG4 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'S") MUNICIPAL DEBT
RATINGS
An S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by 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.
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.
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's 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.
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 if 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, relay 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's municipal note rating reflects the liquidity concerns and
market access risks unique to such notes. Notes due in three years or less
will likely receive a note rating. Notes maturing beyond three years will
most likely receive a long-term debt rating. The following criteria will be
used in making that assessment.
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-I 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
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-l+."
A--Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) or Minus (--): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining or uncertain, as follows:
Improving
Stable
Declining
Uncertain
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue
Conditional: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purpose.
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.
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 (+) 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+."
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.
APPENDIX II
TAXABLE EQUIVALENT YIELDS FOR 1997
<TABLE>
<CAPTION>
TAXABLE INCOME* A TAX-EXEMPT YIELD OF
1997 FEDERAL
SINGLE RETURN JOINT RETURN TAX BRACKET 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
- ------------- ------------ ----------- ----- ----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$24,651-$59,750 $41,201-$99,600 28.00% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42%
$59,751-$124,650 $99,601-$151,750 31.00% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87%
$124,651-$271,050 $151,751-$271,050 36.00% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72%
Over $271,050 Over $271,050 39.60% 8.28% 9.11% 9.93% 10.76% 11.59% 12.42%
</TABLE>
_______________________________
* An investor's marginal tax rates may exceed the rates shown in the above
table due to the reduction, or possible eliminations of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. Income also may be subject to certain state and
local taxes. For investors who pay alternative maximum tax, tax-exempt
yields may be equivalent to lower taxable yields than those shown above.
The tax rates shown above do not apply to corporate taxpayers. The tax
characteristics of the Fund are described more fully elsewhere in this
Prospectus. Consult your tax adviser for further details. This chart
is for illustrative purposes only and cannot be taken as an indication
of anticipated Fund performance.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN ______ Shares
OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR MUNIHOLDINGS FUND, INC.
JURISDICTION OF THE UNITED STATES OR ANY
COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
COMMON STOCK
_________________________
TABLE OF CONTENTS
Page
Prospectus Summary . . . . . . . . . . . . 3
Fee Table . . . . . . . . . . . . . . . . . 9 ------------
The Fund . . . . . . . . . . . . . . . . . 9 PROSPECTUS
Use of Proceeds . . . . . . . . . . . . . . 10 ------------
Investment Objective and Policies . . . . . 10
Risks and Special Considerations of Leverage
17
Investment Restrictions . . . . . . . . . . 19
Directors and Officers . . . . . . . . . . 20
Investment Advisory and Management
Arrangements . . . . . . . . . . . . . . 22
Portfolio Transactions . . . . . . . . . . 23
Dividends and Distributions . . . . . . . . 24 MERRILL LYNCH & CO.
Taxes . . . . . . . . . . . . . . . . . . . 24
Automatic Dividend Reinvestment Plan . . . 28
Mutual Fund Investment Option . . . . . . . 30
Net Asset Value . . . . . . . . . . . . . . 30
Description of Capital Stock . . . . . . . 31
Custodian . . . . . . . . . . . . . . . . . 34
Underwriting . . . . . . . . . . . . . . . 34 April , 1997
Transfer Agent, Dividend Disbursing Agent
and Registrar . . . . . . . . . . . . . . 35
Legal Opinions . . . . . . . . . . . . . . 35
Experts . . . . . . . . . . . . . . . . . . 35
Independent Auditors . . . . . . . . . . . 35
Independent Auditors' Report . . . . . . . 36
Statement of Assets, Liabilities and Capital
37
Appendix I . . . . . . . . . . . . . . . . 38
Appendix II . . . . . . . . . . . . . . . . 46
------------------------------
Until , 1997 (90 days after
______________
the commencement of the offering), all dealers
effecting transactions in the Common Stock,
whether or not participating in this
distribution, may be required to deliver a
Prospectus. This delivery requirement is in
addition to the obligation of dealers to
deliver a Prospectus when acting as
underwriters and with respect to their unsold
allotments or subscriptions.
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits.
(1) Financial Statements
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of
_____________, 1997
(2) Exhibits:
(a) --Articles of Incorporation
(b) --By-Laws
(c) --Not applicable
(d)(1)--Portions of the Articles of Incorporation and By-Laws of
the Registrant defining the rights of holders of shares
of the Registrant. (a)
(d)(2) --Form of specimen certificate for shares of Common Stock
of the Registrant.*
(e) --Form of Dividend Reinvestment Plan*
(f) --Not applicable
(g) --Form of Investment Advisory Agreement between the Fund and
the Investment Adviser*
(h)(1) --Form of Purchase Agreement*
(h)(2) --Merrill Lynch Master Agreement Among Underwriters.*
(h)(3) --Merrill Lynch Standard Dealer Agreement*
(i) --Not applicable
(j) --Custodian Contract between the Fund and ____________*
(k) --Registrar, Transfer Agency and Service Agreement between the
Fund and ___________*
(l) --Opinion and Consent of Brown & Wood LLP, counsel to the
Fund*
(m) --Not applicable
(n) --Consent of ______________, independent auditors for the
Fund*
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.*
(q) --Not applicable
(r) --Financial Date Schedule*
___________________
(a) Reference is made to Article V, Article VI (sections 2,3,4,5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and
Article XIII of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement; and to Article II, Article III
(sections 1,2,3,5 and 17), Article VI, Article VII, Article XII,
Article XIII and Article XIV of the Registrant's By-Laws, filed as Exhibit
(b) to this Registration Statement.
* To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<CAPTION>
<S> <C>
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ *
Stock Exchange listing fee . . . . . . . . . . . . . . . . . . . . . . . . *
Printing (other than stock certificates) . . . . . . . . . . . . . . . . . *
Engraving and printing stock certificates . . . . . . . . . . . . . . . . . *
Fees and expense of qualifications under state securities laws . . . . . . *
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . *
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . *
NASD fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ *
</TABLE>
* To be provided by amendment
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the caption "Investment Advisory
and Management Arrangements" and in Note 1 to the Statement of Assets,
Liabilities and Capital is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value S.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-
Laws, filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which will be filed as Exhibit (g)(1) to this
Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act") may be provided to directors,
officers and controlling persons of the Fund, pursuant to the foregoing
provisions or otherwise, the Fund has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Fund of expenses incurred or paid by a director, officer
or controlling person of the Fund in connection with any successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Fund will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Reference is made to Section Six of the Purchase Agreement, a form of
which will be filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser") acts as
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., and The
Municipal Fund Accumulation Program, Inc., and for the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Florida Fund,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield
Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income
Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund for Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment
and Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Growth Fund, Inc., Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch Institutional Intermediate Fund, Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A Government Reserves, Merrill Lynch Utility Income Fund,
Inc. and Merrill Lynch Variable Series Funds, Inc.; and for the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch
High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate
Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Tax-Exempt Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Investment Adviser, MLAM, Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), Princeton Services, Inc. ("Princeton Services")
and Princeton Administrators, L.P. also is P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
North Tower, World Financial Center, 250 Vesey Street, New York, New York:
10281-1213.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In
addition, Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is
Executive Vice President of all or substantially all of the investment
companies described in the preceding paragraphs and also hold the same
positions with all or substantially all of the investment companies advised
by MLAM as they do with those advised by the Investment Adviser. Messrs.
Giordano, Harvey, Kirstein and Monagle are directors or officers of one or
more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH INVESTMENT PROFESSION,
ADVISOR VOCATION OR EMPLOYMENT
<S> <C> <C>
ML & Co. . . . . . . . . . . . . Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services . . . . . . . General Partner General Partner of MLAM
Arthur Zeikel . . . . . . . . . . President President and Director of MLAM;
President and Director of Princeton
Services; Director of MLFDS;
Executive Vice President of ML & Co.
Terry K. Glenn . . . . . . . . . Executive Vice President Executive Vice President of MLAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFDS;
President of Princeton
Administrators, L.P.
Vincent R. Giordano . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Elizabeth Griffin . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Norman R. Harvey . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Philip L. Kirstein . . . . . . . Senior Vice President, Senior Vice President, General
General Counsel and Counsel
Secretary and Secretary of MLAM; Senior Vice
President, General Counsel Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss . . . . . . . . . Senior Vice President and Senior Vice President and Controller
Controller of MLAM; Senior Vice President and
Controller of Princeton Services
Stephen M. M. Miller . . . . . . Senior Vice President Executive Vice President of
Princeton Administrators L.P.;
Senior Vice President of Princeton
Services
Joseph T. Monagle . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Michael L. Quinn . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch, Pierce, Fenner & Smith
Incorporated from 1989 to 1995
Gerald M. Richard . . . . . . . . Senior Vice President and Senior Vice President and Treasurer
Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Ronald L. Welburn . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Anthony Wiseman . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules promulgated thereunder are maintained at the offices of the registrant
(800 Scudders Mill Road, Plainsboro, New Jersey 08536), its investment
advisor (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and its
custodian and transfer agent,
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of
Common Stock covered hereby until it amends its Prospectus contained herein
if (1) subsequent to the effective date of this registration statement, its
net asset value per share of Common Stock declines more than 10 percent from
its net asset value per share of Common Stock as of the effective date of
this Registration Statement, or (2) its net asset value per share of Common
Stock increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 497(h)
under the 1933 Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 1933
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on is behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 3rd day of March 1997.
MUNIHOLDINGS FUND, INC.
(Registrant)
By /s/ PHILIP L. KIRSTEIN
(Philip L. Kirstein, President)
Each Person whose signature appears below hereby authorizes Philip L.
Kirstein, Mark B. Goldfus, Alice A. Pellegrino or Jerry Weiss any of them,
attorney-in-fact, to sign on his behalf, individually and in each capacity
stated below, any amendments to this Registration Statement (including
Post-Effective Amendments) and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ PHILIP L. KIRSTEIN
_____________________________ President (Principal
(Philip L. Kirstein) Executive Officer) and March 3, 1997
Director
/s/ ALICE A. PELLEGRINO
_____________________________ Treasurer (Principal
(Alice A. Pellegrino) Financial and March 3, 1997
(Alice A. Pellegrino) Accounting Officer) and
Director
/s/ JERRY WEISS
_____________________________
(Jerry Weiss) Director March 3, 1997
ARTICLES OF INCORPORATION
OF
MUNIHOLDINGS FUND, INC.
THE UNDERSIGNED, DAVID S. BAKST, whose post-office address is c/o Brown
& Wood LLP, One World Trade Center, 56th Floor, New York, New York 10048,
being at least eighteen (18) years of age, does hereby act as an
incorporator, under and by virtue of the General Laws of the State of
Maryland authorizing the formation of corporations and with the intention of
forming a corporation.
ARTICLE I
NAME
----
The name of the corporation is MUNIHOLDINGS FUND, INC. (the
"Corporation").
ARTICLE II
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed is to act as
a closed-end, management investment company under the federal Investment
Company Act of 1940, as amended, and in effect from time to time (the
"Investment Company Act"), and to exercise and enjoy all of the powers,
rights and privileges granted to, or conferred upon, corporations by the
General Laws of the State of Maryland now or hereafter in force.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is The Corporation Trust Incorporated, a
corporation of this State, and the post-office address of the resident agent
is The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland
21202.
ARTICLE IV
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Hundred Million (200,000,000) shares,
all of one class called Common Stock, of the par value of Ten Cents ($0.10)
per share, and of the aggregate par value of Twenty Million Dollars
($20,000,000).
(2) The Board of Directors may classify and reclassify any unissued
shares of capital stock into one or more additional or other classes or
series as may be established from time to time by setting or changing in any
one or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock
and pursuant to such classification or reclassification to increase or
decrease the number of authorized shares of any existing class or series.
(3) The Board of Directors may classify and reclassify any issued
shares of capital stock, of any class or series, into one or more additional
or other classes or series as may be established from time to time by setting
or changing in any one or more respects the designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares
of stock and pursuant to such classification or reclassification to increase
or decrease the number of authorized shares of any existing class or series;
provided, however, that any such classification or reclassification shall not
substantially adversely affect the rights of holders of such issued shares.
(4) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, the holders of each class or series of capital stock
shall be entitled to dividends and distributions in such amounts and at such
times as may be determined by the Board of Directors, and the dividends and
distributions paid with respect to the various classes or series of capital
stock may vary among such classes and series.
(5) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, on each matter submitted to a vote of stockholders,
each holder of a share of capital stock of the Corporation shall be entitled
to one vote for each share standing in such holder's name on the books of the
Corporation, irrespective of the class or series thereof, and all shares of
all classes and series shall vote together as a single class; provided,
however, that as to any matter with respect to which a separate vote of any
class or series is required by the Investment Company Act, or any rules,
regulations or orders issued thereunder, or by the Maryland General
Corporation Law, such requirement as to a separate vote by that class or
series shall apply in lieu of a general vote of all classes and series as
described above.
(6) Notwithstanding any provision of the Maryland General Corporation
Law requiring a greater proportion than a majority of the votes of all
classes or series of capital stock of the Corporation (or of any class or
series entitled to vote thereon as a separate class or series) to take or
authorize any action, the Corporation is hereby authorized (subject to the
requirements of the Investment Company Act, and any rules, regulations and
orders issued thereunder) to take such action upon the concurrence of a
majority of the votes entitled to be cast by holders of capital stock of the
Corporation (or a majority of the votes entitled to be cast by holders of a
class or series as a separate class or series).
(7) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders
of each class or series of capital stock of the Corporation shall be
entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation, to share ratably in the remaining net assets
of the Corporation.
(8) Any fractional shares shall carry proportionately all of the rights
of a whole share, excepting any right to receive a certificate evidencing
such fractional share, but including, without limitation, the right to vote
and the right to receive dividends.
(9) The presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast shall constitute
a quorum at any meeting of stockholders, except with respect to any matter
which requires approval by a separate vote of one or more classes or series
of stock, in which case the presence in person or by proxy of the holders of
shares entitled to cast one-third of the votes entitled to be cast by each
class or series entitled to vote as a separate class shall constitute a
quorum.
(10) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of the charter and the By-Laws of
the Corporation. As used in the charter of the Corporation, the terms
"charter" and "Articles of Incorporation" shall mean and include the Articles
of Incorporation of the Corporation as amended, supplemented and restated
from time to time by Articles of Amendment, Articles Supplementary, Articles
of Restatement or otherwise.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------------------------
(1) The initial number of directors of the Corporation shall be three
(3), which number may be increased or decreased pursuant to the By-Laws of
the Corporation but shall never be less than the minimum number permitted by
the General Laws of the State of Maryland. The names of the directors who
shall act until the first annual meeting or until their successors are duly
elected and qualify are:
Philip L. Kirstein
Jerry Weiss
Alice Pellegrino
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock of any
class or series, whether now or hereafter authorized, for such consideration
as the Board of Directors may deem advisable, without any action by the
stockholders, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the
General Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have
any right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or
sell (whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right,
if any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be
indemnified and advanced expenses by the Corporation to the full extent
permitted by the General Laws of the State of Maryland now or hereafter in
force, including the advance of expenses under the procedures and to the full
extent permitted by law subject to the requirements of the Investment Company
Act. The foregoing rights of indemnification shall not be exclusive of any
other rights to which those seeking indemnification may be entitled. No
amendment of these Articles of Incorporation or repeal of any provision
hereof shall limit or eliminate the benefits provided to directors and
officers under this provision in connection with any act or omission that
occurred prior to such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State of
Maryland or decisional law, as amended or interpreted, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation
or repeal of any provision hereof shall limit or eliminate the benefits
provided to directors and officers under this provision in connection with
any act or omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from
time to time any of the By-Laws of the Corporation except any particular By-
Law which is specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act.
(7) A director elected by the holders of capital stock may be removed
(with or without cause), but only by action taken by the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the shares of capital stock
then entitled to vote in an election to fill that directorship.
(8) The enumeration and definition of the particular powers of the
Board of Directors included in the Charter shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the Charter of the Corporation, or construed as
or deemed by inference or otherwise in any manner to exclude or limit any
powers conferred upon the Board of Directors under the General Laws of the
State of Maryland now or hereinafter in force.
ARTICLE VI
DENIAL OF PREEMPTIVE RIGHTS
---------------------------
No stockholder of the Corporation shall by reason of his holding shares
of capital stock have any preemptive or preferential right to purchase or
subscribe to any shares of capital stock of the Corporation, now of hereafter
to be authorized, or any notes, debentures, bonds or other securities
convertible into shares of capital stock, now or hereafter to be authorized,
whether or not the issuance of any such shares, or notes, debentures, bonds
or other securities would adversely affect the dividend or voting rights of
such stockholder; except that the Board of Directors, in its discretion, may
issue shares of any class of the Corporation, or any notes, debentures,
bonds, other securities convertible into shares of any class, either in whole
or in part, to the existing stockholders or holders of any class, series or
type of stock or other securities at the time outstanding to the exclusion of
any or all of the holders of any or all of the classes, series or types of
stock or other securities at the time outstanding.
ARTICLE VII
DETERMINATION BINDING
---------------------
Any determination made in good faith and consistent with applicable law,
so far as accounting matters are involved, in accordance with accepted
accounting practice by or pursuant to the direction of the Board of
Directors, as to the amount of assets, obligations or liabilities of the
Corporation, as to the amount of net income of the Corporation from dividends
and interest for any period or amounts at any time legally available for the
payment of dividends, as to the amount of any reserves or charges set up and
the propriety thereof, as to the time of or purpose for creating reserves or
as to the use, alteration or cancellation of any reserves or charges (whether
or not any obligation or liability for which such reserves or as to the use,
alteration or cancellation of any reserves or charges shall have been
created, shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged), as to the price of any security owned by
the Corporation or as to any other matters relating to the issuance, sale,
redemption or other acquisition or disposition of securities or shares of
capital stock of the Corporation, and any reasonable determination made in
good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities
"short," or an underwriting or the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of,
any securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future,
and shares of the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such
determinations shall be binding as aforesaid. No provision in this charter
shall be effective to (a) require a waiver of compliance with any provision
of the Securities Act of 1933, as amended, or the Investment Company Act, or
of any valid rule, regulation or order of the Securities and Exchange
Commission thereunder or (b) protect or purport to protect any director or
officer of the Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
ARTICLE VIII
PRIVATE PROPERTY OF STOCKHOLDERS
--------------------------------
The private property of stockholders shall not be subject to the payment
of corporate debts to any extent whatsoever.
ARTICLE IX
CONVERSION TO OPEN-END COMPANY
------------------------------
Notwithstanding any other provisions of these Articles of Incorporation
or the By-Laws of the Corporation, a favorable vote of the holders of at
lease sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
capital stock of the Corporation entitled to be voted on the matter shall be
required to approve, adopt or authorize an amendment to these Articles of
Incorporation of the Corporation that makes the Common Stock a "redeemable
security" (as that term is defined in section 2(a) (32) the Investment
Company Act) unless such action has previously been approved, adopted or
authorized by the affirmative vote of at least two-thirds of the total number
of directors fixed in accordance with the By-Laws of the Corporation, in
which case the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Corporation entitled to vote
thereon shall be required.
ARTICLE X
MERGER, SALE OF ASSETS, LIQUIDATION
-----------------------------------
Notwithstanding any other provisions of these Articles of Incorporation
or the By-Laws of the Corporation, a favorable vote of the holders of at
least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
capital stock of the Corporation entitled to be voted on the matter shall be
required to approve, adopt or authorize (i) a merger or consolidation or
statutory share exchange of the Corporation with any other corporation, (ii)
a sale of all or substantially all of the assets of the Corporation (other
than in the regular course of its investment activities), or (iii) a
liquidation or dissolution of the Corporation, unless such action has
previously been approved, adopted or authorized by the affirmative vote of at
least two-thirds of the total number of directions fixed in accordance with
the By-Laws of the Corporation, in which case the affirmative vote of the
holders of a majority of the outstanding shares of capital stock of the
Corporation entitled to vote thereon shall be required.
ARTICLE XI
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE XII
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in its charter, in any manner now or hereafter prescribed
by statute, including any amendment which alters the contract rights, as
expressly set forth in the charter, of any outstanding stock and
substantially adversely affects the stockholders' rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
Notwithstanding any other provisions of these Articles of Incorporation or
the By-Laws of the Corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, these Articles of Incorporation or the
By-Laws of the Corporation), the amendment or repeal of Section (6) of
Article IV, Section (1), Section (4), Section (5), Section (6) and Section
(7) of Article V, Article VIII, Article IX, Article X, Article XI or this
Article XII, of these Articles of Incorporation shall require the affirmative
vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of
the outstanding shares of capital stock of the Corporation entitled to be
voted on the matter.
IN WITNESS WHEREOF, the undersigned incorporator of MuniHoldings Fund,
Inc. hereby executes the foregoing Articles of Incorporation and acknowledges
the same to be his act.
Dated this day
of February, 1997
______________________________
David S. Bakst
BY-LAWS
OF
MUNIHOLDINGS FUND, INC.
ARTICLE I.
Offices
-------
Section 1. Principal Office. The principal office of the
----------------
Corporation shall be in the City of Baltimore and State of Maryland.
Section 2. Principal Executive Office. The principal executive
--------------------------
office of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
Section 3. Other Offices. The Corporation may have such other
-------------
offices in such places as the Board of Directors from time to time may
determine.
ARTICLE II.
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. Except as otherwise required by the
--------------
rules of any stock exchange on which the Corporation's shares of stock may be
listed, the Corporation shall not be required to hold an annual meeting of
its stockholders in any year in which the election of directors is not
required to be acted upon under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). In the event that the Corporation
shall be required to hold an annual meeting of stockholders to elect
directors under the Investment Company Act, such meeting shall be held no
later than 120 days after the occurrence of the event requiring the meeting.
Any stockholders' meeting held in accordance with this Section shall for all
purposes constitute the annual meeting of stockholders for the year in which
the meeting is held.
In the event an annual meeting is required by the rules of a stock
exchange on which the Corporation's shares of stock are listed, the annual
meeting of the stockholders of the Corporation for the election of directors
and for the transaction of such other business as may properly be brought
before the meeting shall be held on such day and month of each year as shall
be designated annually by the Board of Directors.
Section 2. Special Meetings. Special meetings of the stockholders,
----------------
unless otherwise provided by law, may be called for any purpose or purposes
by a majority of the Board of Directors, the President, or on the written
request of the holders of at least 10% of the outstanding shares of capital
stock of the Corporation entitled to vote at such meeting if they comply with
Section 2-502(b) or (c) of the Maryland General Corporation Law.
Section 3. Place of Meetings. The annual meeting and any special
-----------------
meeting of the stockholders shall be held at such place within the United
States as the Board of Directors from time to time may determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the
------------------------------------
place, date and time of the holding of each annual and special meeting of the
stockholders and the purpose or purposes of each special meeting shall be
given personally or by mail, not less than ten nor more than 90 days before
the date of such meeting, to each stockholder entitled to vote at such
meeting and to each other stockholder entitled to notice of the meeting.
Notice by mail shall be deemed to be duly given when deposited in the United
States mail addressed to the stockholder at his or her address as it appears
on the records of the Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who,
either before or after the meeting, shall submit a signed waiver of notice
which is filed with the records of the meeting. When a meeting is adjourned
to another time and place, unless the Board of Directors, after the
adjournment, shall fix a new record date for an adjourned meeting, or unless
the adjournment is for more than 120 days after the original record date,
notice of such adjourned meeting need not be given if the time and place to
which the meeting shall be adjourned were announced at the meeting at which
the adjournment is taken.
Section 5. Quorum. The presence in person or by proxy of the
------
holders of shares of stock entitled to cast one-third of the votes entitled
to be cast shall constitute a quorum at any meeting of stockholders, except
with respect to any matter which requires approval by a separate vote of one
or more classes or series of stock, in which case the presence in person or
by proxy of the holders of shares entitled to cast one-third of the votes
entitled to be cast by each class or series entitled to vote as a separate
class or series shall constitute a quorum. In the absence of a quorum no
business may be transacted, except that the holders of a majority of the
shares of stock present in person or by proxy and entitled to vote may
adjourn the meeting from time to time, without notice other than announcement
thereat except as otherwise required by these By-Laws, until the holders of
the requisite amount of shares of stock shall be so present. At any such
adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally
called. The absence from any meeting, in person or by proxy, of holders of
the number of shares of stock of the Corporation in excess of a majority
thereof which may be required by the laws of the State of Maryland, the
Investment Company Act, or other applicable statute, the Charter, or these
By-Laws, for action upon any given matter shall not prevent action at such
meeting upon any other matter or matters which properly may come before the
meeting, if there shall be present thereat, in person or by proxy, holders of
the number of shares of stock of the Corporation required for action in
respect of such other matter or matters.
Section 6. Organization. At each meeting of the stockholders, the
------------
Chairman of the Board (if one has been designated by the Board), or in his or
her absence or inability to act, the President, or in the absence or
inability to act of the Chairman of the Board and the President, a Vice
President, shall act as chairman of the meeting. The Secretary, or in his or
her absence or inability to act, any person appointed by the chairman of the
meeting, shall act as secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings
-----------------
of the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
------
Charter, each holder of record of shares of stock of the Corporation having
voting power shall be entitled at each meeting of the stockholders to one
vote for every share of such stock standing in his or her name on the record
of stockholders of the Corporation as of the record date determined pursuant
to Section 9 of this Article or, if such record date shall not have been so
fixed, then at the later of (i) the close of business on the day on which
notice of the meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or her by a proxy signed
by such stockholder or his or her attorney-in-fact. No proxy shall be valid
after the expiration of eleven months from the date thereof, unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases where such proxy states that
it is irrevocable and where an irrevocable proxy is permitted by law. Except
as otherwise provided by statute, the Charter or these By-Laws, any corporate
action to be taken by vote of the stockholders (other than the election of
directors, which shall be by a plurality of votes cast) shall be authorized
by a majority of the total votes cast at a meeting of stockholders by the
holders of shares present in person or represented by proxy and entitled to
vote on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute
or these By-Laws, or determined by the chairman of the meeting to be
advisable, any such vote need not be by ballot. On a vote by ballot, each
ballot shall be signed by the stockholder voting, or by his or her proxy, if
there be such proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a
---------------------
record date for the purpose of determining stockholders entitled to vote at
any meeting of the stockholders. The record date, which may not be prior to
the close of business on the day the record date is fixed, shall be not more
than 90 nor less than ten days before the date of the meeting of the
stockholders. All persons who were holders of record of shares at such time,
and not others, shall be entitled to vote at such meeting and any adjournment
thereof.
Section 10. Inspectors. The Board, in advance of any meeting of
----------
stockholders, may appoint one or more inspectors to act at such meeting or
any adjournment thereof. If the inspectors shall not be so appointed or if
any of them shall fail to appear or act, the chairman of the meeting may, and
on the request of any stockholder entitled to vote thereat shall, appoint
inspectors. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath to execute faithfully the duties of
inspector at such meeting with strict impartiality and according to the best
of his or her ability. The inspectors shall determine the number of shares
outstanding and the voting powers of each, the number of shares represented
at the meeting, the existence of a quorum, and the validity and effect of
proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count
and tabulate all votes, ballots or consents, determine the result, and do
such acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the chairman of the meeting or any stockholder
entitled to vote thereat, the inspectors shall make a report in writing of
any challenge, request or matter determined by them and shall execute a
certificate of any fact found by them. No director or candidate for the
office of director shall act as inspector of an election of directors.
Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting.
------------------------------------------
Except as otherwise provided by statute or the Charter, any action required
to be taken at any annual or special meeting of stockholders, or any action
which may be taken at any annual or special meeting of such stockholders, may
be taken without a meeting, without prior notice and without a vote, if the
following are filed with the records of stockholders' meetings: (i) a
unanimous written consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter and (ii) a written waiver of any
right to dissent signed by each stockholder entitled to notice of the meeting
but not entitled to vote thereat.
ARTICLE III.
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the
--------------
Charter, the business and affairs of the Corporation shall be managed under
the direction of the Board of Directors. All powers of the Corporation may
be exercised by or under authority of the Board of Directors except as
conferred on or reserved to the stockholders by law or by the Charter or
these By-Laws.
Section 2. Number of Directors. The number of directors shall be
-------------------
fixed from time to time by resolution of the Board of Directors adopted by a
majority of the entire Board of Directors then in office; provided, however,
that in no event shall the number of directors be less than the minimum
permitted by the General Law of the State of Maryland nor more than 15. Any
vacancy created by an increase in the number of directors may be filled in
accordance with Section 6 of this Article III. No reduction in the number of
directors shall have the effect of removing any director from office prior to
the expiration of his or her term unless such director specifically is
removed pursuant to Section 5 of this Article III at the time of such
decrease. Directors need not be stockholders. As long as any preferred
stock of the Corporation is outstanding, the number of directors shall be not
less than five.
Section 3. Election and Term of Directors. Directors shall be
------------------------------
elected annually at a meeting of stockholders held for that purpose;
provided, however, that if no meeting of the stockholders of the Corporation
is required to be held in a particular year pursuant to Section 1 of Article
II of these By-Laws, directors shall be elected at the next meeting held.
The term of office of each director shall be from the time of his election
and qualification until the election of directors next succeeding his
election and until his successor shall have been elected and shall have
qualified, or until his death, or until he shall have resigned or until
December 31 of the year in which he shall have reached seventy-two years of
age, or until he shall have been removed as hereinafter provided in these
By-Laws, or as otherwise provided by statute or by the Charter.
Section 4. Resignation. A director of the Corporation may resign at
-----------
any time by giving written notice of his or her resignation to the Board or
the Chairman of the Board or the President or the Secretary. Any such
resignation shall take effect at the time specified therein or, if the time
when it shall become effective shall not be specified therein, immediately
upon its receipt; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation
--------------------
may be removed (with or without cause) by the stockholders by a vote of
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
capital stock then entitled to vote in the election of such director.
Section 6. Vacancies. Subject to the provisions of the Investment
---------
Company Act, any vacancies in the Board of Directors, whether arising from
death, resignation, removal, an increase in the number of directors or any
other cause, shall be filled by a vote of a majority of the Board of
Directors then in office, regardless of whether they constitute a quorum.
Section 7. Place of Meetings. Meetings of the Board may be held at
-----------------
such place as the Board from time to time may determine or as shall be
specified in the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board may be
---------------
held without notice at such time and place as may be determined by the Board
of Directors.
Section 9. Special Meetings. Special meetings of the Board may be
----------------
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 10. Telephone Meetings. Members of the Board of Directors
------------------
or of any committee thereof may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Subject
to the provisions of the Investment Company Act, participation in a meeting
by these means constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special
--------------------------
meeting of the Board shall be given by the Secretary as hereinafter provided,
in which notice shall be stated the time and place of the meeting. Notice of
each such meeting shall be delivered to each director, either personally or
by telephone or any standard form of telecommunication, at least 24 hours
before the time at which such meeting is to be held, or by first-class mail,
postage prepaid, addressed to him or her at his or her residence or usual
place of business, at least three days before the day on which such meeting
is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special
----------------------------
meeting need not be given to any director who, either before or after the
meeting, shall sign a written waiver of notice which is filed with the
records of the meeting or who shall attend such meeting. Except as otherwise
specifically required by these By-Laws, a notice or waiver of notice of any
meeting need not state the purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two
-----------------
(unless there is only one director) of the members of the entire Board shall
be present in person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and except as
otherwise expressly required by statute, the Charter, these By-Laws, the
Investment Company Act, or other applicable statute, the act of a majority of
the directors present at any meeting at which a quorum is present shall be
the act of the Board. In the absence of a quorum at any meeting of the
Board, a majority of the directors present thereat may adjourn such meeting
to another time and place until a quorum shall be present thereat. Notice of
the time and place of any such adjourned meeting shall be given to the
directors who were not present at the time of the adjournment and, unless
such time and place were announced at the meeting at which the adjournment
was taken, to the other directors. At any adjourned meeting at which a
quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 14. Organization. The Board, by resolution adopted by a
------------
majority of the entire Board, may designate a Chairman of the Board, who
shall preside at each meeting of the Board. In the absence or inability of
the Chairman of the Board to preside at a meeting, the President or, in his
or her absence or inability to act, another director chosen by a majority of
the directors present, shall act as chairman of the meeting and preside
thereat. The Secretary (or, in his or her absence or inability to act, any
person appointed by the Chairman) shall act as secretary of the meeting and
keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting.
----------------------------------------- -------
Subject to the provisions of the Investment Company Act, any action required
or permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board
or the committee, as the case may be, consent thereto in writing, and the
writings or writing are filed with the minutes of the proceedings of the
Board or the committee.
Section 16. Compensation. Directors may receive compensation for
------------
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the
Board.
Section 17. Investment Policies. It shall be the duty of the Board
-------------------
of Directors to direct that the purchase, sale, retention and disposal of
portfolio securities and the other investment practices of the Corporation at
all times are consistent with the investment policies and restrictions with
respect to securities investments and otherwise of the Corporation, as re-
cited in the Prospectus of the Corporation included in the registration
statement of the Corporation relating to the initial public offering of its
capital stock, as filed with the Securities and Exchange Commission (or as
such investment policies and restrictions may be modified by the Board of
Directors, or, if required, by a majority vote of the stockholders of the
Corporation in accordance with the Investment Company Act) and as required by
the Investment Company Act. The Board, however, may delegate the duty of
management of the assets and the administration of its day to day operations
to an individual or corporate management company and/or investment adviser
pursuant to a written contract or contracts which have obtained the requisite
approvals, including the requisite approvals of renewals thereof, of the
Board of Directors and/or the stockholders of the Corporation in accordance
with the provisions of the Investment Company Act.
ARTICLE IV.
Committees
----------
Section 1. Executive Committee. The Board, by resolution adopted by
-------------------
a majority of the entire board, may designate an Executive Committee
consisting of two or more of the directors of the Corporation, which
committee shall have and may exercise all of the powers and authority of the
Board with respect to all matters other than:
(1) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Charter;
(2) the filling of vacancies on the Board of Directors;
(3) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive
Committee;
(4) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the
Investment Company Act, or the taking of any other action required to be
taken by the Board of Directors by the Investment Company Act;
(5) the amendment or repeal of these By-Laws or the adoption of new
By-Laws;
(6) the amendment or repeal of any resolution of the Board which by its
terms may be amended or repealed only by the Board;
(7) the declaration of dividends and, except to the extent permitted by
law, the issuance of capital stock of the Corporation; and
(8) the approval of any merger or share exchange which does not require
stockholder approval.
The Executive Committee shall keep written minutes of its proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors
-----------------------------
from time to time, by resolution adopted by a majority of the whole Board,
may designate one or more other committees of the Board, each such committee
to consist of two or more directors and to have such powers and duties as the
Board of Directors, by resolution, may prescribe.
Section 3. General. One-third, but not less than two, of the
-------
members of any committee shall be present in person at any meeting of such
committee in order to constitute a quorum for the transaction of business at
such meeting, and the act of a majority present shall be the act of such
committee. The Board may designate a chairman of any committee and such
chairman or any two members of any committee may fix the time and place of
its meetings unless the Board shall otherwise provide. In the absence or
disqualification of any member of any committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or
not he or she or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any
such absent or disqualified member. The Board shall have the power at any
time to change the membership of any committee, to fill all vacancies, to
designate alternate members to replace any absent or disqualified member, or
to dissolve any such committee. Nothing herein shall be deemed to prevent
the Board from appointing one or more committees consisting in whole or in
part of persons who are not directors of the Corporation; provided, however,
that no such committee shall have or may exercise any authority or power of
the Board in the management of the business or affairs of the Corporation
except as may be prescribed by the Board.
ARTICLE V.
Officers, Agents and Employees
------------------------------
Section 1. Number of Qualifications. The officers of the
------------------------
Corporation shall be a President, who shall be a director of the Corporation,
a Secretary and a Treasurer, each of whom shall be elected by the Board of
Directors. The Board of Directors may elect or appoint one or more Vice
Presidents and also may appoint such other officers, agents and employees as
it may deem necessary or proper. Any two or more offices may be held by the
same person, except the offices of President and Vice President, but no
officer shall execute, acknowledge or verify any instrument in more than one
capacity. Such officers shall be elected by the Board of Directors each year
at its first meeting held after the annual meeting of stockholders, each to
hold office until the next meeting of the stockholders and until his or her
successor shall have been duly elected and shall have qualified, or until his
or her death, or until he or she shall have resigned, or have been removed,
as hereinafter provided in these By-Laws. The Board from time to time may
elect such officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
The President also shall have the power to appoint such assistant officers
(including one or more Assistant Vice Presidents, one or more Assistant
Treasurers and one or more Assistant Secretaries) as may be necessary or
appropriate to facilitate the management of the Corporation's affairs. Such
officers and agents shall have such duties and shall hold their offices for
such terms as may be prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign
------------
at any time by giving written notice of resignation to the Board, the
Chairman of the Board, the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer,
-------------------------------------
agent or employee of the Corporation may be removed by the Board of Directors
with or without cause at any time, and the Board may delegate such power of
removal as to agents and employees not elected or appointed by the Board of
Directors. Such removal shall be without prejudice to such person's contract
rights, if any, but the appointment of any person as an officer, agent or
employee of the Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
---------
death, resignation, removal or any other cause, may be filled for the
unexpired portion of the term of the office which shall be vacant, in the
manner prescribed in these By-Laws for the regular election or appointment to
such office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her
control.
Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his or her duties, in such amount
and with such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive
---------
officer of the Corporation. In the absence of the Chairman of the Board (or
if there be none), the President shall preside at all meetings of the
stockholders and of the Board of Directors. He or she shall have, subject to
the control of the Board of Directors, general charge of the business and
affairs of the Corporation. He or she may employ and discharge employees and
agents of the Corporation, except such as shall be appointed by the Board,
and he or she may delegate these powers.
Section 8. Vice President. Each Vice President shall have such
--------------
powers and perform such duties as the Board of Directors or the President
from time to time may prescribe.
Section 9. Treasurer. The Treasurer shall:
---------
(1) have charge and custody of, and be responsible for, all of the
funds and securities of the Corporation, except those which the Cor-
poration has placed in the custody of a bank or trust company or member
of a national securities exchange (as that term is defined in the
Securities Exchange Act of 1934, as amended) pursuant to a written
agreement designating such bank or trust company or member of a national
securities exchange as custodian of the property of the Corporation;
(2) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(3) cause all moneys and other valuables to be deposited to the credit
of the Corporation;
(4) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(5) disburse the funds of the Corporation and supervise the investment
of its funds as ordered or authorized by the Board, taking proper
vouchers therefor; and
(6) in general, perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to
him or her by the Board or the President.
Section 10. Secretary. The Secretary shall:
---------
(1) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;
(2) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(3) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its
seal;
(4) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly
kept and filed; and
(5) in general, perform all of the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to
him or her by the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any
--------------------
officer of the Corporation, or for any other reason that the Board may deem
sufficient, the Board may confer for the time being the powers or duties, or
any of them, of such officer upon any other officer or upon any director.
ARTICLE VI.
Indemnification
---------------
Section 1. General Indemnification. Each officer and director of
-----------------------
the Corporation shall be indemnified by the Corporation to the full extent
permitted under the General Laws of the State of Maryland, except that such
indemnity shall not protect any such person against any liability to the Cor-
poration or any stockholder thereof to which such person otherwise would be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her
office. Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, the decision by the Corporation
to indemnify such person must be based upon the reasonable determination of
independent legal counsel or the vote of a majority of a quorum of the
directors who are neither "interested persons," as defined in Section
2(a)(19) of the Investment Company Act, nor parties to the proceeding ("non-
party independent directors"), after review of the facts, that such officer
or director is not guilty of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his or her
office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and
to the full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to
the Corporation a written affirmation of his or her good faith belief that
the standard of conduct necessary for indemnification by the Corporation has
been met and a written undertaking to repay any such advance, if it
ultimately should be determined that the standard of conduct has not been
met, and provided further that at least one of the following additional
conditions is met:
(i) the person seeking indemnification shall provide a security in form
and amount acceptable to the Corporation for his or her undertaking;
(ii) the Corporation is insured against losses arising by reason of the
advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based on
a review of facts readily available to the Corporation at the time the
advance is proposed to be made, that there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled
to indemnification.
The Corporation may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under the
General Laws of the State of Maryland, from liability arising from his or her
activities as an officer or director of the Corporation. The Corporation,
however, may not purchase insurance on behalf of any officer or director of
the Corporation that protects or purports to protect such person from
liability to the Corporation or to its stockholders to which such officer or
director otherwise would be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his or her office.
The Corporation may indemnify, make advances or purchase insurance to
the extent provided in this Article VI on behalf of an employee or agent who
is not an officer or director of the Corporation.
Section 2. Other Rights. The indemnification provided by this
------------
Article VI shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may
be entitled under any insurance or other agreement, vote of stockholders or
disinterested directors or otherwise, both as to action by a director or
officer of the Corporation in his or her official capacity and as to action
by such person in another capacity while holding such office or position, and
shall continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such
person.
ARTICLE VII.
Capital Stock
-------------
Section 1. Stock Certificates. Each holder of stock of the
------------------
Corporation shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Board, representing
the number of shares of stock of the Corporation owned by him or her,
provided, however, that certificates for fractional shares will not be
delivered in any case. The certificates representing shares of stock shall
be signed by or in the name of the Corporation by the President or a Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or
an Assistant Treasurer and sealed with the seal of the Corporation. Any or
all of the signatures or the seal on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to
be such officer, transfer agent or registrar before such certificate shall be
issued, it may be issued by the Corporation with the same effect as if such
officer, transfer agent or registrar were still in office at the date of
issue.
Section 2. Books of Account and Record of Stockholders. There shall
-------------------------------------------
be kept at the principal executive office of the Corporation correct and
complete books and records of account of all the business and transactions of
the Corporation.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a
transfer agent or transfer clerk, and on surrender of the certificate or
certificates, if issued, for such shares properly endorsed or accompanied by
a duly executed stock transfer power and the payment of all taxes thereon.
Except as otherwise provided by law, the Corporation shall be entitled to
recognize the exclusive right of a person in whose name any share or shares
stand on the record of stockholders as the owner of such share or shares for
all purposes, including, without limitation, the rights to receive dividends
or other distributions, and to vote as such owner, and the Corporation shall
not be bound to recognize any equitable or legal claim to or interest in any
such share or shares on the part of any other person.
Section 4. Regulations. The Board may make such additional rules
-----------
and regulations, not inconsistent with these By-Laws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation. It may appoint, or authorize any officer
or officers to appoint, one or more transfer agents or one or more transfer
clerks and one or more registrars and may require all certificates for shares
of stock to bear the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of
-----------------------------------------
any certificates representing shares of stock of the Corporation immediately
shall notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof
shall allege to have been lost or destroyed or which shall have been
mutilated, and the Board, in its discretion, may require such owner or his or
her legal representatives to give to the Corporation a bond in such sum,
limited or unlimited, and in such form and with such surety or sureties, as
the Board in its absolute discretion shall determine, to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss or destruction of any such certificate, or issuance of a new
certificate. Anything herein to the contrary notwithstanding, the Board, in
its absolute discretion, may refuse to issue any such new certificate, except
pursuant to legal proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions.
----------------------------------------- -------------
The Board may fix, in advance, a date not more than 90 days preceding the
date fixed for the payment of any dividend or the making of any distribution
or the allotment of rights to subscribe for securities of the Corporation, or
for the delivery of evidences of rights or evidences of interests arising out
of any change, conversion or exchange of common stock or other securities, as
the record date for the determination of the stockholders entitled to receive
any such dividend, distribution, allotment, rights or interests, and in such
case only the stockholders of record at the time so fixed shall be entitled
to receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder
--------------------------------------
of the Corporation or his or her agent may inspect and copy during usual
business hours the Corporation's By-Laws, minutes of the proceedings of its
stockholders, annual statements of its affairs, and voting trust agreements
on file at its principal office.
ARTICLE VIII.
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal" and "Maryland". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner
reproduced.
ARTICLE IX.
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the 31st day of October.
ARTICLE X.
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be
------------
deposited with such banks or other depositories as the Board of Directors of
the Corporation from time to time may determine.
Section 2. Custodians. All securities and other investments shall
----------
be deposited in the safekeeping of such banks or other companies as the Board
of Directors of the Corporation from time to time may determine. Every
arrangement entered into with any bank or other company for the safekeeping
of the securities and investments of the Corporation shall contain provisions
complying with the Investment Company Act, and the general rules and
regulations thereunder.
ARTICLE XI.
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
--------------------------
acceptances, bills of exchange and other orders or obligations for the
payment of money shall be signed by such officer or officers or person or
persons as the Board of Directors by resolution from time to time shall
designate.
Section 2. Sale or Transfer of Securities. Stock certificates,
------------------------------
bonds or other securities at any time owned by the Corporation may be held on
behalf of the Corporation or sold, transferred or otherwise disposed of
subject to any limits imposed by these By-Laws and pursuant to authorization
by the Board and, when so authorized to be held on behalf of the Corporation
or sold, transferred or otherwise disposed of, may be transferred from the
name of the Corporation by the signature of the President or a Vice President
or the Treasurer or pursuant to any procedure approved by the Board of
Directors, subject to applicable law.
ARTICLE XII.
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the
Securities and Exchange Commission shall be selected annually by the Board of
Directors and ratified by the stockholders in accordance with the provisions
of the Investment Company Act.
ARTICLE XIII.
Annual Statement
----------------
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of
the Corporation and at such other times as may be directed by the Board. A
report to the stockholders based upon each such examination shall be mailed
to each stockholder of record of the Corporation on such date with respect to
each report as may be determined by the Board, at his or her address as the
same appears on the books of the Corporation. Such annual statement also
shall be available at the annual meeting of stockholders and shall be placed
on file at the Corporation's principal office in the State of Maryland, and
if no annual meeting is held pursuant to Article II, Section 1, such annual
statement of affairs shall be placed on file as the Corporation's principal
office within 120 days after the end of the Corporation's fiscal year. Each
such report shall show the assets and liabilities of the Corporation as of
the close of the period covered by the report and the securities in which the
funds of the Corporation then were invested. Such report also shall show the
Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the period covered by the
report and any other information required by the Investment Company Act, and
shall set forth such other matters as the Board or such firm of independent
public accountants shall determine.
ARTICLE XIV.
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by the
affirmative vote of a majority of the Board of Directors. The stockholders
shall have no power to make, amend, alter or repeal By-Laws.
