MUNIHOLDINGS CALIFORNIA FUND INC, N-2, 1997-05-12

MUNIHOLDINGS CALIFORNIA FUND INC
N-2, 1997-05-12

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] PRE-EFFECTIVE AMENDMENT NO.
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[_] AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)

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MUNIHOLDINGS CALIFORNIA INSURED 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)

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(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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ARTHUR ZEIKEL
MUNIHOLDINGS CALIFORNIA 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:
PATRICK D. SWEENEY, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. LAURIN BLUMENTHAL KLEIMAN, ESQ.
P.O. BOX 9011 BROWN & WOOD LLP
PRINCETON, NEW JERSEY 08543-9011 ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557

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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.

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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]

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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF BEING OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par val-
ue)...................... 66,666 shares $15.00 $999,990 $303.03
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.

--------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>

MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
- --------------------- ---------------------
<S> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1.Outside Front Cover Page............ Outside Front Cover Page
2.Inside Front and Outside Back Cover Inside Front and Outside Back Cover
Pages............................. 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 Debt, and Description of Capital Stock
Other Securities..................
11.Defaults and Arrears on Senior Not Applicable
Securities........................
12.Legal Proceedings................... Not Applicable
13.Table of Contents of the Statement
of Additional Information......... Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14.Cover Page.......................... Not Applicable
15.Table of Contents................... Not Applicable
16.General Information and History..... Not Applicable
17.Investment Objective and Policies... Prospectus Summary; Investment
Objective and Policies; Investment
Restrictions
18.Management.......................... Directors and Officers; Investment
Advisory and Management 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 Other Portfolio Transactions
Practices.........................
22.Tax Status.......................... Taxes; Automatic Dividend Reinvestment
Plan
23.Financial Statements................ Report of Independent Auditors;
Statement of Assets, Liabilities and
Capital
</TABLE>

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.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 12, 1997
PROSPECTUS
SHARES

MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.

COMMON STOCK

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MuniHoldings California Insured Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal and California income
taxes. The Fund seeks to achieve its investment objective by investing
primarily in a portfolio of long-term, investment grade municipal obligations
the interest on which, in the opinion of bond counsel to the issuer, is exempt
from Federal and California income taxes. The Fund intends to invest 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. Under normal circumstances, at least 80% of the Fund's
assets will be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest. 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."

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."
(Continued on next page)

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.
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<TABLE>
<CAPTION>
PRICE TO SALES LOAD PROCEEDS TO
PUBLIC (1)(2) FUND(3)
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<S> <C> <C> <C>
Per Share.............. $ None $
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Total(4)............... $ None $
</TABLE>
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- --------------------------------------------------------------------------------
(1) The Investment Adviser or an affiliate will pay the Underwriter 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
Underwriter 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 Underwriter 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 Underwriter, subject to prior sale, when, as
and if issued by the Fund and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares will be made in New York, New York on or about June ,
1997.

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MERRILL LYNCH & CO.

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The date of this Prospectus is June , 1997.
<PAGE>

(Continued from preceding page)

The Fund may invest all or a portion of its assets 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 Underwriter does 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.

The Underwriter may engage in transactions that stabilize, maintain, or
otherwise affect the price of the Fund's Common Stock. Such transactions may
include stabilizing, the purchase of the Fund's Common Stock to cover short
positions and the imposition of penalty bids. For a description of these
activities, see "Underwriting."

2
<PAGE>

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 California Insured Fund, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment
company. See "The Fund."

THE The Fund is offering shares of Common Stock at an initial
OFFERING offering price of $ per share. The Common Stock is being offered
by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch" or the "Underwriter"). The Underwriter has 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 The investment objective of the Fund is to provide shareholders
OBJECTIVE with current income exempt from Federal and California income
AND taxes. The Fund seeks to achieve its investment objective by
POLICIES 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 and California income
taxes ("California Municipal Bonds"). The Fund intends to invest in
municipal obligations that are rated investment grade or, if
unrated, are considered by the Investment Adviser to be of
comparable quality. The Fund will seek to achieve its investment
objective by seeking to invest substantially all (a minimum of 80%)
of its assets in California Municipal Bonds, except at times when,
in the judgment of the Investment Adviser, California Municipal
Bonds of sufficient quality and quantity are unavailable for
investment at suitable prices by the Fund. At all times, except
during interim periods pending investment of the net proceeds of
public offerings of the Fund's securities and during temporary
defensive periods, the Fund will maintain at least 65% of its
assets in California Municipal Bonds and at least 80% of its assets
in California Municipal Bonds and other long-term municipal
obligations exempt from Federal income taxes, but not from
California income taxes ("Municipal Bonds"). Under normal
circumstances, at least 80% of the Fund's assets will be invested
in municipal obligations with remaining maturities of one year or
more that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest. The Fund does not ordinarily
intend to realize significant investment income not exempt from
Federal and California income taxes. 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
Underwriter does 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."

3
<PAGE>

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."

4
<PAGE>

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, 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 on 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.
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 Fund Asset Management, L.P. is the Fund's investment adviser and is
ADVISER responsible for the management of the Fund's investment portfolio
and for providing administrative services to the Fund. For its
services, the Fund pays the Investment Adviser a monthly fee at the
annual rate of 0. % of the Fund's average weekly net assets. The
Investment Adviser is an affiliate of Merrill Lynch Asset
Management, L.P. ("MLAM"), which is owned and controlled by Merrill
Lynch & Co., Inc. ("ML & Co."). The Investment Adviser or MLAM acts
as the investment adviser for over 130 registered management
investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and
institutions. As of April 30, 1997, the Investment Adviser and MLAM
had a total of approximately $ billion in investment company and
other portfolio assets under

5
<PAGE>

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 All dividend and capital gains distributions will be automatically
DIVIDEND reinvested in additional shares of Common Stock of the Fund unless
REINVESTMENTa shareholder elects to receive cash. Shareholders whose shares are
PLAN 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 Purchasers of shares of Common Stock of the Fund through Merrill
FUND Lynch in this offering will have an investment option consisting of
INVESTMENT the right to reinvest the net proceeds from a sale of such shares
OPTION (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."

6
<PAGE>

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 "Prospectus
Summary--Listing," 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 intends to invest a substantial portion of its assets in California
Municipal Bonds and, therefore, it is more susceptible to factors adversely
affecting issuers of California Municipal Bonds than is a municipal bond fund
that is not concentrated in issuers of California Municipal Bonds to this
degree. See "Investment Objective and Policies--Special Considerations Relating
to California Municipal Bonds" and Appendix I, "Economic Conditions in
California."

The Fund has registered as a "non-diversified" 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 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. 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 the insurance companies issuing the portfolio insurance and to
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

7
<PAGE>

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"). Certain of such investments may be made solely
for hedging purposes, not for speculation, and may in some cases require
limitations as to the type of permissible counterparty to the transaction.
Investments in indexed securities, including inverse securities, subject the
Fund to the risks associated with changes in the particular indices, which may
include reduced or eliminated interest payments and losses of invested
principal. Derivative instruments may have certain characteristics that have a
similar effect on the return to Common Stock investors as the 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. Certain OTC options and assets used to cover OTC
options written by the Fund may be considered to be illiquid. The illiquidity
of such options or assets may prevent a successful sale of such options or
assets, result in a delay of sale, or reduce the amount of proceeds that might
be otherwise realized. See "Investment Objective and Policies--Options and
Futures Transactions." The Fund intends to apply for ratings of the preferred
stock from one or more NRSROs. 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.

8
<PAGE>

FEE TABLE

<TABLE>
<S> <C>
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)............................................. %
====
</TABLE>

<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
EXAMPLE ---- ----- ----- -----
<S> <C> <C> <C> <C>
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 % annual return throughout the
periods:
Assuming No Leverage.................................. $ $ $ $
Assuming Leverage..................................... $ $ $ $
</TABLE>
- --------
(a) See "Investment Advisory and Management Arrangements"--page 27.
(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, as a percentage of net assets attributable to Common Stock, 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.

9
<PAGE>

THE FUND

MuniHoldings California Insured 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 April 24, 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 companies do not
generally make a continuous offering of their shares or redeem their
securities at the option of the shareholder, whereas open-end companies issue
securities redeemable at net asset value at any time at the option of the
shareholder and typically engage in a continuous offering of their shares.
Accordingly, open-end investment companies are subject to continuous asset in-
flows and out-flows that can complicate portfolio management. Shares of
closed-end investment companies, however, frequently trade at a discount from
their net asset value. 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 Underwriter exercises 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 current
income exempt from Federal and California income taxes. The Fund seeks to
achieve its investment objective by investing primarily in a portfolio of
long-term, investment grade municipal obligations issued by or on behalf of
the State of California, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and
California income taxes. The Fund will seek to achieve its investment
objective by seeking to invest substantially all (a minimum of 80%) of its
assets in California Municipal Bonds, except at times when, in the judgment of
the Investment Adviser, California Municipal Bonds of sufficient quality and
quantity are unavailable for investment by the Fund. At all times, except
during temporary defensive periods, the Fund will maintain at least 65% of its
assets in California Municipal Bonds. Under normal circumstances, at least 80%
of the Fund's assets will be invested in municipal obligations with remaining
maturities of one year or more which are covered by insurance guaranteeing the
timely payment of principal at maturity and interest. 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

10
<PAGE>

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 ordinarily does not intend to realize significant investment income
not exempt from Federal and California income taxes. To the extent that
suitable California Municipal Bonds are not available for investment by the
Fund, as determined by the Investment Adviser, the Fund may purchase long-term
obligations issued by or on behalf of states, territories and possessions of
the United States and their political subdivisions, agencies and
instrumentalities paying interest which, in the opinion of bond counsel to the
issuer, is exempt from Federal but not California income taxes ("Municipal
Bonds"). At all times, except during interim periods pending investment of the
net proceeds of public offerings of the Fund's securities and during temporary
defensive periods, the Fund will have at least 80% of its assets invested in
California Municipal Bonds and Municipal Bonds. 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 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 also 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 "California Municipal Bonds" or
"Municipal Bonds" for purposes of the Fund's investment objective and policies.

Investment in shares of Common Stock of the Fund offers several potential
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal and California income taxes by investing in a professionally
managed portfolio comprised primarily of investment grade insured California
Municipal Bonds. Investment in the Fund also relieves the investor of the
burdensome administrative details involved in managing a portfolio of
California 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 California Municipal Bonds and Municipal Bonds in which
the Fund will invest are those California Municipal Bonds and 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-1+ 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+

11
<PAGE>

through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+ 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 II to this
Prospectus for a description of S&P's, Moody's and Fitch's ratings of
Municipal Bonds. In assessing the quality of California Municipal Bonds and
Municipal Bonds with respect to the foregoing requirements, the Investment
Adviser will take into account the portfolio insurance as well as the nature
of any letters of credit or similar credit enhancements to which particular
California Municipal Bonds and Municipal Bonds are entitled and the
creditworthiness of the insurance company or other financial institution that
provided such insurance or credit enhancement. Consequently, if California
Municipal Bonds or Municipal Bonds are covered by insurance policies issued by
insurers whose claims-paying ability is rated AAA by S&P or Aaa by Moody's,
the Investment Adviser may consider such municipal obligations to be
equivalent to AAA- or Aaa- rated securities, as the case may be, even though
such California Municipal Bonds or Municipal Bonds would generally be assigned
a lower rating if the rating were based primarily upon the credit
characteristics of the issuers without regard to the insurance feature. The
insured California Municipal Bonds and Municipal Bonds must also comply with
the standards applied by the insurance carriers in determining eligibility for
portfolio insurance.

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%) in the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Fund has been advised by
its counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.

The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio
can be expected to decline. Prices of longer-term securities generally
fluctuate more in response to interest rate changes than do short-term or
medium-term securities. These changes in net asset value are likely to be
greater in the case of a fund having a leveraged capital structure, as
proposed for the Fund. See "Risks and Special Considerations of Leverage."

The Fund intends to invest primarily in long-term California Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term California Municipal Bonds and Municipal Bonds
with a maturity of between three years and ten years. The Fund may invest in
short-term,

12
<PAGE>

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 or California income tax.

The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by such Act in the proportion of its
assets that it may invest in securities of a single issuer. However, the Fund's
investments will be limited so as to qualify the Fund for special tax treatment
afforded regulated investment companies under the Code. See "Taxes." To
qualify, among other requirements, the Fund will limit its investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities
(other than U.S. Government securities) of a single issuer, and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities (other than
U.S. Government securities) of a single issuer. A fund that elects to be
classified as "diversified" under the 1940 Act must satisfy the foregoing 5%
requirement with respect to 75% of its total assets. To the extent that the
Fund assumes large positions in the securities of a small number of issuers,
the Fund's yield may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.

PORTFOLIO INSURANCE

Under normal circumstances, at least 80% of the Fund's assets will be
invested in California Municipal Bonds and Municipal Bonds either (i) insured
under an insurance policy purchased by the Fund or (ii) insured under an
insurance policy obtained by the issuer thereof or any other party. The
insurance policies in either instance will be issued by insurance carriers that
have total admitted assets (unaudited) of at least $75,000,000 and capital and
surplus (unaudited) of at least $50,000,000 and insurance claims-paying ability
ratings of AAA from S&P and Aaa from Moody's. See Appendix III to this
Prospectus for a brief description of S&P's and Moody's insurance claims-paying
ability ratings. Currently, it is anticipated that a majority of the insured
California Municipal Bonds and Municipal Bonds in the Fund's portfolio will be
insured by the following insurance companies that satisfy the foregoing
requirements: AMBAC Indemnity Corporation, Financial Guaranty Insurance
Company, Financial Security Assurance and Municipal Bond Investors Assurance
Corporation. The Fund also may purchase California Municipal Bonds and
Municipal Bonds covered by insurance issued by any other insurance company that
satisfies the foregoing requirements. It is anticipated that initially a
majority of insured California Municipal Bonds and Municipal Bonds held by the
Fund will be insured under policies obtained by parties other than the Fund.

The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the requirements set
forth above that guarantee the payment of principal and interest on specified
eligible California Municipal Bonds and Municipal Bonds purchased by the Fund.
A California Municipal Bond and a Municipal Bond will be eligible for coverage
if it meets certain requirements of the insurance company set forth in a
Policy. In the event interest or principal on an insured California Municipal
Bond and Municipal Bond is not paid when due, the insurer will be obligated
under its Policy to make such payment not later than 30 days after it has been
notified by, and provided with documentation from, the Fund that such
nonpayment has occurred.

13
<PAGE>

The Policies will be effective only as to insured California Municipal Bonds
and Municipal Bonds beneficially owned by the Fund. In the event of a sale of
any California Municipal Bonds and Municipal Bonds held by the Fund, the
issuer of the relevant Policy will be liable only for those payments of
interest and principal that are then due and owing. The Policies will not
guarantee the market value of the insured California Municipal Bonds and
Municipal Bonds or the value of the shares of the Fund.

The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities
remain in the Fund's portfolio. In addition, the insurer may not cancel its
Policies for any reason except failure to pay premiums when due. The Board of
Directors of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.

The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately . of 1% to . of 1% of the principal amount of the California
Municipal Bonds and Municipal Bonds covered by such Policies. The estimate is
based on the expected composition of the Fund's portfolio of California
Municipal Bonds and Municipal Bonds. Additional information regarding the
Policies is set forth in Appendix III to this Prospectus. In instances in
which the Fund purchases California Municipal Bonds and Municipal Bonds
insured under policies obtained by parties other than the Fund, the Fund does
not pay the premiums for such policies; rather, the cost of such policies may
be reflected in the purchase price of the California Municipal Bonds and
Municipal Bonds.

It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place
a value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities which are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternative value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser will be unable to
manage the portfolio to the extent it holds defaulted securities, which may
limit its ability in certain circumstances to purchase other California
Municipal Bonds and Municipal Bonds. See "Net Asset Value" below for a more
complete description of the Fund's method of valuing defaulted securities and
securities that have a significant risk of default.

There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event the Board of Directors
determines that such insurance is unavailable or that the cost of such
insurance outweighs the benefits to the Fund, the Fund may discontinue its
policy of maintaining insurance for all or any of the California Municipal
Bonds and Municipal Bonds held in the Fund's portfolio. Although the
Investment Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honor
their obligations under the circumstances.

The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured California Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured California Municipal Bonds or Municipal Bonds
are subject to market risk (i.e., fluctuations in market value as a result of
changes in prevailing interest rates).

14
<PAGE>

DESCRIPTION OF CALIFORNIA MUNICIPAL BONDS AND MUNICIPAL BONDS

California Municipal Bonds and 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 and as California Municipal Bonds if
the interest thereon is exempt from Federal income tax and exempt from
California 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 California Municipal Bonds or Municipal Bonds.

The two principal classifications of California Municipal Bonds and
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 repayment of principal and
the payment of interest. Revenue or special obligation bonds are payable only
from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source such as from the user of the facility being financed. IDBs are
in most cases revenue bonds and do not generally constitute the pledge of the
credit or taxing power of the issuer of such bonds. The repayment of principal
and the payment of interest on such industrial development bonds depends
solely on the ability of the user of the facility financed by the bonds to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. California Municipal Bonds
and 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 California Municipal Bonds and 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 California Municipal
Bonds and Municipal Bonds that may subject certain investors to an alternative
minimum tax. See "Taxes--General." Also included within the general category
of California Municipal Bonds and 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

15
<PAGE>

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 California Municipal Bonds and Municipal Bonds for
investment by the Fund.

SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL BONDS

The Fund ordinarily will invest at least 80% of its total assets in
California Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of California Municipal Bonds than is a municipal
bond mutual fund that is not concentrated in issuers of California Municipal
Bonds to this degree. Since the start of the 1990-91 fiscal year, the State of
California has faced the worst economic, fiscal and budget conditions since
the 1930s. On July 5, 1994, all three of the rating agencies rating the State
of California's long-term debt lowered their ratings of the State of
California's general obligation bonds. Moody's lowered its rating from "Aa" to
"A1," Standard & Poor's lowered its rating from "A+" to "A" and termed its
outlook as "stable," and Fitch lowered its rating from "AA" to "A." No
assurance can be given that such ratings will not be lowered in the future.
Although a steady upturn has been underway since 1994, pre-recession job
levels are not expected to be reached until later in the decade. The
Investment Adviser does not believe that the current economic conditions in
California will have a significant adverse effect on the Fund's ability to
invest in high quality California Municipal Bonds. For a discussion of
economic and other conditions in the State of California, see Appendix I,
"Economic Conditions in California."

OTHER INVESTMENT POLICIES

The Fund has adopted certain other policies as set forth below:

Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known as
"leveraging") create an opportunity for greater total return since the Fund
will not be required to sell portfolio securities to repurchase or redeem
shares but, at the same time, 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 California Municipal Bonds and 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
securities having a market value at all times at least equal to the amount of
the commitment.

16
<PAGE>

Indexed and Inverse Floating Obligations. The Fund may invest in California
Municipal Bonds and Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest
in California Municipal Bonds and Municipal Bonds that pay interest based on
an index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain California Municipal Bonds and 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 California Municipal Bonds and
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 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 California Municipal Bond or Municipal
Bond issuer's right to call all or a portion of such California Municipal Bond
or 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 California Municipal Bonds or Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related California Municipal Bond or Municipal Bond will expire without
value. The economic effect of holding both the Call Right and the related
California Municipal Bond or Municipal Bond is identical to holding a
California Municipal Bond or 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.

17
<PAGE>

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 California Municipal Bonds and 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

18
<PAGE>

expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities that it intends to purchase. The Fund
will not purchase options on securities if, as a result of such purchase, the
aggregate cost of all outstanding options on securities held by the Fund would
exceed 5% of the market value of the Fund's total assets.

Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in California Municipal Bonds and
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 California Municipal
Bonds and 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 that may become available,
if the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the
California Municipal Bonds and 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.

19
<PAGE>

Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.

Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security 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 that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and California
Municipal Bonds 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
liquid 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."

20
<PAGE>

The volume of trading in the exchange markets with respect to California
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.

The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
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 that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be 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

21
<PAGE>

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 any or all of 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 case, 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

22
<PAGE>

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 35% 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>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses)................................... (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return.................... ( )% ( )% ( )% % %
</TABLE>

Leveraging of the Common Stock cannot be fully achieved until preferred
stock is issued and the proceeds of the offering of preferred stock have been
invested in long-term California Municipal Bonds and Municipal Bonds.

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 NRSROs. 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

23
<PAGE>

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, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.

3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.

4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.

5. Make loans to other persons, except that the Fund may purchase
California Municipal Bonds, Municipal Bonds and other debt securities and
enter into repurchase agreements in accordance with its investment
objective, policies and limitations.

6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.

24
<PAGE>

Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:

a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.

b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.

c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).

d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on California Municipal Bonds,
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 California Municipal Bonds and 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 that 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
managers 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.

25
<PAGE>

Arthur Zeikel (64)--President and Director (1)(2)--President of the
Investment Adviser (which term, as used herein, includes its corporate
predecessors) since 1977; President of Merrill Lynch Asset Management, L.P.
("MLAM") (which term, as used herein, includes its corporate predecessors)
since 1977; President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; Executive Vice President of Merrill Lynch & Co., Inc.
("ML & Co.") since 1990; Director of Merrill Lynch Funds Distributor, Inc.
("MLFD") since 1977.

[Additional Directors to be provided by Amendment.]

Terry K. Glenn (56)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of MLFD
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.

Vincent R. Giordano (52)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.

Donald C. Burke (36)--Vice President (1)(2)--Vice President and Director of
Taxation of MLAM since 1990.

Kenneth A. Jacob (45)--Vice President (1)(2)--Vice President of the
Investment Adviser and MLAM since 1984.

Walter O'Connor (35)--Portfolio Manager (1)(2)--Vice President of MLAM since
1993; Assistant Vice President of MLAM from 1991 to 1993; Assistant Vice
President of Prudential Securities from 1984 to 1991.

Gerald M. Richard (47)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of MLFD since
1981; Treasurer of MLFD since 1990.

Patrick D. Sweeney (43)--Secretary (1)(2)--Vice President of MLAM since
1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.

26
<PAGE>

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 pays members of its Audit Committee, which consists of all of
the Directors not affiliated with the Investment Adviser, an annual fee of
$ . 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 full
fiscal year and for the calendar year ended December 31, 1996 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
interested Directors.

<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM FUND FUND EXPENSE DIRECTORS
- ---------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
(1).................. $ None $
(1).................. $ None $
(1).................. $ None $
(1).................. $ None $
(1).................. $ None $
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows: ( registered investment companies
consisting of portfolios); ( registered investment companies
consisting of portfolios); ( registered investment companies
consisting of portfolios); ( registered investment companies
consisting of portfolios); and ( registered investment companies
consisting of 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 April 30, 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

27
<PAGE>

for the actual management of the Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Investment Adviser, subject to review by the Board of Directors.

The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. Walter O'Connor 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 0. %
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

28
<PAGE>

of the Investment Adviser or its affiliates 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

29
<PAGE>

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 purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. 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
pro rata at least annually to holders of Common Stock and any 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.

30
<PAGE>

TAXES

GENERAL

The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Fund intends to distribute substantially all of such income.

The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.

The 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.

The portion of exempt-interest dividends paid from interest received by the
Fund from California Municipal Bonds also will be exempt from California
income tax. However, exempt-interest dividends paid to a corporate shareholder
subject to California state franchise tax will not be exempt from California
taxation. Shareholders subject to income taxation by states other than
California will realize a lower after-tax rate of return than California
shareholders since the dividends distributed by the Fund generally will not be
exempt, to any significant degree, from income taxation by such other states.
The Fund will inform shareholders annually as to the portion of the Fund's
distributions which constitutes exempt-interest dividends and the portion
which is exempt from California income taxes. Interest on indebtedness
incurred or continued to purchase or carry Fund shares is not deductible for
Federal or California personal income tax purposes to the extent attributable
to exempt-interest dividends.

31
<PAGE>

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 and California 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 and,
for California income tax purposes, are treated as capital gains which are
taxed at ordinary income tax rates. 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

32
<PAGE>

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 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 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

33
<PAGE>

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 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.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to
the Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its 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.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and California income and
corporate franchise tax laws presently in effect. For the complete provisions,
reference should be made to the pertinent Code sections, the Treasury
Regulations promulgated

34
<PAGE>

thereunder and California income and corporate franchise tax laws. The Code
and the Treasury Regulations, as well as the California tax laws, 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 or resumption 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

35
<PAGE>

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 , , .

36
<PAGE>

MUTUAL FUND INVESTMENT OPTION

Purchasers of shares of Common Stock of the Fund through Merrill Lynch 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 California Municipal Bonds and 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. California Municipal Bonds and
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.

It is the intention of the Investment Adviser, subject to guidelines
established by the Board of Directors of the Fund, to hold insured California
Municipal Bonds and Municipal Bonds in the Fund's portfolio that are in
default, or in significant risk of default, in the payment of principal or
interest until the default has been cured or the principal and interest are
paid by the issuer or the insurer. In accordance with such guidelines, the
Investment

37
<PAGE>

Adviser will consider the following factors in determining the effective value
of insured California Municipal Bonds and Municipal Bonds in the Fund's
portfolio that are in default, or in significant risk of default, in the
payment of principal or interest: (i) the market value of the bonds; (ii) the
market value of securities of similar issuers whose securities carry similar
interest rates; and (iii) the value of insurance guaranteeing interest and
principal payments. Absent unusual or unforeseen circumstances, the value
ascribed to the insurance feature of the bonds would be the difference between
the market value of the bonds and the market value of securities of a similar
nature that are not in default or significant risk of default.

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 the 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. There is no assurance
that such preferred stock will be issued.

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 shares of Common Stock of the Fund for $ . 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.

38
<PAGE>

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 short 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

39
<PAGE>

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
66 2/3% 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 66 2/3% of the Fund's shares of capital stock then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:

(i) a merger or consolidation or statutory share exchange of the Fund
with 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.

40
<PAGE>

In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares 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 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the 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

Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase shares of Common Stock from
the Fund. The Underwriter is committed to purchase all of such shares if any
are purchased.

The Underwriter has advised the Fund that it proposes initially to offer the
shares 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
Underwriter from its own assets a commission in connection with the sale of
shares of Common Stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $ per share on
sales by such dealers. After the initial public offering, the public offering
price and other selling terms may be changed. Investors must pay for shares of
Common Stock purchased in the offering on or before June , 1997.

41
<PAGE>

The Fund has granted the Underwriter 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.

The Underwriter may engage in certain transactions that stabilize the price
of the shares of Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
Common Stock.

If the Underwriter creates a short position in the shares of Common Stock in
connection with the offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriter may
reduce that short position by purchasing shares of Common Stock in the open
market.

The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of Common Stock
in the open market to reduce the Underwriter's short position or to stabilize
the price of the shares of Common Stock, it may reclaim the amount of the
selling concession from the selling group members who sold those shares of
Common Stock as part of the offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.

Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of Common Stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

Prior to this offering, there has been no public market for the shares of
the 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 Underwriter does 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 Underwriter has undertaken to sell
lots of 100 or more shares to a minimum of 2,000 beneficial owners.

The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-
term, tax-exempt securities subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."

The Underwriter is an affiliate of the Investment Adviser of the Fund.

The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.

42
<PAGE>

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 Underwriter by Brown & Wood LLP, New
York, New York.

EXPERTS

The statement of assets, liabilities and capital of the Fund as of ,
1997, included in this Prospectus and Registration Statement has been audited
by , independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in auditing and accounting. The selection of
independent auditors is subject to ratification by shareholders of the Fund.

43
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholder of MuniHoldings California Insured
Fund, Inc.:

We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings California Insured Fund, Inc. as of , 1997. This
statement of assets, liabilities and capital is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this
statement of assets, liabilities and capital based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and capitals. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings California Insured Fund, Inc. as of , 1997 in conformity
with generally accepted accounting principles.

44
<PAGE>

MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.

STATEMENT OF ASSETS, LIABILITIES AND CAPITAL

, 1997

<TABLE>
<S> <C>
ASSETS
Cash................................................................ $
Deferred organization expenses (Note 1).............................
--------
Total assets......................................................
--------
LIABILITIES
Accrued expenses (Note 1)...........................................
--------
NET ASSETS............................................................ $
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares
authorized; 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).............................................. $
========
</TABLE>

NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL

NOTE 1. ORGANIZATION

The Fund was incorporated under the laws of the State of Maryland on April
24, 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 shares for $ on ,
1997. The General Partner of the Investment Adviser is an indirectly wholly-
owned subsidiary of Merrill Lynch & Co., Inc.

Deferred organization costs will be amortized on a straight-line basis over a
five-year period beginning with the commencement of operations of the Fund.

NOTE 2. MANAGEMENT ARRANGEMENTS

The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0. % 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.

45
<PAGE>

APPENDIX I

ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA

The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily
upon one or more publicly available offering statements relating to debt
offerings of state issuers, however, it has not been updated nor will it be
updated during the year. The Fund has not independently verified the
information.

GENERAL ECONOMIC CONDITIONS

The economy of the State of California (sometimes referred to herein as the
"State") is the largest among the 50 states and one of the largest in the
world. This diversified economy has major components in agriculture,
manufacturing, high technology, trade, entertainment, tourism, construction
and services. Total State gross domestic product is expected to exceed $1
trillion in 1997. On a stand alone basis, California's economy is larger than
all but six nations in the world.

California's July 1, 1996 population of over 32 million represented over 12%
of the total United States population. The official 1990 Census population was
29,760,021 as of April 1, 1990, which represented an increase of over 6
million persons, or 26%, during the decade of the 1980s. As of the April 1,
1990 Census, the median age of California's population was 31.5 years, younger
than the 1990 U.S. median of 32.9 years.

California's population is concentrated in metropolitan areas. As of the
April 1, 1990 Census, 96% resided in the 23 Metropolitan Statistical Areas in
the State. Overall, California's population per square mile was 191 in 1990.
As of July 1, 1995, the 5-county Los Angeles area accounted for 49%, with 15.6
million residents. The 10-county San Francisco Bay Area represented 21%, with
a population of 6.6 million.

After suffering through a severe recession, California's economy has been on
a steady recovery since the start of 1994. More than 300,000 nonfarm jobs were
added in the State in 1996, while personal income grew by more than $55
billion. California's economic expansion is being fueled by strong growth in
high-technology industries, including computer software, electronics
manufacturing and motion picture production, all of which have offset the
recession-related losses, which were heaviest in aerospace and defense-related
industries (which accounted for two-thirds of the job losses), finance and
insurance.

THE STATE

Fiscal Years Prior to 1995-96. The State's budget problems in recent years
have been caused by a combination of external economic conditions and a
structural imbalance in that the largest general fund programs--K-14
education, health, welfare and corrections--were increasing faster than the
revenue base, driven by the State's rapid population growth. These pressures
are expected to continue as population trends maintain strong demand for
health and welfare services, as the school age population continues to grow,
and as the State's corrections program responds to a "Three Strikes" law
enacted in 1994, which requires mandatory life prison terms for certain third-
time felony offenders.

As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for
social welfare programs, from the late 1980s until 1992-93, the State

46
<PAGE>

had a period of budget imbalance. During this period, expenditures exceeded
revenues in four out of six years, and the State accumulated and sustained a
budget deficit in its budget reserve, the Special Fund for Economic
Uncertainties ("SFEU") approaching $2.8 billion at its peak at June 30, 1993.
Starting in the 1990-91 Fiscal Year and for each fiscal year thereafter, each
budget required multibillion dollar actions to bring projected revenues and
expenditures into balance. The State Legislature and Governor agreed on the
following principal steps to produce Budget Acts in the years 1991-92 to 1994-
95, although not all these actions were taken in each year.

. significant cuts in health and welfare program expenditures;

. transfers of program responsibilities and funding from the State to local
governments (referred to as "realignment"), coupled with some reduction
in mandates on local government;

. transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to
local school districts, thereby reducing State funding for schools under
Proposition 98 (discussed below);

. reduction in growth of support for higher education programs, coupled
with increases in student fees, through the 1994-95 Fiscal Year;

. maintenance of the minimum Proposition 98 funding guarantee for K-14
schools, and the disbursement of additional funds to keep a constant
level of about $4,200 per K-12 pupil through the 1993-94 Fiscal Year;

. revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;

. increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
illegal immigrants, although during this time frame, most of the
additional aid requested by the Administration was not received; and

. various one-time adjustments and accounting changes.

Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.

Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget
for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller issued registered warrants to pay a variety of
obligations representing prior years' or continuing appropriations, and
mandates from court order. Available funds were used to make constitutionally-
mandated payments, such as debt service on bonds and warrants. Between July 1
and September 4, 1992, when the budget was adopted, the State Controller
issued a total of approximately $3.8 billion of registered warrants.

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During the past several fiscal years, the State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession
of notes and revenue anticipation warrants were issued in the period from June
1992 to July 1994, often needed to pay previously maturing notes or warrants.
These borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year, as noted earlier.
The last and largest of these borrowings was $4.0 billion of revenue
anticipation warrants which were issued in July, 1994 and matured on April 25,
1996.

1995-96 Fiscal Year. The 1995-96 Budget Act was signed by the Governor on
August 3, 1995, 34 days after the start of the fiscal year. The Budget Act
projected general fund revenues and transfers of $44.1 billion, a 3.5%
increase from the prior year. Expenditures were budgeted at $43.4 billion, a 4
percent increase. The Budget Act also projected Special Fund revenues of $12.7
billion and appropriated Special Fund expenditures of $13.0 billion.

Final data for the 1995-96 Fiscal Year showed revenues and transfers of
$46.1 billion, some $2 billion over the original fiscal year estimate, which
was attributed to the strong economic recovery. Expenditures also increased,
to an estimated $45.4 billion, as a result of the requirement to expend
revenues for schools under Proposition 98, and, among other things, failure of
the federal government to enact welfare reform during the fiscal year and to
budget new aid for illegal immigrant costs, both of which had been counted on
to allow reductions in State costs. SFEU had a small negative balance of about
$87 million at June 30, 1996, all but eliminating the accumulated budget
deficit from the early 1990's. Available internal borrowable resources
(available cash, after payment of all obligations due) on June 30, 1996 was
about $3.8 billion, representing a significant improvement in the State's cash
position, and ending the need for deficit borrowing over the end of the fiscal
year. The State's improved cash position allowed it to repay the $4.0 billion
Revenue Anticipation Warrant issue on April 25, 1996, and to issue only $2.0
billion of revenue anticipation notes during the fiscal year, which matured on
June 28, 1996.

The 1995-96 Budget Act included substantial additional funding under
Proposition 98 for schools and community colleges (about $1.0 billion general
fund and $1.2 billion total above 1994-95 levels). Because of higher than
projected revenues in 1994-95, an additional $561 million ($92 per K-12 ADA)
was appropriated to the 1994-95 Proposition 98 entitlement. A large part of
this was a block grant of about $50 per pupil for any one-time purpose. For
the first time in several years, a full 2.7 percent cost of living allowance
was funded. The budget was based on the settlement of the CTA v. Gould
litigation. Cuts in health and welfare costs totaled about $220 million,
almost $700 million less than had been anticipated, because of the failure by
the federal government to approve certain of these actions in a timely manner.
The federal government also failed to appropriate all but $31 million of an
anticipated $500 million in new federal aid for incarceration and health care
costs of illegal immigrants. Funding from the general fund for the University
of California was increased by $106 million and for the California State
University system by $97 million, with no increases in student fees.

1996-97 Fiscal Year. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, along with various implementing bills. The Governor vetoed
about $82 million of appropriations (both general fund and Special Fund). With
the signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The Department of
Finance projected that, on June 30, 1997, the State's available internal
borrowing (cash) resources will be $2.9 billion, after payment of all
obligations due by that date, so that no cross-fiscal year borrowing will be
needed.

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Revenues--The Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased in over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting
on January 1, 1997. As a result, revenues for the Fiscal Year were estimated
to total $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special Fund revenues were estimated to be $13.3 billion.

Expenditures--The Budget Act contained general fund appropriations totaling
$47.251 billion, a 4.0% increase over the final estimated 1995-96
expenditures. Special Fund expenditures were budgeted at $12.6 billion.

The following are principal features of the 1996-97 Budget Act:

1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (general fund) and $1.65 billion total
above revised 1995-96 levels. Almost half of this money was budgeted to
fund class-size reductions in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2%) was funded.
The Proposition 98 increases have brought K-12 expenditures to almost
$4,800 per pupil (also called per ADA, or Average Daily Attendance), an
almost 15% increase over the level prevailing during the recession years.
Community colleges will receive an increase in funding of $157 million for
1996-97 out of this $1.6 billion total.

Because of the higher than projected revenues in 1995-96, an additional
$1.1 billion ($190 per K-12 ADA and $145 million for community colleges)
was appropriated and retroactively applied towards the 1995-96 Proposition
98 guarantee, bringing K-12 expenditures in that year to over $4,600 per
ADA. These new funds were appropriated for a variety of purposes, including
block grants, allocations for each school site, facilities for class size
reduction, and a reading initiative. Similar retroactive increases totaling
$230 million, based on final figures on revenues and State population
growth, were made to the 1991-92 and the 1994-95 Proposition 98 guarantees,
most of which was allocated to each school site.

2. The Budget Act assumed savings of approximately $660 million in health
and welfare costs which required changes in federal law, including federal
welfare reform. The Budget Act further assumed federal law changes in
August 1996 which would allow welfare cash grant levels to be reduced by
October 1, 1996. These cuts totaled approximately $163 million of the
anticipated $660 million savings.

3. A 4.9% increase in funding for the University of California ($130
million general fund) and the California State University system ($101
million general fund), with no increases in student fees, maintaining the
second year of the Governor's four-year "Compact" with the State's higher
education units.

4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the general fund. (For
purposes of cash flow projections, the State Department of Finance expects
$540 million of this amount to be received during the 1996-97 fiscal year.)

5. General fund support for the State Department of Corrections was
increased by about 7% over the prior year, reflecting estimates of
increased prison population.

6. With respect to aid to local governments, the principal new programs
included in the Budget Act are $100 million in grants to cities and
counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile
crime.

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Federal Welfare Reform--Following enactment of the 1996-97 Budget Act,
Congress passed and the President signed (on August 22, 1996) the Personal
Responsibility and Work Opportunity Act of 1996 (the "Law") making a
fundamental reform of the current welfare system. Among many provisions, the
Law includes: (i) conversion of Aid to Families with Dependent Children from
an entitlement program to a block grant titled Temporary Assistance for Needy
Families (TANF), with lifetime time limits on TANF recipients, work
requirements and other changes; (ii) provisions denying certain federal
welfare and public benefits to legal noncitizens, allowing states to elect to
deny additional benefits (including TANF) to legal noncitizens, and generally
denying almost all benefits to illegal immigrants; and (iii) changes in the
Food Stamp program, including reducing maximum benefits and imposing work
requirements.

The Law requires states to implement the new TANF program not later than
July 1, 1997 and provides California approximately $3.7 billion in block grant
funds for FY 1996-97 for the provisions of the Law. States are allowed to
implement TANF as soon as possible and will receive a prorated block grant
effective the date of application. The California State Plan was approved
November 27, 1996 to allow grant reductions to be implemented effective
January 1, 1997 and to allow the State to capture approximately $267 million
in additional federal block grant funds over the currently budgeted level.
None of the other federal changes needed to achieve the balance of the $660
million cost savings were enacted. Thus, in lieu of the $660 million savings
initially assumed, it is now projected that savings will total approximately
$320 million.

A preliminary analysis of the Laws by the State Legislative Analyst's Office
indicates that an overall assessment of how these changes will affect the
State's general fund will not be known for some time, and will depend on how
the State implements the Law. There are many choices including how quickly the
State implements the Law; the degree to which the State elects to make up for
cuts in federal aid, provide more aid to counties, or cut some of its own
existing programs for noncitizens; and the State's ability to avoid certain
penalties written into the Law.

Other Subsequent Developments--With the continued strong economic recovery
in the State, the Department of Finance has estimated, in connection with the
release of the Governor's 1997-98 Budget Proposal, that revenues for the 1996-
97 Fiscal Year will exceed initial projections by about $760 million. This
increase will be offset by higher expenditures for K-14 school aid (pursuant
to Proposition 98) and for health and welfare costs, because federal law
changes and other federal actions did not provide as much assistance to the
State as was initially planned in the Budget Act. The Department's updated
projections show a balance in the SFEU of $197 million, slightly lower than
projected in July, 1996. The Department also projects the State's cash
position will be stronger than originally estimated, with unused internal
borrowable resources at June 30, 1997 of about $4.3 billion.

1997-98 Fiscal Year Proposed Budget. On January 9, 1997, the Governor
released his proposed budget for the 1997-98 Fiscal Year (the "Governor's
Budget"). The Governor's Budget projects general fund revenues and transfers
in 1997-98 of $50.7 billion, a 4.6% increase from revised 1996-97 figures. The
Governor proposes expenditures of $50.3 billion, a 3.9% increase from 1996-97.
The Governor's Budget projects a balance in the SFEU of $553 million on June
30, 1998. The Governor's Budget also anticipates about $3 billion of external
borrowing for cash flow purposes during the year, with no requirement for
cross-fiscal year borrowing.

Among the major initiatives and features of the Governor's Budget are the
following:

1. A proposed 10% cut in the Bank and Corporation Tax rate, to be phased
in over two years.

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2. Proposition 98 funding for K-14 schools will be increased again, as a
result of stronger revenues. Per-pupil funding for K-12 schools will reach
$5,010, compared to $4,220 as recently as the 1993-94 Fiscal Year. Part of
the new funding is proposed to be dedicated to the completion of the
current program to reduce class size to 20 pupils in lower elementary
grades, and to expand the program by one grade, so that it will cover K-3rd
grade.

3. Funding for higher education will be increased consistent with a four-
year "compact" established in 1995-96. There is not projected to be any
increase in student fees at any of the three levels of the State higher
education system.

4. The 1997-98 proposed Governor's Budget assumes approximately $500
million in savings contingent upon federal action. The Budget assumes that
federal law will be enacted to remove the maintenance-of-effort requirement
for Supplemental Security Income (SSI) payments, thereby enabling the state
to reduce grant levels pursuant to previously enacted state law ($279
million). The Budget also assumes the federal government will fund $216
million in costs of health care for illegal immigrants.

LOCAL GOVERNMENTS

The primary units of local government in California are the counties,
ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles).
Counties are responsible for the provision of many basic services, including
indigent healthcare, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 incorporated cities and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the
future growth of property taxes and limited the ability of local governments
to impose "special taxes" (those devoted to a specific purpose) without two-
thirds voter approval.

In the aftermath of Proposition 13, the State provided aid from the general
fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated remnants of this post-Proposition 13 aid to entities other than K-
14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected. Orange County
implemented significant reductions in services and personnel, and continues to
face fiscal constraints in the aftermath of its bankruptcy.

On November 5, 1996, voters approved Proposition 218, entitled the "Right to
Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges
and assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments to changes through local initiatives.

Proposition 218 does not affect the State or its ability to levy or collect
taxes. There are a number of ambiguities concerning the Proposition and its
impact on local governments and their bonded debt which will require
interpretation by the courts or the State Legislature. The State Legislature
Analyst estimated that enactment of Proposition 218 would reduce local
government revenues statewide by over $100 million a year,

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and that over time revenues to local government would be reduced by several
hundred million dollars a year under this proposition.

CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES; PENDING
LEGISLATION

Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIIIA provides
that the maximum ad valorem tax on real property cannot exceed 1% of the "full
cash value" of the property and effectively prohibits the levying of any other
ad valorem tax on real property for general purposes. However, on May 3, 1986,
Proposition 46, an amendment to Article XIIIA, was approved by the voters of
the State of California, creating a new exemption under Article XIIIA
permitting an increase in ad valorem taxes on real property in excess of 1%
for bonded indebtedness approved by two-thirds of the voters voting on the
proposed indebtedness. "Full cash value" is defined as "the County Assessor's
valuation of real property as shown on the 1975-76 tax bill under "full cash
value" or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment". The "full cash value" is subject to annual adjustment to reflect
increases (not to exceed 2%) or decreases in the consumer price index or
comparable local data, or to reflect reductions in property value caused by
damage, destruction or other factors.

Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has
financial responsibility for providing. To the extent that the revenues of the
State and/or local government exceed its appropriations, the excess revenues
must be rebated to the public either directly or through a tax decrease.
Expenditures for voter-approved debt services are not included in the
appropriations limit.

At the November 9, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules be
transferred and allocated (up to a maximum of 40%) to the State School Fund
and be expended solely for purposes of instructional improvement and
accountability. Proposition 98 also amends Article XVI to require that the
State of California provide a minimum level of funding for public schools and
community colleges. Commencing with the 1988-89 Fiscal Year, money to be
applied by the State for the support of school districts and community college
districts shall not be less than the greater of: (i) the amount which, as a
percentage of the State general fund revenues which may be appropriated
pursuant to Article XIIIB, equals the percentage of such State general fund
revenues appropriated for school districts and community college districts,
respectively, in Fiscal Year 1986-87 or (ii) the amount required to ensure
that the total allocations to school districts and community college districts
from the State general fund proceeds of taxes appropriated pursuant to Article
XIIIB and allocated local proceeds of taxes shall not be less than the total
amount from these sources in the prior year, adjusted for increases in
enrollment and adjusted for changes in the cost of living pursuant to the
provisions of Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirements
for one year. As a result of Proposition 98, funds that the State might
otherwise make available to its political subdivisions may be allocated
instead to satisfy such minimum funding level.

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During the recent recession, general fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlement. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.

In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an
appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriations that count toward
satisfying the Proposition 98 guarantee, or from "below" the current base.
Repayments are spread over the eight-year period of 1994-95 through 2001-02 to
mitigate any adverse fiscal impact.

Substantially increased general fund revenues, above initial budget
projections, in the 1994-95, 1995-96 and 1996-97 fiscal years have resulted or
will result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets.

On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen
or a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of
all students. If the district "reasonably suspects" that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and
certain other parties. The measure also prohibits a school district from
providing education to a student it does not verify as either a United States
citizen or a person legally admitted to the United States. The State
Legislative Analyst estimates that verification costs could be in the tens of
millions of dollars on a statewide level (including verification costs
incurred by other local governments), with first-year costs potentially in
excess of $100 million.

The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive Federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving Federal education funds,
which total $2.3 billion annually to California school districts. The
Secretary of the United States Department of Education has indicated that the
reporting requirements in Proposition 187 could jeopardize the ability of
school districts to receive these funds.

Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. On November 2, 1995, a
United States District Court judge struck down the central provisions of
Proposition 187 by ruling that parts of Proposition 187 conflict with Federal
power over immigration. The ruling concluded that states may not enact their
own schemes to "regulate immigration or devise immigration

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regulations which run parallel or purport to supplement Federal immigration
law". As a consequence of the ruling, students may not be denied public
education and may not be asked about their immigration status when enrolling
in public schools. Further, the ruling struck down the requirements of
Proposition 187 that teachers and district employees report information on the
immigrant status of students, parents and guardians. An appeal has been filed.

Article XIIIA, Article XIIIB and a number of other propositions were adopted
pursuant to California's constitutional initiative process. From time to time,
other initiative measures could be adopted by California voters. The adoption
of any such initiatives may cause California issuers to receive reduced
revenues, or to increase expenditures, or both.

Pending Litigation. The State is a party to numerous legal proceedings, many
of which normally occur in governmental operations. Some of the more
significant lawsuits pending against the State are described herein.

The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to state-mandated costs. The action involves an appeal by
the Director of Finance from a 1984 decision by the State Board of Control
(now succeeded by the Commission on State Mandates (Commission)). The Board of
Control decided in favor of local school districts' claims for reimbursement
for special education programs for handicapped students. The case was then
brought to the trial court by the State and later remanded to the Commission
for redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the
issuance of a final consolidated decision is anticipated sometime in early
1997. To date, the Legislature has not appropriated funds. The liability to
the State, if all potentially eligible school districts pursue timely claims,
has been estimated by the Department of Finance at more than $1 billion.

The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J. B. Stringfellow, Jr., et al., the State is seeking recovery
for post costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $200 million to $800 million.

The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs.
Potential liability to the remaining 300 plaintiffs, from claims filed, ranges
from $800 million to $1.5 billion. An appeal has been filed.

In Professional Engineers in California Government v. Wilson, the
petitioners are challenging several appropriations in the 1993, 1994, and 1995
Budget Acts. The appropriations mandate the transfer of approximately $262
million from the State Highway Account and $113 million from the Motor Vehicle
Account to the general fund and appropriate approximately $6 million from the
State Highway Account to fund a highway-grade crossing program administered by
the Public Utilities Commission. Petitioners contend that the transfers
violate several constitutional provisions and request that the moneys be
returned to the State Highway Account and Motor Vehicle Account.

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The State is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and
Tobacco Products Surtax Fund for years ended June 30, 1990, through June 30,
1995 for programs which were allegedly not health education or tobacco-related
disease research. If the State loses, the general fund and funds from other
sources would be used to reimburse the Cigarette and Tobacco Products Surtax
Fund for approximately $166 million.

The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson, et
al., where the plaintiffs are challenging the legality of various budget
action transfers and appropriations from particular special funds for years
ended June 30, 1995, and June 30, 1996. The plaintiffs allege that the
transfers and appropriations are contrary to the substantive law establishing
the funds and providing for interest accruals to the funds, violate the single
subject requirement of the State Constitution, and is an invalid "special
law." Plaintiffs seek to have monies totaling approximately $335 million
returned to the special funds.

The State is a defendant in two related cases, Beno vs. Sullivan (Beno) and
Welch v. Anderson (Welch), concerning reductions in Aid to Families with
Dependent Children (AFDC) grant payments. In the Beno case, plaintiffs seek to
invalidate AFDC grant reductions and in the Welch case, plaintiffs contend
that AFDC grant reductions are not authorized by state law. The Beno case
concerns the total grant reductions while the Welch case concerns the period
of time the State did not have a waiver for those reductions. The State's
potential liability for retroactive AFDC grant reductions is estimated at $831
million if the plaintiffs are awarded the full amount in both cases.

In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
("PERS") beginning in Fiscal Year 1992-93. On January 11, 1995, the Sacramento
County Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation were found to be unconstitutional and to transfer to PERS the
1993-94 and 1994-95 contributions that are unpaid to date. On February 19,
1997, the State Court of Appeals affirmed the decision of the Superior Court.
The 1993-94 and 1994-95 transfers to PERS were made pursuant to the
legislation deferring payment. The transfers to PERS which have not yet been
made, but which would be required under the judgment total approximately $900
million, representing the transfers for 1995-96 and for a portion of the 1996-
97 fiscal year. This amount does not include any interest that may be awarded.
The State defendants intend to seek review of the decision by the State
Supreme Court.

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APPENDIX II

RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS

Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.

Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.

Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Con.(. . .)--Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are

56
<PAGE>

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,
A1, Baa1, Ba1 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"; MIG-4/VMIG-4 instruments are of "adequate quality, carrying specific
risk but having protection . . . and not distinctly or predominantly
speculative."

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

PRIME-1--Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
Prime-1 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.

57
<PAGE>

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 "C1" 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.

58
<PAGE>

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-1" 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 it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P's by the issuer or obtained by S&P's from other sources it
considers reliable. S&P's does not conduct an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information or based on other circumstances.

An S&P'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).

59
<PAGE>

Note rating symbols are as follows:

SP-1
A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given
a "+" designation.

SP-2
A satisfactory capacity to pay principal and interest.

SP-3
A speculative capacity to pay principal and interest.

DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS

Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.

Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.

Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.

Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.

Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.

AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-
1+."

A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.

60
<PAGE>

BBB--Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.

Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.

Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining or uncertain, as follows:

Improving UP ARROW

Stable LEFT/RIGHT ARROW

Declining DOWN ARROW

Uncertain UP/DOWN ARROW

Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.

NR indicates that Fitch does not rate the specific issue.

Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.

Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.

Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.

FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive" indicating a
potential upgrade, "Negative" for potential downgrade, or "Evolving" where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within three to 12 months.

Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.

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

61
<PAGE>

defaulted bonds, the rating ("DDD" to "D") is an assessment of the ultimate
recovery value through reorganization or liquidation.

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.

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.

62
<PAGE>

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.

63
<PAGE>

APPENDIX III

PORTFOLIO INSURANCE

Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured California Municipal Bonds and Municipal
Bonds held by the Fund. The Fund has no obligation to obtain any such
Policies, and the terms of any Policies actually obtained may vary
significantly from the terms discussed below.

In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards
such companies normally use in establishing the insurability of new issues of
California Municipal Bonds and Municipal Bonds and are not necessarily the
criteria that would be used in regard to the purchase of such bonds by the
Fund. The Policies do not insure (i) municipal securities ineligible for
insurance and (ii) municipal securities no longer owned by the Fund.

The Policies do not guarantee the market value of the insured California
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable
to meet is obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the
insurance company will not have any obligation to insure any issue held by the
Fund that is adversely affected by either of the above described events. In
addition to the payment of premiums, the Policies may require that the Fund
notify the insurance company as to all California Municipal Bonds and
Municipal Bonds in the Fund's portfolio and permit the insurance company to
audit their records. The insurance premiums will be payable monthly by the
Fund in accordance with a premium schedule to be furnished by the insurance
company at the time the Policies are issued. Premiums are based upon the
amounts covered and the composition of the portfolio.

The insurance companies used by the Fund will have insurance claims-paying
ability ratings of AAA from Standard & Poor's Ratings Services ("S&P") and Aaa
from Moody's Investors Service ("Moody's").

An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Moody's
insurance claims-paying ability rating is an opinion of the ability of an
insurance company to repay punctually senior policyholder obligations and
claims. An insurer with an insurance claims-paying ability rating of Aaa is
considered by Moody's to be of the best quality. In the opinion of Moody's,
the policy obligations of an insurance company with an insurance claims-paying
ability rating of Aaa carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position.

An insurance claims-paying ability rating of S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can
only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet nonpolicy
obligations (i.e., debt contracts).

The assignment of ratings by S&P or Moody's to debt issues that are fully or
partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.

64
<PAGE>

APPENDIX IV

TAXABLE EQUIVALENT YIELDS FOR 1997

<TABLE>
<CAPTION>
A TAX-FREE YIELD OF
-----------------------------------
TAXABLE INCOME*
- ------------------------------------ 1997 FEDERAL CALIFORNIA
SINGLE RETURN JOINT RETURN TAX BRACKET 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> <C>
$ 25,485-$ 32,207 $ 50,969-$ 64,414 28.00% 8.0% 7.55 8.30 9.06 9.81 10.57 11.32
$ 32,208-$ 59,750 $ 64,415-$ 99,600 28.00% 9.3% 7.66 8.42 9.19 9.95 10.72 11.48
$ 59,751-$124,650 $ 99,601-$151,750 31.00% 9.3% 7.99 8.79 9.59 10.39 11.19 11.98
$124,651-$271,050 $151,751-$271,050 36.00% 9.3% 8.61 9.47 10.34 11.20 12.06 12.92
Over $271,050 Over $271,050 39.60% 9.3% 9.13 10.04 10.95 11.87 12.78 13.69
</TABLE>

- --------
* An investor's marginal tax rate may exceed the rates shown in the above
table due to the reduction, or possible elimination, of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. For investors who pay alternative minimum tax, tax-free
yields may be equivalent to lower taxable yields than those shown above.
Shareholders subject to income taxation by states other than California will
realize a lower after-tax return than California shareholders. This table is
a combination of the Federal and California taxable income brackets, which
are adjusted annually for inflation. The California taxable income brackets
have not yet been adjusted for 1997. The California taxable yields set forth
in the above table presume that taxpayers in each Federal tax bracket are in
the highest California tax bracket corresponding to that Federal bracket.
The tax rates shown above do not apply to corporate taxpayers subject to the
California corporate franchise tax. 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.

65
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
STATE OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER
WOULD BE UNLAWFUL.

---------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 7
Fee Table.................................................................. 9
The Fund................................................................... 10
Use of Proceeds............................................................ 10
Investment Objective and Policies.......................................... 10
Risks and Special Considerations of Leverage............................... 21
Investment Restrictions.................................................... 24
Directors and Officers..................................................... 25
Investment Advisory and Management Arrangements............................ 27
Portfolio Transactions..................................................... 29
Dividends and Distributions................................................ 30
Taxes...................................................................... 31
Automatic Dividend Reinvestment Plan....................................... 35
Mutual Fund Investment Option.............................................. 37
Net Asset Value............................................................ 37
Description of Capital Stock............................................... 38
Custodian.................................................................. 41
Underwriting............................................................... 41
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 43
Legal Opinions............................................................. 43
Experts.................................................................... 43
Report of Independent Auditors............................................. 44
Statement of Assets, Liabilities and Capital............................... 45
Appendix I................................................................. 46
Appendix II................................................................ 56
Appendix III............................................................... 64
Appendix IV................................................................ 65
</TABLE>

---------------

UNTIL SEPTEMBER , 1997 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.

COMMON STOCK

---------------

PROSPECTUS

---------------

MERRILL LYNCH & CO.

JUNE , 1997

CODE

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(1) Financial Statements

Report of Independent Auditors

Statement of Assets, Liabilities and Capital as of , 1997

(2) Exhibits:

(a)(1)--Articles of Incorporation
(a)(2)--Articles of Amendment
(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 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 and
the Underwriter*
(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 Data 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).

C-1
<PAGE>

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>
<S> <C>
Registration fees.................................................... $ *
Stock Exchange listing fee........................................... *
Printing (other than stock certificates)............................. *
Engraving and printing stock certificates............................ *
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 $0.10 per
share, as of the effective date of this Registration Statement.

ITEM 29. INDEMNIFICATION.

Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which 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.

C-2
<PAGE>

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., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings 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 Government Bond
Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc.,
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.

C-3
<PAGE>

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>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
ML & Co. ....... Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton General Partner General Partner of MLAM
Services.......
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. Senior Vice President Senior Vice President of MLAM; Senior Vice
Giordano....... President of Princeton Services
Elizabeth Senior Vice President Senior Vice President of MLAM; Senior Vice
Griffin........ President of Princeton Services
Norman R. Senior Vice President Senior Vice President of MLAM; Senior Vice
Harvey......... President of Princeton Services
Michael J. Senior Vice President Senior Vice President of MLAM; Senior Vice
Hennewinkel.... President of the MLAM International Group
Philip L. Senior Vice President, Senior Vice President, General Counsel and
Kirstein....... General Counsel and Secretary of MLAM; Senior Vice President, General
Secretary Counsel Director and Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss. Senior Vice President Senior Vice President and Controller of MLAM;
and Controller Senior Vice President and Controller of Princeton
Services
Stephen M. M. Senior Vice President Executive Vice President of Princeton
Miller......... Administrators, L.P.; Senior Vice President of
Princeton Services
Joseph T. Senior Vice President Senior Vice President of MLAM; Senior Vice
Monagle........ President of Princeton Services
Michael L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Quinn.......... President of Princeton Services; Managing Director
and First Vice President of Merrill Lynch, Pierce,
Fenner & Smith Incorporated from 1989 to 1995
Gerald M. Senior Vice President Senior Vice President and Treasurer of MLAM;
Richard........ and Treasurer Senior Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of MLFD
Ronald L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Welburn........ 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 adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.

ITEM 32. MANAGEMENT SERVICES.

Not applicable.

C-4
<PAGE>

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% 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.

C-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and State of New Jersey, on the 9th day of May
1997.

MuniHoldings California Insured Fund,
Inc.
(Registrant)

/s/ Alice A. Pellegrino
By___________________________________
(ALICE A. PELLEGRINO, TREASURER)

Each person whose signature appears below hereby authorizes Patrick D.
Sweeney, Thomas D. Jones, III, Alice A. Pellegrino or Ira Shapiro, or any of
them, attorney-in-fact, to sign on his or her 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 date(s) indicated.

SIGNATURES TITLE DATE

/s/ Thomas D. Jones, III President May 9, 1997
- ------------------------------------ (Principal
(THOMAS D. JONES, III) Executive Officer)
and Director

/s/ Alice A. Pellegrino Treasurer May 9, 1997
- ------------------------------------ (Principal
(ALICE A. PELLEGRINO) Financial
andAccounting
Officer)
and Director

/s/ Ira Shapiro Secretary and May 9, 1997
- ------------------------------------ Director
(IRA SHAPIRO, ATTORNEY-IN-FACT)

C-6

<PAGE>

Exhibit (a)(1)

ARTICLES OF INCORPORATION

MUNIHOLDINGS CALIFORNIA FUND, INC.

THE UNDERSIGNED, ANN MARIE PREVOST, 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 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 CALIFORNIA 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
<PAGE>

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 200,000,000 shares, all initially classified as one
class called Common Stock, of the par value of Ten Cents ($0.10) per share, and
of the aggregate par value of Twenty Million Dollars ($20,000,000).
(2) The Board of Directors may 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

2
<PAGE>

powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series provided, however, that the
total amount of shares of all classes or series shall not exceed the total
number of shares of capital stock authorized in the Charter.
(3) 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.
(4) 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

3
<PAGE>

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.
(5) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act, and any rules, regulations and orders issued thereunder)
to take such action upon the concurrence of a majority of the votes entitled to
be cast by holders of capital stock of the Corporation (or a majority of the
votes entitled to be cast by holders of a class or series as a separate class or
series) unless a greater proportion is specified in the Charter.
(6) 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.

4
<PAGE>

(7) 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.
(8) 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.
(9) 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.

5
<PAGE>

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:

Thomas D. Jones, III
Ira Shapiro
Alice A. 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

6
<PAGE>

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.

7
<PAGE>

(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 or hereafter to be

8
<PAGE>

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

9
<PAGE>

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

10
<PAGE>

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 least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize an amendment to these Articles of Incorporation of
the Corporation that makes the Common Stock a "redeemable security" (as that
term is defined in section 2(a) (32) the Investment Company Act) unless such
action has previously been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of directors fixed in accordance
with the By-Laws of the Corporation, in which case the affirmative vote of the
holders of

11
<PAGE>

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
directors fixed in accordance with the By-Laws of the Corporation, in which case
the affirmative vote of the holders of a majority of the outstanding shares of
capital stock of the Corporation entitled to vote thereon shall be required.

ARTICLE XI.
PERPETUAL EXISTENCE
-------------------

The duration of the Corporation shall be perpetual.

12
<PAGE>

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 (5) 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.

13
<PAGE>

IN WITNESS WHEREOF, the undersigned incorporator of MuniHoldings
California Fund, Inc. hereby executes the foregoing Articles of Incorporation
and acknowledges the same to be his act.

Dated this 24th day
of April, 1997

/s/ Ann Marie Prevost
_________________________
Ann Marie Prevost

<PAGE>

EXHIBIT(a)(2)

MUNIHOLDINGS CALIFORNIA FUND, INC.

ARTICLES OF AMENDMENT TO THE

ARTICLES OF INCORPORATION

MUNIHOLDINGS CALIFORNIA FUND, INC., a Maryland corporation (the
"Corporation"), to change its name from MuniHoldings California Fund, Inc. to
MuniHoldings California Insured Fund, Inc., does hereby certify to the State
Department of Assessments and Taxation of Maryland that:

FIRST: The charter of the Corporation is hereby amended by deleting
Article I thereof in its entirety and inserting the following in lieu thereof:

"ARTICLE I

NAME
----

The name of the corporation is MUNIHOLDINGS CALIFORNIA INSURED FUND,
INC. (the "Corporation")."

SECOND: Pursuant to Section 2-607 of the Maryland General Corporation
Law, these Articles of Amendment amend the provisions of the Articles of
Incorporation of the Corporation.

THIRD: These Articles of Amendment have been approved by a majority of
the entire Board of Directors of the Corporation, there being no stock
outstanding or subscribed for at the time of approval.
<PAGE>

FOURTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.

FIFTH: Except as amended hereby, the Corporation's charter shall remain
in full force and effect.

The undersigned President acknowledges these Articles of Amendment to be
the corporate act of the Corporation and as to all matters or facts required to
be verified under oath, the undersigned President acknowledges that to the best
of his knowledge, information and belief, the matters and facts set forth in
these Articles of Amendment with respect to the authorization and approval of
the amendment of the Corporation's charter are true in all material respects,
and that this statement is made under the penalties of perjury.

2
<PAGE>

IN WITNESS WHEREOF, MUNIHOLDINGS CALIFORNIA FUND, INC. has caused these
Articles of Amendment to be signed in its name and on its behalf by its
President and witnessed by its Secretary as of the 7th day of May, 1997.

MUNIHOLDINGS CALIFORNIA
FUND, INC.
(a Maryland corporation)

WITNESS:

/s/ Ira Shapiro By: /s/ Thomas D. Jones, III
- ------------------------ ------------------------
Ira Shapiro Thomas D. Jones, III
Secretary President

<PAGE>

EXHIBIT (b)

BY-LAWS

MUNIHOLDINGS CALIFORNIA 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
<PAGE>

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

2
<PAGE>

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

3
<PAGE>

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

4
<PAGE>

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

5
<PAGE>

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

6
<PAGE>

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

7
<PAGE>

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

8
<PAGE>

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,

9
<PAGE>

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

10
<PAGE>

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

11
<PAGE>

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.

12
<PAGE>

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 recited
in the Prospectus of the Corporation included in the registration statement of
the Corporation relating to the initial public offering of its capital stock, as
filed with the Securities and Exchange Commission (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

13
<PAGE>

Board, however, may delegate the duty of management of the assets and the
administration of its day to day operations to an individual or corporate
management company and/or investment adviser pursuant to a written contract or
contracts which have obtained the requisite approvals, including the requisite
approvals of renewals thereof, of the Board of Directors and/or the stockholders
of the Corporation in accordance with the provisions of the Investment Company
Act.

ARTICLE IV.

Committees
----------

Section 1. Executive Committee. The Board, by resolution adopted by
-------------------
a majority of the entire board, may designate an Executive Committee consisting
of two or more of the directors of the Corporation, which committee shall have
and may exercise all of the powers and authority of the Board with respect to
all matters other than:

(i) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Charter;

(ii) the filling of vacancies on the Board of Directors;

(iii) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive
Committee;

(iv) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms

14
<PAGE>

are defined in the Investment Company Act, or the taking of any other
action required to be taken by the Board of Directors by the
Investment Company Act;

(v) the amendment or repeal of these By-Laws or the adoption of new
By-Laws;

(vi) the amendment or repeal of any resolution of the Board which by
its terms may be amended or repealed only by the Board;

(vii) the declaration of dividends and, except to the extent permitted
by law, the issuance of capital stock of the Corporation; and

(viii) the approval of any merger or share exchange which does not
require stockholder approval.

The Executive Committee shall keep written minutes of its proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.

Section 2. Other Committees of the Board. The Board of Directors
-----------------------------
from time to time, by resolution adopted by a majority of the whole Board, may
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the Board
of Directors, by resolution, may prescribe.

Section 3. General. One-third, but not less than two, of the
-------
members of any committee shall be present in person at any

15
<PAGE>

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.

16
<PAGE>

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

17
<PAGE>

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.

18
<PAGE>

Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her control.

Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his or her duties, in such amount and
with such surety or sureties as the Board may require.

Section 7. President. The President shall be the chief executive officer
---------
of the Corporation. In the absence of the Chairman of the Board (or if there be
none), the President shall preside at all meetings of the stockholders and of
the Board of Directors. He or she shall have, subject to the control of the
Board of Directors, general charge of the business and affairs of the
Corporation. He or she may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he or she may
delegate these powers.

Section 8. Vice President. Each Vice President shall have such powers and
--------------
perform such duties as the Board of Directors or the President from time to time
may prescribe.

Section 9. Treasurer. The Treasurer shall:
---------

(i) have charge and custody of, and be responsible for, all of the funds
and securities of the Corporation, except those which the Corporation has
placed in the custody of a bank or trust company or member of a national
securities exchange

19
<PAGE>

(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;

(ii) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;

(iii) cause all moneys and other valuables to be deposited to the credit
of the Corporation;

(iv) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;

(v) disburse the funds of the Corporation and supervise the investment of
its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and

(vi) in general, perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him
or her by the Board or the President.

Section 10. Secretary. The Secretary shall:
---------

(i) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;

(ii) see that all notices are duly given in accordance with the provisions
of these By-Laws and as required by law;

20
<PAGE>

(iii) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;

(iv) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly
kept and filed; and

(v) in general, perform all of the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him
or her by the Board or the President.

Section 11. Delegation of Duties. In case of the absence of any officer
--------------------
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.

ARTICLE VI.

Indemnification
---------------

Section 1. General Indemnification. Each officer and director of the
-----------------------
Corporation shall be indemnified by the Corporation to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not

21
<PAGE>

protect any such person against any liability to the Corporation or any
stockholder thereof to which such person otherwise would be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office. Absent a court
determination that an officer or director seeking indemnification was not liable
on the merits or guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office,
the decision by the Corporation to indemnify such person must be based upon the
reasonable determination of independent legal counsel or the vote of a majority
of a quorum of the directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to the proceeding
("non-party independent directors"), after review of the facts, that such
officer or director is not guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.

Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and to
the full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Corporation a written

22
<PAGE>

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

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<PAGE>

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

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<PAGE>

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

25
<PAGE>

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

26
<PAGE>

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,

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<PAGE>

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 30th day of April.

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

28
<PAGE>

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.

29
<PAGE>

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

30
<PAGE>

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.